[By Suhyon Song]
What is Bitcoin?
Many people might consider bills and coins as money. However, money is a collectively understood narrative about value. Now, think about the value of likes in YouTube. Some people might not value YouTube likes because they don’t use it, but YouTube likes can have monetary value through sponsorships and online advertising revenue. Within this context, people can understand that YouTube likes have “value”.
Cryptocurrencies are digital monies that are not controlled by any government or bank. Bitcoin being the first generation decentralized cryptocurrency, is of symbolic value like YouTube likes, designed to work in a world without intermediaries.
What are intermediaries?
Intermediaries are simply middle men. When a person goes to a store to buy a product, they can use cash, coins or credit cards to facilitate the transaction. Cash and coins are supported by the intermediary, known as the government, whereas credit cards are supported by the intermediary, known as the bank.
However, cryptocurrencies function without any of these intermediaries, but the prospect of the future of cryptocurrencies as a form of money is still debatable.
Two sides of the same Bitcoin
A digital currency researcher, Neha Narula reveals interesting aspects of cryptocurrency. With cryptocurrency, she asserts that we can make bank transfers without asking permission from a bank. In the Bitcoin system, everyone has a list of everyone’s transactions. The information is encoded in software which runs on thousands of networked computers around the world.
She further adds that money functions as a medium of exchange, a store of value, and a unit of account. However, with cryptocurrencies combining with software, money can become more than this. People do not have to rely on banks or other institutions for security, as money will be directed by software, and will flow securely.
On the other hand, Nouriel Roubini, a professor at NYU’s Stern School of Business, stated that cryptocurrency such as “Bitcoin do not fulfil their own stated purpose”. He mentioned that the price of Bitcoin can fluctuate by 20%-30% in a single day, meaning that it can’t function as a unit of account or a store of value. He adds that people use Bitcoin for speculative purposes, as many shops including Bitcoin conferences do not accept it as a valid form of payment.
Furthermore, cryptocurrency is dangerous as it is an anonymous transaction which can be used for many illegal activities ranging from money laundering to drug deals. He claims that cryptocurrencies such as Bitcoin will lose its potential as G20 (Group of Twenty) members are planning to regulate cryptocurrency and eliminate the anonymity.
The durability of cryptocurrencies
The most prevalent problem associated with Bitcoin is that people cannot trust each other since every transaction can be done anonymously. Thus, people cannot give a concrete value to any form of cryptocurrency. A certain amount of time is required to earn trust. For example, Airbnb was not successful until it gained people’s trust as a safe medium for accommodation. Similarly, trust has to be built for Bitcoin to function as a medium of money.
Furthermore, Bitcoin keeps triggering many social problems regarding illegal activities because of a lack of regulation. As mentioned by Professor Nouriel Roubini, countries need to regulate the cryptocurrency market to eliminate any malpractice of cryptocurrency. However, it does not seem as straightforward of a task since cryptocurrencies have no intrinsic value in terms of currency.
Bitcoin – the future or just a gamble?
Bitcoin is predominantly used for speculative purposes. The consistently high value increments can make first-mover investors multiply their investments many times over. Other than granting total financial freedom, it should be noted that Bitcoin does not have any inherent value as traditionally understood with fiat currencies. Unlike fiat currencies, cryptocurrencies are not tied to any assets like the US dollar to gold or the Chinese Yen to its exports. Instead, the value of cryptocurrencies comes purely from how much money people are willing to pay for it, and will only run out when there is no remitter of last resort.
Yet, the emergence of cryptocurrencies ushers in a new dawn of possibilities for the digital world. The key innovation behind cryptocurrencies relies on its digital architecture; a securely coded system called ‘Blockchain’.
To put it briefly, Blockchains provide a decentralised means of storing information by linking a series of data blocks to one another in a manner that makes it impossible to alter, hence making the retention of such data ‘immutable’. To imagine what it would take for a hacker to change any information on a blockchain system, they would have to change the data of all the data blocks linked in the blockchain series from thousands of computers worldwide, simultaneously. Such a feat would require a computational power larger than any institutions currently possess. Therefore, since blockchains are a digital safety box for information, such a system has many potential uses;
- Digital Identity.
Since blockchains are essentially impenetrable lockboxes for information, why not use them to store your personal information? IDs, passport, birth certificates; theoretically, blockchain users would not have to worry about identity theft.
- Smart Contracts.
These are fully automated, self-regulating contracts that record stakeholder actions, ensuring that parties fulfill their obligations and accurately flags financial and legal penalties for those who do not.
- Crowdfunding projects.
Merging crowdfunding with blockchain can bring a positive impact on an economy by encouraging more startups.
With a lack of regulation and control over Bitcoin, but an assurance of anonymity and safety, the future of this cryptocurrency remains uncertain—nevertheless worth discussing.
Merry Christmas to you too.