Bitcoin: Speculative Bubble or Currency of the Future?

Bitcoin: Speculative Bubble or Currency of the Future?

These are difficult weeks for bitcoin , the virtual currency created in 2009 by an anonymous programmer known by the pseudonym Satoshi Nakamoto. The main feature of this currency is its peer-to-peer payment system (user to user, without intermediaries), based on open source software managed by a community of volunteers. There is no authority or central banks that manage the system and no one who owns it. Its acceptance as a means of payment will ultimately depend on the trust generated by the currency. Its security, however, has been called into question with the disappearance of MtGox, until now the main bitcoin exchange and custody platform ., victim of a massive theft by hackers.

Trading bitcoins requires both parties to a transaction to have Bitcoin accounts, called bitcoin wallets . To transfer the currency, the seller must provide his key to the buyer and the buyer sends the bitcoins to him using a software application . The network of Bitcoin users makes the computing power of their computers available to the system to verify that the seller is the legitimate owner of the bitcoins .transferred and to record the transaction carried out in a register. This process, which is intended to guarantee the security of the system, requires finding the solution to a complex mathematical problem and can take from a minute to an hour for very high-volume transactions. Users who contribute to the resolution of this problem are rewarded with new bitcoins (called “digital mining”).

It is also possible to acquire bitcoins through the various exchange platforms that exist and that operate in real time. After the sudden closure of MtGox, Bitstamp has emerged as the most popular platform for custody and exchange of bitcoins for other currencies.

A virtual currency like bitcoincan have several advantages. First of all, its low transaction costs compared to commissions on credit card payments or the costs associated with a bank transfer. However, the security offered by the Bitcoin system is not yet comparable to that of traditional payment systems (it is a more vulnerable system, for example, to theft through computer attacks). Another feature valued by users (especially those involved in illegal activities) is the practical anonymity of transactions and the fact that there is no need to share bank account numbers or credit card details. Additionally, users have the ability to generate multiple Bitcoin addresses to differentiate and isolate each transaction. Finally,bitcoins (total number of units in circulation) will grow at a predetermined rate to a maximum of 21 million (current supply is 12.3 million units). This commitment to limit the supply of currency in circulation, in contrast to the practice of central banks continually increasing the money supply, is intended to anchor the currency’s long-term value and thus promote its role as a reserve. of value and its use as a medium of exchange.

The use of bitcoin as a medium of exchange is still very limited. Currently, on average, about 42 transactions are made per minute (Visa carries out more than 165,000 per minute). Even so, the price of bitcoin increased dramatically during 2013, with a lot of associated volatility: from 10 dollars/BTC to more than 1,200 dollars/BTC. Currently, the price is slightly below 550 dollars/BTC after the attacks suffered by hackers in some of the bitcoin exchange platforms and the closure of MtGox . The first transaction with bitcoinsIt was made in 2010: two pizzas for 10,000 BTC. The price of these pizzas at the current price of bitcoin would be close to 5.5 million dollars.

The price of bitcoin basically reflects speculation about its future value. Like all fiduciary currency, one that is not backed by precious metals, bitcoin will have long-term value to the extent that it is commonly accepted as a medium of exchange and a store of value. The higher its acceptance, the more it will tend to be worth (in its equivalent in dollars or euros) given a number of bitcoins in circulation. But the degree of future acceptance is a great unknown. The strong volatility of its price reflects, to a large extent, changes in the perception of said degree of acceptance. The day that Ben Bernanke, for example, declared in the US Senate that bitcoinit could be a promise for the future, its price shot up above 1,000 dollars. Days later, when Chinese authorities banned banks in that country from processing payments in bitcoin , its price plummeted below $600. The prohibitions by Thailand and Korea to use bitcoin in these countries also caused, at the time, an adverse effect on its price.

More recently, attacks on some bitcoin exchanges have caused refunds to be suspended on three exchanges ( MtGox , Bitstamp, and BTC-e) and the price to drop from $900/BTC to $550. /BTC. Operations on Bitstamp and BTC-e recovered normally a few days after their suspension, but Mt Gox has ceased operations indefinitely and has trapped hundreds of thousands of users who had some 744,000 bitcoins on the platform. equivalent to more than 400 million dollars at the current price.

In addition to being vulnerable to hacking, bitcoin has a major drawback compared to other fiat currencies: no one is required by law to accept it. In other words, it is not legal tender and does not have the support of a State that has declared it acceptable as a means of exchange and a legal way to pay off debts (including the payment of taxes). On the other hand, bitcoin is also subject to competition from other virtual currencies. These currencies seem destined to acquire a greater prominence in the face of the progressive increase in the use of the Internet and social networks, the greater volume of electronic commerce and the proliferation of digital goods.

Traditional financial institutions and large technology companies may want to introduce their own virtual currency systems. In order for these systems to achieve widespread acceptance, they must have some of the main virtues of bitcoin (an agile exchange medium with low transaction costs) and generate sufficient confidence so that the exchange rate against legal tender currencies maintains a certain stability. These systems, potentially more secure, faster and with lower transaction costs (in terms of lower energy consumption or computer memory) and that would allow to inspire more confidence, could prevail and cause a collapse in the value of bitcoins in circulation. They will be a litmus test for thebitcoins , whether they are trading at $1,000 or $100.

Samuel Edwards
Samuel Edwards is the name you must have heard many times while reading reports related to Finance, that's what he is good at. From Major Investments to Stock Market Updates, he got 'em all. Be ready to blow your mind by the mind-blowing reports of Finance World from Samuel Edwards.