By Caroline Sha
On September 14th, Bitcoin, the most famous cryptocurrency in the world, saw its value decrease by more than 20% percent after BTC China, one of the largest exchangers of bitcoins, announced it would no longer allow the trade of the cryptocurrency. This comes after Chinese officials’ recent proclamation that they would be cracking down on the digital currency’s trade. Understandably, the new announcement frightened many bitcoin owners and brought down its value from almost $4,000 to about $3,300, launching it into the mainstream media’s gaze once again. But what exactly is this mysterious currency and how does it work?
Bitcoin was created in 2009 by a mysterious figure under the pseudonym Satoshi Nakamoto. In a publication he posted, Nakamoto explained how the currency system intended to remove the middleman of banks during transactions would work. In essence, when someone buys Bitcoin on an exchange or receives it from someone else, it goes into a digital wallet that is stored on the cloud or in the user’s computer. They can then exchange their bitcoin for goods and services, similar to the process of sending cash through apps such as Venmo.
The real genius behind this cryptocurrency, however, is found in the public ledger, or block chain. Many people have tried to create things similar to Bitcoin before, but they could not get past the problem of ensuring that no one was using counterfeit money or taking advantage of a manipulatable digital system. Nakamoto's solution was to introduce the blockchain, a public record of the balance in everyone person’s wallet. In the most basic terms, everyone who has bitcoin has a pseudonymous account made up of a combination of letters and numbers. Everyone in the system can see how much an account has in it and through a process called bitcoin mining, bitcoin users can solve mathematical problems to determine if a spent bitcoin is counterfeit. Then can then turn that transaction they just verified into a “block” that is sent out to other miners that can add that block to their ledgers. To incentivize people to actually do this seemingly complicated task, the bitcoin system gives a certain amount of bitcoin for each “block” or problem mined. This number decreases every four years to control how much bitcoin is available in the world.
Proponents of Bitcoin have praised the lack of a central authority. Without a bank being the entity that transactions go through, no organization can take a cut of the money sent, potentially lowering prices for items. In addition, many people, particularly libertarians, enjoy the fact that the government would have a lesser role in the financial system if bitcoin became the main currency in use. Because the treasury cannot control the flow of bitcoin, they would have no way to change the value of the dollar. Moreover, advocates of Bitcoin have also asserted that inflation will not be a problem in the future for bitcoin. Inflation is the increase in the average level of prices, leading to a decrease in the purchasing power of a dollar; for example, $25 dollars in 1940 would be equal to $413.13 today. Bitcoin avoids this problem with a limit on how much money can be put out. As the amount of Bitcoin from mining will get smaller with time, the maximum of 21 million Bitcoin will never be reached, so there will always be almost the same amount of Bitcoin going around after a while, preventing inflation from happening. Finally, bitcoin has the ability to transcend national currencies, deleting exchange rates from the code of society. People from all around the globe would easily be able to trade with each other without having to worry about euros or yen or so on.
Critics of Bitcoin, however, have a different view on its possibilities. Many point out that because there is no way to track the purchases made, anyone, including criminals, can buy dangerous items such as weapons. In 2013, The Silk Road, a dark web site which used Bitcoin as its payment method was shut down by the DEA. On the website, visitors could buy a wide range of illegal items ranging from marijuana to cyanide with the anonymity that Bitcoin gave. This raised questions such as what would happen if a terrorist used it to buy weapons or even bombs? How could law enforcement find killers if they couldn’t trace purchased weapons back to anybody? In addition to the security risk posed, others have also used the ever changing price of Bitcoin to say that Bitcoin could never be stable enough to be a legal tender. As the value crash in September showed, the worth of Bitcoin is extremely volatile and any external factor could cause a rapid increase or decrease in value. Lastly, the virtual aspect of Bitcoin has also been called in question. Because Bitcoin has no physical backing, a virus or an accidental deletion could easily destroy all the Bitcoin off of one’s computer. In addition, if a hacker were to steal a person’s Bitcoin, there would be no easy way to get the money back since Bitcoin cannot be traced like a credit card. Or, because of the lack of transaction reversals, a conman could easily scam someone out of his or her money without having to pay it back.
Hypothetically, if we were to assume that Bitcoin’s flaws could be fixed, Bitcoin truly could become a new system of payment that would change the entire world. On the extreme, Bitcoin could completely remove government and corporate control from economics. The market would become completely free, with people buying and selling anything they wanted without any regulations restricting them. Items could be moved across borders more and more easily since currencies won’t have to be exchanged, resulting in companies such as Western Union losing business. Banks could even be shut down since more people will be storing their money in their personal digital wallet and not in banks. The balance of power would drastically shift from big businesses to the common people. But that’s just one possibility.
Is there a way to solve all of Bitcoin’s weaknesses? Could enough people be on board with this currency to make it the next big thing? Will another cryptocurrency take Bitcoin’s dominant role in the internet world? Will an economic digital revolution happen? The answers to these questions are as unpredictable as Bitcoin itself. With sources saying different things, there is no leading prediction. Time will only tell whether Bitcoin succeeds and revolutionizes economics or if it crashes and burns into the oblivion where all failed currencies go.