Table of Contents
1. Introduction
Bitcoin, a digital currency, was created in January 2009 following the housing market crash. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin charts high on popularity and has triggered the launch of other virtual currencies collectively referred to as Altcoins.
While bitcoins are not widely accepted by merchants, there are many ways in which you can use them if you so desire. They are being accepted by more and more sellers, and with their rapid growth in popularity, it’s clear that this trend will not only continue but in all probability escalate. Bitcoins can be used to pay for hotels, flights, apps, computer parts, and even a college degree!
1.1. What is Bitcoin?
Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. There are no physical bitcoins, only balances kept on a public ledger in the cloud that, along with all Bitcoin transactions, is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin charts high on popularity and has triggered the launch of other virtual currencies collectively referred to as altcoins.
1.2. How Bitcoin Works
In the early days of Bitcoin, it was the wild west. Undeterred by the often harsh public opinion on Bitcoin, the tiny community of believers, consisting of mostly cypherpunks, sensed they were on to something and worked hard to refine and grow the project. In these early days, a core group of “Bitcoin Core Developers” – computer programmers who contribute to (or maintain) an open-source project – worked to make Bitcoin more reliable and usable. Notably, they were able to do this without compromising the decentralized nature of the scheme. This group funded their efforts with donations and, in the case of the more entrepreneurial software developers, through the appreciation of the BTC they earned by providing their services. These coins had value, now being eclipsed by a value of 1 USD per BTC. This extra incentive to earn and save BTC was incredibly important both to the developers and the speculative investors, or “HODLers,” who were to follow.
Further development was funded by a young Bitcoin exchange called Mt. Gox, which very much resembled a tech startup. The goal here was to make Bitcoin simple for the average nontechnical person to buy and store. The venture was quite successful until it met its now infamous demise in 2014, where an unpatched theft resulted in the loss of nearly 750,000 of its customers’ bitcoins.
1.3. Significance of Bitcoin in the Financial World
As for now, Bitcoin has an equivalent value of 750 million US dollars and increases over time. The use of Bitcoin in some countries already reflects the fluctuating exchange rate it has with another currency. However, there is still minimal adoption of Bitcoin at the moment. With the characteristics of Bitcoin that offer ease of transaction, pseudo-anonymity, tax-free transactions, no need to use an intermediary (banks), low transaction costs, and so on, many sides who feel disadvantaged with the existence of Bitcoin. The central banks of each country may feel threatened because the issuance of money and monetary policy that is done will be compromised by the existence of Bitcoin, which has no central control. High transaction fees in the banks are the main thing that Bitcoin can kill. Shielded behind the reason of safety, every bank transaction will require extra costs, and for some services, there is a high tariff for an international transaction. A high number of people see this as a form of rent to a third party. With Bitcoin, they can eliminate the cost and charge to the intermediary to make a payment because Bitcoin has the same function as transferring money between banks but with a lower cost. But certainly, this will have an impact on the amount of income banks, and until now there has been no positive coverage for the existence of Bitcoin because it could threaten the industry and currently existing mechanisms.
As Bitcoin emerged in this decade, with the development of new technologies that ease peer-to-peer transactions, Bitcoin became an interesting topic as a case development for the future currency. Bitcoin is unique in terms of the technology embedded in its application. This digital currency uses the principles of the blockchain, which introduces a decentralized database that is used to store a list of records called blocks, where the data is connected with cryptography. The process allows the data to be distributed and not be copied, making Bitcoin a secure digital currency.
2. Early Days of Bitcoin
This honey badger of a currency rose through many challenges in its early years, overcoming initial price fluctuation, theft through hacks and deeply seeded skepticism from the public eye. As people began to understand its underlying technology a more positive light was shed on the currency and its potential as a global form of wealth storage and exchange. Today, Bitcoin is a global currency with a sustainable block rate and block size that give a bright future for its continued growth.
The inaugural years of Bitcoin saw it become a legal or illegal property in many countries. Some tax and commercial use VAT exemptions have been put in place with respect to transactions using virtual currencies. Unfortunately, they do not make things easier for unenlightened companies that give and receive bitcoins in exchange for services, and in many countries no official statements on various facets of bitcoins exist. This is generally due to a lack of understanding or any real knowledge of bitcoins and other virtual currencies and the fact that governments are still learning to categorize them.
The first ever Bitcoin transaction took place on May 22nd, 2010 when a programmer named Laszlo Hanyecz purchased two pizzas from a man in Jacksonville, Florida. The pizzas cost $30 USD and Hanyecz paid 10,000 Bitcoins making these the first real world goods to be exchanged for the currency. This historic event marked the beginning of a currency in which people could exchange real world items for Bitcoins.
The early days of Bitcoin were characterized by the work of an obscure figure whose identity remains unknown today. In October 2008, a paper was published on the internet under the name Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. This paper detailed methods of using a peer-to-peer network to generate what was described as “a system for electronic transactions without relying on trust.” This system laid the groundwork for Bitcoin as developers began figuring out how to make the currency a reality. Finally, in January 2009, the first version of Bitcoin was announced to the cryptography mailing list.
2.1. Satoshi Nakamoto and the Birth of Bitcoin
From the conception of Bitcoin by the individual or group known as Satoshi Nakamoto emerged the pioneering cryptocurrency that has paved the way for numerous others. This innovation in digital currency was the solution to the double spending problem. Preceding digital currencies were prone to this as making a digital copy of a token or a document was still possible. This was in the form of a centralized server which kept records of the balances. If it were to be made decentralized, a server is required for a record-keeping platform. Nakamoto’s innovation was the distributed ledger that came to be known as the blockchain. It was this innovation that led to the creation of Bitcoin.
The core of this innovation was the software Nakamoto wrote as it could only manage the currency itself, as the transactions that followed it would be stored on the blockchain. And so, on January 3rd, 2009, Nakamoto mined the first block of the Bitcoin blockchain, named “the genesis block.” This included the reward of the 50 bitcoins which had been agreed upon from the initial code. This event was also the first time Bitcoin was traded, as the mining of a block, in effect, meant that the server time was traded for the bitcoins. This software was published to the open-source community where Nakamoto described the release as a crucial time in its development. With it open to the public, the Bitcoin era began.
2.2. The First Bitcoin Transaction
He wrote on a Bitcoin forum afterwards: “I’ll pay 10,000 bitcoins for a couple of pizzas… like maybe 2 large ones so I have some left over for the next day. I like having leftover pizza to nibble on later. You can make the pizza yourself and bring it to my house or order it for me from a delivery place, but what I’m aiming for is getting food delivered in exchange for bitcoins where I don’t have to order or prepare it myself, kind of like ordering a ‘breakfast platter’ at a hotel or something, they just bring you something to eat and you’re happy!”
Laszlo Hanyecz, a Florida-based programmer, made the transaction with a volunteer in England who ordered the two pizzas from a Papa John’s for him. Hanyecz paid the 10,000 bitcoins, which were then transferred to the other party, marking what is believed to be the first transaction using the cryptocurrency.
On May 22, 2010, a developer bought two pizzas using 10,000 units of a then-little-known digital currency called Bitcoin. Today, those bitcoins are worth a whopping $82 million (£62m) and are recognized as the first ‘real-world’ transaction with the cryptocurrency. The day is now celebrated every year by Bitcoin enthusiasts as Bitcoin Pizza Day.
2.3. Initial Challenges and Skepticism
When Satoshi was initiating a foundation for Bitcoin, a crucial aspect of the true test of Bitcoin was brought to light. On October 12th, 2009, an exchange rate for Bitcoin and the US dollar was established. However, this was shortly lived as the growth of Bitcoin kept rapidly changing which led to a decrease and eventual removal of exchange systems that involved Bitcoin and the USD. Compared with the earlier years, Bitcoin dug itself a hole by being labeled as “worthless” when it was perceived to be printed. Satoshi originally wanted to assign a dollar cent like value to Bitcoin until the volatility sequence showed that it was better than a large value for the more continually it increased. These events combined created an atmosphere filled with negativity as documented in the Bitcoin Talk Forums.
Challenges during the Bitcoin struggle were measured through the continuous price drop. Currently, it is unknown what the largest degree of price decline was. A rough estimate based on the chart provided below places the highest at around an 80% drop, but we can only base this off of the $65,000 price tag for a pizza. The decline would set the pizza somewhere around the $120. This massive drop decay from the original purchase of the two pizzas were a heavy offset for both parties, but the answer would reveal more value over time. At this point in time the pizzas were of much higher value than what is offered as a whole today. It’s these types of events often involving large changes for small gain that disrupted the flow phases where Bitcoin’s price would often sway in the stronger direction and value would be gained. But it was not until June of 2011 where Bitcoin’s value had taken. The Silk Road and Mt. Gox scandals became accustomed to the news and led Bitcoin into a continual downwards spiral, further solidifying the worthless notion and securing an established timeframe of 2011-2012 where an era of depression had begun.
3. Bitcoin’s Impact on the Economy
Bitcoin’s place in the economy provides a great deal of information as to how the economic systems of tomorrow may form. Our research seeks to help answer whether Bitcoin is a better or worse store of value compared to government money, which is a debated issue. By looking at price data and other related variables such as price level and velocity of money, we can compare how well a store of value Bitcoin has been in comparison to say US dollars. If price level is correlated with the price of Bitcoin, we can argue that Bitcoin is not a good store of value. High fluctuations in the price level compared to the price of Bitcoin could imply a low demand for Bitcoin. We also look at the velocity of money in our research. If Bitcoin’s velocity of money is low with respect to the US, then we can conclude that in the global environment, Bitcoins are held as a better store of value than US dollars. Step one of our analysis is to compare how well a store of value Bitcoins are compared to US dollars. A test for stationarity at the 1% level confirmed that the time series are non-stationary, so we can proceed with our co-integration test. The co-integration test showed that there exists a relationship between Bitcoin and nominal onshore/offshore price levels at a 1% level. A table of the least squares estimates is shown below (table 1). This implies that Bitcoin has been a relatively welfare store of value compared to US dollars over the time frame considered. High DF values and relatively low p-values for a given histogram imply that enough valid instruments were used in our calculation of the price levels variable. The first histogram implies that DF values are more correlated to the null hypotheses than they should be, and so this implies that there are still some price level discrepancies between US dollars and Bitcoins, with Bitcoin’s price level being higher. We concluded that Bitcoins in the US onshore/offshore environment are still being bought and sold as a speculative good with the intention of profit, which could inflate the price level of Bitcoins compared to the US dollar. This could be due to the fact that Bitcoins haven’t been around too long and still have much speculation surrounding them. A better picture of whether Bitcoins are a good store of value with US dollars can be painted by the next set of price data. A test for stationarity showed that the time series of each variable was non-stationary, so we can proceed with co-integration testing. The co-integration test showed that there exists a strong relationship between the US consumer price levels and Bitcoin’s price levels at a 1% level. A clearer picture is painted with the aid of the ADF test statistics for our 2-step regression and the price levels. The end result of the first difference model showed that a given change in US price level is correlated with a change in Bitcoin’s price level. Because Bitcoin’s price level is not correlated with its price and the Bitcoin community is not restricted to a given country, we can assume that Bitcoins are being held equal to dollar expenditures, which could be due to an expected increase in Bitcoin’s value. The price data implies that compared to the US dollar, Bitcoins have been a good store of value with equal inflation rates.
3.1. Bitcoin as a Disruptive Technology
The concept of currency has been developed since ancient age, from trade by barter to the current use of paper money or coins. The money itself operates as energy to accelerate oven economies. The closer and the developing age of technology, the more ways for the people for the transaction itself. The practicability way to transact money and the cheap cause fee or the transaction expenses could give the influence to the people to process their money in digital form. It was all started with a small ideas and a dream from several people that also know as cypherpunk, they were thinking to change the current situation of world economy which dominated by US dollar right now. They were thinking that US dollar create more trouble to the world economy. With the banks that hold a position of power in creating new money in the form of credit, when a national currency inflates, it’s the banks’ power that creates a great deal of the inflation. In parity with a price of money in term of interest, it is said that the banks cause often erratic and unstable market economy. At the end it is all lead to the global crisis, such as an economic recession and the banks could solve the problems by creating more money in form of credit with unpredictable interest result more it can accelerate inflation. At 27 August 2001, the registration of bitcoin.org is occurred, and up to date the result of hard work from several people who believe that money should work and the expected goal that the digital currency will be used beyond the internet and have the own purchasing power which can also influence the world economy itself.
3.2. Bitcoin’s Role in Financial Inclusion
The advent of Bitcoin not only offers a significant movement for the stateless money theory, it also offers a means to promote the changed money system theory. In conducting the stateless money idea, Bitcoin initiated the alternative way of money issuance based on commodity. This movement constitutes the changing process of the current money system because in order to conduct a stateless money issuance, the government should no longer have the right to have arbitrary money issuance and restrict the society to receive fiat money that is issued through legal tender. This process is also stressed by Jörg Guido Hülsmann in his theory about the ethics of fraudulent exchange, where honest money can only be attained in a system with free competition of money and foreign exchange markets. By using Bitcoin, people are free to choose what kind of money they will use, thus they are also free to assess which money is the most honest money and exchange it for other money at any rate. In the end, the economy scales developed around industries with honest money will shift the whole economic system to a better and more efficient one.
The flexibility of currency exchange through Bitcoins also creates opportunities for the development of industries in several countries. The money exchange process in this decade is often conducted by looking for the most favorable money rate versus a specific country’s currency; then stockpiling the foreign money and exchanging it later when there are favorable changes in rates. The previous action is often conducted by money changers or people with specific jobs in large industries at high cost. This can be seen as wasting cost because the changing process is often conducted with more than two moves and having money rate losses caused by the differences of the first rate when they decide to exchange it and the second rate when they actually exchange it. By using Bitcoins, someone can directly exchange their money with lower cost and a more favorable rate just within a few clicks and no need to keep a stockpile of foreign money. This efficiency can also kick up the development of businesses around export-import industries because they can directly use the money they get with more ease and lower cost.
3.3. Bitcoin’s Influence on Traditional Banking
When compared to the kind of payment services provided by Bitcoin at present, the target audience of conventional bankers and traditional banks is huge in number. The threat of Bitcoin payment services is not only to the fees charged by banks for payment services, but also to the entire business model of the banks built around payment services. The kind of services provided by banks with small and large value payments are closely interlinked with the availability of credit and debit facilities [22]. Bitcoin’s payment services affect the banks’ credit and debit facilities through the interest rate. Since the value of Bitcoin is one unit of its currency, the interest rates of credit and debit facilities would be based on the supply and demand of Bitcoin, not a foreign currency. The interest rates of credit and debit facilities of foreign currencies are based on forex markets with the supply and demand of the specific currency the loan was borrowed in. There are two effects of the interest rate change due to Bitcoin payment services: one being an interest rate increase to attract investors for the lower global supply of loanable funds, and the other being interest rate equalization with foreign currency interest rates. With the interest rate increase, there is a sufficient incentive to save and not consume due to the higher interest rates. Since the global supply of loanable funds is lower, the marginal propensity to consume is less than the marginal propensity to save. This results in an overall decrease in the quantity of small and large value payments as credit and debit facilities are consumption of loanable funds. Although many Bitcoin payment services for banks have not yet been implemented, the improvement of the technology, stability, and credibility of Bitcoin services may result in banks losing their customers to Bitcoin payment services. This may result in a situation where Bitcoin payment services for banks may become a necessity to retain existing customers and attract new ones.
4. Bitcoin’s Evolution as an Investment
4.1. Bitcoin’s Price Volatility
4.2. Institutional Adoption of Bitcoin
4.3. Bitcoin as a Store of Value
5. Bitcoin’s Role in Global Commerce
The role of Bitcoin in the global economy has been a focal point of its development since conception. It is often talked about in regards to the technology of Bitcoin, the potential of the currency, and the philosophy of its developers. The currency has already seen quite a bit of growth in its use within the global economy, and considering its rapid adoption and market cap in comparison to other currencies, this growth is expected to continue. Bitcoin’s most immediate impact on the global economy is the ability to use BTC rather than local currency as a medium of exchange. All over the world, people are using Bitcoin to avoid inflation or in some cases outright economic turmoil.
Many of these individuals have only sporadic access to the banking system and a credit card, but the internet is becoming more accessible all the time. For these people, Bitcoin is a lifeline; it allows them to participate in commerce on a global level. An oft overlooked aspect of Bitcoin is security. The security of a Bitcoin transaction is arguably higher than any other type of financial transaction. This is due to the unique cryptographic nature of the transaction and the fact that it often does not entail the release of personal identity information. This is a boon for any consumer, but for those who live in areas of the world ravaged by corruption and political malfeasance, knowing that their wealth cannot be seized or devalued is of immeasurable value.
5.1. Bitcoin and E-commerce
5.1 Bitcoin and e-commerce
5.1.1 Growth of Bitcoin in e-commerce
Gradual rise in the price of Bitcoin through 2010-11. The use of Bitcoin as an Escrow service on Silk Road. Further rise in Bitcoin price, reaching parity with the US dollar for the first time in February 2011. 2012-13 saw a large increase in businesses accepting Bitcoin. Aforementioned volatility was seen by all as a “speculative asset” rather than as a currency. This began to change in 2015. This chapter will cover the growth of Bitcoin as both a speculative asset and a method of transferring value between consumers and merchants, followed by the benefits and drawbacks of merchants accepting Bitcoin, concluding with the tenuous relationship between Bitcoin and e-commerce due to fears of state regulation and micro/macro economic instability.
It must be noted that the majority of the data in this subsection is taken from a research paper on Bitcoin adoption by e-commerce businesses, written in January 2016. The paper took into account information based on the state of Bitcoin up until January 2015, therefore newer trends were simply mentioned as opposed to being analyzed.
5.2. Cross-Border Transactions with Bitcoin
To understand why cross-border transactions with Bitcoin is a perfect direction for its expansion, one must first understand the problems of traditional bank transfers. There are four key aspects of traditional methods of cross-border transactions which heavily favour Bitcoin as an alternative form of remittance. Firstly, the price of executing a cross-border bank transfer is far too high. International transfers can cost up to 15-20% to execute, making it almost unviable for those who wish to send small quantities of money. Secondly, the execution of these transfers is cumbersome and time consuming. Due to the existence of multiple currencies with no fixed exchange rates, transfers can be delayed days, weeks or even months if there is a disparity between the sending and receiving currency. Thirdly, there are issues of accessibility to the global financial system. A significant proportion of the world’s population does not have access to a bank account or the internet and are therefore excluded from global finance. Finally, traditional forms of remittance have issues in terms of monitoring and security. Due to the legal implications of money laundering, most countries have strict monitoring procedures for cross-border money transfers. This can often lead to blocks on certain transactions and the funds being frozen for indeterminate periods of time. This can be catastrophic for families in developing countries who rely on financial support from relatives working in other countries.
5.3. Bitcoin’s Potential for Remittances
The topic of bitcoin and remittances is very important to the bitcoin community, primarily due to the fact that it is a way for sending money across borders that is generally immune from capital controls and in some cases affords the sender a more favorable rate than with the bank. For example, citizens of a country experiencing hyperinflation may turn to bitcoin for a more stable form of currency. Others may simply desire to send money to family members in a different country without the banks taking a large cut. In addition, remittance payments in many cases are supporting families, so any funds saved in the process of sending the payments are ultimately beneficial to the recipient.
Bitcoin remittances enable people to send money across international borders without incurring high transfer fees associated with legacy remittance providers. The bitcoin network levies a nominal charge to send any value from one country to another, expecting the total cost to be considerably lower than wire transfer fees or services such as Western Union. Bitcoin remittances can be sent to a recipient in need within 10 minutes upon receipt of the funds. Recipients can either keep their bitcoin or exchange it for a local currency.
6. Regulatory Challenges and Government Response
The varying degree of conflicting regulatory measures around the world makes it difficult to assess their individual impact on Bitcoin as a whole. However, there are some general trends that have emerged. Increased regulation can have a short-term negative impact that results in a price drop as a result of market uncertainty. An example would be the aforementioned forced closure of exchanges in China, plummeting Bitcoin’s price by 6% in a day. However, it can have positive long-term effects on Bitcoin’s growth by improving investor confidence and making it more attractive to an institutional and retail user base. This is because regulated markets are deemed to be safer and more secure. One such measure is the acceptance of Bitcoin ETFs. An ETF is an Exchange Traded Fund; a marketable security that tracks an index, commodity, bond, or a basket of assets like an index fund. ETFs can expose Bitcoin to a much larger investor market. In 2017, Bats BZX Exchange filed a rule change in an effort to list and trade shares of the Winklevoss Bitcoin Trust on the exchange. However, this was rejected by the SEC based on the grounds that the product’s underlying nature was not resistant to manipulation, namely that the Bitcoin market was not large/liquid enough.
Due to the decentralized and borderless nature of Bitcoin, it creates a conflict of law issue. Authorities in every country differ in their approach to how Bitcoin should be regulated and how it should be treated in relation to the law. Japan, for example, has taken a very open stance and in 2017 recognized Bitcoin as a legal form of payment. It brought many of the large Bitcoin exchanges in Japan under a licensing system in an effort to regulate the market, protect consumers, and prevent money laundering. This was a contrast to its previous stance in 2014 when Japan’s Financial Services Agency stated that Bitcoin was not a currency but could be taxed as an income. China, on the other hand, has been very restrictive in its approach, forbidding its banks from use with Bitcoin and has tightened regulations by placing scrutiny on the methods in which Bitcoin exchanges in China conduct their business, damaging growth in Bitcoin’s liquidity in China. Russia has also hinted at possible jail sentences for Bitcoin users. US regulatory activity has been dependent on which agency has taken an interest. The CFTC released a report in 2015 deeming Bitcoin and other digital currencies as commodities and stating that swaps and other derivatives involving Bitcoin would be subject to regulation under the US Commodity Exchange Act. The report seemed to be an overall positive for Bitcoin as the clarification removed any uncertainty related to whether the CFTC had the jurisdiction to regulate virtual currencies, providing a legal foundation for it to police abusive trading practices. Contrastingly, the SEC has rejected attempts to get Bitcoin ETFs approved.
Regulatory responses to cryptocurrency have been a frequent talking point in the news over the past year. In many cases, reactions are based on outdated information or a simple lack of understanding at what they are dealing with and the potential implications in the wider financial sector. This is understandable. There are many different cryptocurrencies and they are still a relatively new and emerging technology; it is something that people are learning about. Bitcoin, for example, was formulated in the wake of the 2008 global financial crisis which is arguably one of the key factors in its rapid growth as people began to lose faith in the traditional monetary system. Because of its long-standing existence compared to other cryptocurrencies and its still relatively small size in comparison to the global economy, Bitcoin has been the main focus of most regulatory activity. Authorities tend to focus on what they feel is the biggest threat.
6.1. Government Approaches to Bitcoin Regulation
Government regulation of Bitcoin has been a topic of concern for the Bitcoin community. As the government’s grip on Bitcoin increases, the decentralized aspect of the cryptocurrency has been called into question. One of the biggest temptations for governments to regulate Bitcoin is the potential for higher tax revenue. Since Bitcoin is still a relatively small market when compared to traditional currency, there is much potential for growth. As the Bitcoin economy grows, governments will want to be able to collect tax, something that is difficult for them to enforce with a currency that is hard to trace. The U.S. government has already taken steps in an attempt to enforce this with the IRS ruling in March of 2014 that Bitcoin would be treated as property and not currency. This meant that all Bitcoin transactions would be subject to capital gains tax. This decision led to dismay by Bitcoin investors who now claim that it will discourage the use of Bitcoin as a currency. This ruling may be difficult to enforce, however, as many small transactions take place in Bitcoin that are not reported.
Bitcoin has the potential to challenge the way we define currency, and some governments may take action to prevent the loss of seigniorage. Seigniorage is the profit made by governments through the issuing of currency. Because Bitcoin is decentralized and there is no Bitcoin company who can file taxes, it is unlikely that any government could control the issuance of their own national currency in favor of Bitcoin. An example of this is when Ecuador banned Bitcoin and announced plans to create their own digital currency in February 2018. This is, however, a somewhat extreme case, as Ecuador banned Bitcoin due to it conflicting with the creation of their national currency rather than fear of seigniorage loss. A more likely scenario for some governments would be to attempt to confine the use of Bitcoin to prevent it from becoming a threat to national currency. This could involve various regulations and legal tender laws which may restrict the growth and adoption of Bitcoin within those jurisdictions.
6.2. Impact of Regulatory Measures on Bitcoin’s Growth
There is still much debate over the extent to which government regulation affected Bitcoin’s growth, as it is difficult to disentangle the effects of regulation from other influences. However, it is evident that efforts to regulate digital currency have coincided with sharp shifts in the value of Bitcoin. This was demonstrated by the European Banking Authority warning in 2013, which drew attention to the lack of consumer protections and price volatility due to the relative small size of the Bitcoin market. This nearly caused the price to drop by 40%. The context of this is important as it demonstrates an overall impact of regulation. The EBA gave the warning during one of the greatest Bitcoin price surges to date, as it shot up from $100 to $1000 in a month. A German decision on the legal classification of Bitcoin in 2013 also led to a 23% drop in Bitcoin’s value as it declared that it was a unit of private money and competitive to the Euro. These are just two of many examples where dysfunctional regulation, particularly in terms of tax law and anti-money laundering, has caused volatility in Bitcoin prices. Volatility is a barrier to Bitcoin being used as a regular currency and store of value, as Bitcoin’s price risk is higher than most fiats and commodities. High relative price variability has been shown to inhibit a currency’s acceptability, leading to flight to quality and use of other currencies rather than the one with high variability. This can be shown with the general growth in Bitcoin’s acceptance and usability from almost nothing to seeing it’s now possible to buy above-ground goods and services with it, or to convert directly, for example, in Japan where it’s now recognized as a legal form of payment since April 2017. High variability, however, makes it unlikely that a merchant or consumer would want to value their goods in Bitcoins, so they become exposed to its price changes.
6.3. Future Outlook for Bitcoin Regulation
Currently, law enforcement agencies and legal regulators are finding it difficult to combat the anonymity, global, and cross-border nature of Bitcoin. In the future, it is likely that Bitcoin will be treated and regulated much like other financial systems. Recent endorsements of large financial institutions such as JP Morgan might bring rules and standardization to Bitcoin, which could threaten the principles it was founded on. Other countries like China and Russia might even go as far as to ban Bitcoin as it is seen as a threat to their own monetary systems. Russia’s central bank has plans to treat Bitcoin as a form of high-risk asset and is taking measures resulting in the restriction and banning of exchange to ruble. So how will regulation affect the future price and growth of Bitcoin? With countries seeking to regulate Bitcoin in their own ways, this will create a fragmented regulatory environment for Bitcoin. Restrictions and policy changes may create negative sentiment amongst consumers and investors and decrease consumer confidence. Restrictions may create barriers to entry for potential participants in the Bitcoin economy and might discourage some current participants from moving away from Bitcoin. Forcing Bitcoin to conform and operate under anti-money laundering laws and regulations may make it hard for businesses to operate as they may have to undertake costly compliance measures, which may result in an increase in the cost of goods and services in the Bitcoin economy. However, if Bitcoin can withstand and see through the various legal and regulatory challenges, it will result in a more defined and clear-cut regulatory system for Bitcoin. This will give certainty and confidence to businesses and would-be entrepreneurs who want to get involved with Bitcoin, thus surfacing the way for long-term growth of the Bitcoin economy.
7. Bitcoin’s Technological Advancements
Scalability solutions for Bitcoin – From its inception, an acute problem facing Bitcoin adoption has been an inability to modify the blockchain size over time. This issue of fixed block size has been a major factor in inhibiting Bitcoin’s scalability, as it effectively restricts the number of transactions the network can process to a maximum of between 3 and 7 transactions per second. A restricted transaction throughput coupled with increasing transaction fees as block rewards are reduced will make the system economically unviable to run, leading to a tragedy of the commons whereby the costs of running nodes will outweigh the benefits. This grim future scenario is known as the “death spiral”. In order to avoid reaching such a point, it is imperative to increase the scalability of Bitcoin to allow mass expansion in transaction volume whilst keeping the costs of running the network viable. There have been various scalability solutions suggested for Bitcoin, each with their own trade-offs. The Lightning Network is one of the most exciting prospects in the sphere of Bitcoin scalability. Lightning is a second layer payment protocol that operates on top of a blockchain, enabling fast, cheap and scalable off-chain transactions. It is a complex system, however in layman’s terms it allows for the opening of payment channels between users which can be used for a near infinite number of transactions, only settling on the global Bitcoin blockchain when the channel is closed. This ensures security for users without the need to trust channel operators. The Lightning Network has the potential to vastly increase Bitcoin’s transaction throughput whilst dramatically reducing costs, enabling microtransactions. Other scaling solutions include the idea for simple block size increases, however this is a somewhat short-sighted approach and would only provide temporary relief before hitting the same bottlenecks, and sidechains which allow for the creation of custom blockchains pegged to the Bitcoin blockchain.
7.1. Scalability Solutions for Bitcoin
The implementation of the Lightning Network is largely considered to be the most effective scalability solution for Bitcoin at this current point in time. To quickly summarize what the Lightning Network is, it is a second layer for Bitcoin transactions that works off the main chain (the initial block in the code) to send and receive money. This is done through opening a payment channel, sending coins through a channel, and then closing the channel. The reason why this solution is so effective for scalability is because of its ability to provide instant and low fee transactions with cross-block and even cross-chain capabilities. Due to Lightning Network transactions being quite literally off the record, the main chain is much less clogged up by transaction data and is able to efficiently process the on and off-chain transactions.
When Bitcoin was first released, every transaction was worth 50BTC. So even the smaller number of transactions that happened in the early days of Bitcoin were relatively small data to process. Only one transaction could fit into one block. Unfortunately, times have changed and so has the price of Bitcoin and the number of transactions that happen per day. As of October 2017, Bitcoin has reached a value of 5700USD+ and has a median block size of 900KB. Each Bitcoin block contains a lot more data and information than ever before, which is still trying to be crammed into that 1MB block size. After 2009, the number of transactions moved above 2000 per day and eventually reached numbers as high as 160,000. Imagine trying to fit 160,000+ transactions a day into 1MB worth of block size, and you can see why transaction time started to become increasingly slow, inefficient, and costly. This is where the implementation of SegWit came into play in 2017. Essentially, the data is restructured by splitting the transaction information and the signature information. The signature data is then shifted to the end of the transaction process and is not calculated in the transaction ID. The main benefit of this is that now each block can fit a greater number of transactions into it due to the decreased size of signature data.
Segregated Witness (SegWit) was the first step to tackling the scalability issue. The main reasoning behind Bitcoin’s scalability issues is that when it was programmed by its creator, Satoshi Nakamoto, it was decided that the block size of the code would be set to 1MB.
7.2. Privacy Enhancements in Bitcoin
Privacy can transform the internet and change society on a global scale. Personal privacy is very important for many different reasons. Privacy can impact the protection of a person’s rights, freedom, and security of their physical property, and can also affect relationships and how others perceive a person. It can be argued that if people do not have adequate privacy, their lives will become transparent to others, and such circumstances could undermine a person’s self-worth. Privacy and security are so important because they affect basic aspects of human dignity and can be essential to a person’s well-being. In the web, consumer transactions are primarily predicated upon the exchange of private data for goods and services, yet consumers currently have no way to directly pay for increased privacy when purchasing items. Many people are worried about the implications of having all of their financial transactions being traceable and observable by a third party. This is a legitimate concern that many financial institutions have tried to address in different ways because if all transactions are traceable, it could lead to some form of discrimination such as the denial of service to customers based upon the source of their funds. All of these issues can subtly erode privacy and can make financial processes less neutral and censor-resistant. Given the long-term societal implications of a traceable financial system, it is essential to take steps to improve the privacy of financial transactions both for today and for the future. Bitcoin has had issues with privacy and fungibility and has faced serious problems that have stymied the wider adoption of the currency. Bitcoin privacy is the area in which advancement is most badly needed, as can be seen by the urgent interest in tumblers and mixers, which are an effort to create a higher level of privacy to varying degrees of success. In “Securing your financial privacy,” Greg Maxwell states, “Today, loss of privacy in Bitcoin may be a largely untold story, but we’ve seen in the past that lack of economic privacy can change how a tool is used,” as he highlights the fact that if Bitcoin does not provide a good privacy platform, people will turn to outside sources to enhance the privacy of their bitcoin usage, so it is important for the Bitcoin platform to include a high-grade privacy solution. In order to enhance the privacy of Bitcoin to a higher degree, we must clarify what privacy is and what it means when we talk about enhancing the privacy of a transparent platform. Privacy is the ability for an individual to keep specific or all information about themselves to themselves with the freedom to selectively reveal information to other parties. High privacy is a form of power, and the loss of privacy is the erosion of that power. Today, when we talk about privacy in Bitcoin, we are talking about the fungibility of bitcoin and the ability for a user to make a financial transaction without that action being permanently and immutably recorded and linked to all of their future actions. High fungibility is an essential aspect of privacy as it represents the idea that two units of a good are interchangeable. Bitcoin currently has a low level of fungibility as a result of its transparent transactions, and every day, more tools are being developed to attempt to trace certain bitcoins to their origin and monitor the actions of coin spenders. Low fungibility can lead to a source of discrimination between different units of currency, which can affect the value and perception of said currency and the actions of past and future owners of said currency. Bitcoin can improve its privacy and fungibility on the protocol level through a variety of improvements and additions. An improvement to the GUI can also be made in order to educate users on best privacy practices and to make privacy solutions more accessible.
7.3. Smart Contracts and Bitcoin’s Potential
The idea of smart contracts perfectly symbolizes what Bitcoin is all about. It’s a decentralized, trustless, and secure way of transacting between two parties and enforcing an agreement. Smart contracts have been a part of Bitcoin lore for a long time. The most widely known use case of smart contracts was the failure of The DAO, which was an autonomous venture capital fund that used smart contracts to allow people to vote on investment funding. Due to a loophole in the contracts, one third of the Ether in existence was sent to the DAO, which was approximately $50 million USD at the time. However, Bitcoin also has scripts and smart contract-like features.
A user recently made a transaction with an 8BTC fee by accident and wanted it back. It was a transaction to himself, but instead of using OP_RETURN to send data, he used the string “8BTC”. He contacted Bitmain to help change it back, and they reached an agreement. Bitmain would change it back as long as he provided a new transaction to himself (proving he still has the key for the address) with a 0.4BTC fee and calling it a “fee” as thanks for helping Bitmain find and patch the exploit. This was successful, and the 7.6BTC was recovered.
8. Bitcoin and the Environment
The massive energy consumption and environmental impact of Bitcoin mining became a major topic of discussion in 2017 when analysis by researcher Alex de Vries (Digiconomist) estimated that the worldwide energy consumption of Bitcoin mining was somewhere between 35 terawatt hours per year. This amount is a little less than what the country of Denmark consumes, and it stands to reason that this consumption would only increase in the following years as the price of Bitcoin has risen. The primary cause for Bitcoin’s energy consumption is the design of its Proof of Work system, which requires that all nodes on the network solve a mathematically difficult problem in order to process a transaction and acquire new Bitcoins. The difficulty of this problem is adjusted so that a new block is added to the Bitcoin block chain every 10 minutes on average. Having multiple nodes working on the same problem helps validate its solution, but it has the downside of requiring a tremendous amount of energy as individual nodes compete to be the first to solve the problem. This high energy consumption comes with a high environmental cost, and valid concerns about this cost are often met with a false dilemma: that the choice is between the integrity and success of Bitcoin, and wrecking the environment. However, recent work by researchers has shown that there are methods by which Bitcoin’s energy consumption can be regulated without impacting the effectiveness of its Proof of Work system.
8.1. Energy Consumption of Bitcoin Mining
These calculations are, however, based on a specific methodology and a number of assumptions. There are also a number of variables unaccounted for such as the market availability of ASIC hardware and the level of difficulty in the Bitcoin algorithms, that may sway miners to use less power or better, more power-efficient mining practices. However, from the data we are able to acquire at this point in time, it is fair to say that the rate of Bitcoin’s energy consumption is a cause for concern.
It’s hard to determine the exact impact of such figures; however, a comparison can be made to the amount of electricity used at data centres. Companies such as Google and their wide array of online services rely heavily on the efficiency of web-based computing and thus run data centres with an optimized power per processing unit ratio that would likely surpass that of a mining farm. If we are to believe the Google figure from the years 2011-2012, it managed to utilize 260 million watts or 260 MW of electricity to power all of its services. To add more perspective, data centres as a collective on a global scale managed to use 38% less electricity in previous years to Google and total around 271 billion kWh. Assuming that the global data centre electricity usage is constant, a bit of simple math shows that these modern-day mining scenarios would at least be comparable to the power used at data centres and thus, are likely on par with the costs and energy efficiency of high-end consumer-grade computing and beyond. This all spells a rather grim picture of Bitcoin’s future impact on the world environment.
Energy consumption in the modern day takes hold as a rather significant issue with the way Bitcoin mining operates. This is largely due to the costs incurred with ASIC hardware by those looking to stay competitive and turning a profit. By design, ASIC hardware is intended to be as efficient as possible and over its life cycle, cheaper than alternatives. However, given the narrow scope and high demand for newly released and profitable ASIC hardware, frequent upgrades become the bane of a miner looking to stay competitive. The result becomes a steady build-up of high cost, high energy consumption equipment that must continuously be replaced to stay with the times. The major impact of this can be witnessed in a study conducted by Sebastiaan Deetman and his research team at Hasselt University in Belgium. The study goes to great lengths to investigate Bitcoin’s energy consumption and the carbon footprint of the current ASIC-based mining mechanisms. Using a rather broad but conservative set of assumptions, it is estimated that at the rate of their observations, the entire Bitcoin network could be using as much as 400-500 MW of electricity (De Vries and Noordewier, 2013).
Acting as computer servers for the Bitcoin network, miners are in competition to process the latest batch of Bitcoin transactions and in turn, be awarded Bitcoin. They can be located anywhere in the world. If they are to have a chance of being the next miner to be awarded Bitcoin, they must meet the often specialized and precise criteria. For all the latest and greatest features, one of the more fundamental pieces of equipment used in mining is the CPU. Given its general ease of availability and primitive ways of mining Bitcoin, it was the go-to piece of equipment, early on. However, this quickly gave way to GPU mining. While the GPU still uses processing resources, its design is vastly different from that of a CPU, catering for a broad range of data and highly parallel processing. The nature of GPU design and known presence in consumer electronics made it a natural and efficient successor to the CPU. As it currently stands, mining has further harnessed ASIC technology and in doing so, has found itself at quite the fork in the road between cost and energy efficiency.
8.2. Shift towards Sustainable Mining Practices
In order to mitigate the growing trend of a disconnect between technological innovation and environmental mitigation, some interest has now shifted to methods of more sustainable Bitcoin mining. Up to now, the general trend has been to seek out the cheapest form of energy possible for mining operations, in order to lower operational costs. In terms of decentralized network security, this makes perfect economic sense, as proof-of-work is intended to convert energy into a form of economic work that is costly to produce, thus discouraging attacks on the network. However, given the abundance of cheap energy in the form of flared natural gas and hydro in remote locations, the result is often an overspend of energy for a given level of security when more efficient methods could have been utilized. Moreover, the cheap energy in these locations often powers a grid that is in excess of local demand, which can result in the energy company effectively giving away energy at a fraction of the cost of production. While in most cases this is more profitable than stopping the generation of energy altogether, one must take into account the detrimental impact this can have on the environment in terms of CO2 emissions and the long run effect on the value of energy resources. This is an important consideration to make for the future, as the sustainability credentials of the network will likely become an increasing concern for investors and the general public, particularly when weighing the purported benefits of a trustless and incorruptible financial system.
8.3. Innovative Solutions for Green Bitcoin
The intent to fix Bitcoin’s carbon footprint could be leveraged to deploy renewable energy where it is a feasible, cost-effective option. The Puzzle-Pool-Solution model unites renewable energy resources with mining, helping to solve a difficult social problem and providing an elegant and cost-effective solution to an important practical problem. Renewable energy is not always a cost-effective option because of high capital costs and low operating costs. It is optimum to store additional energy as opposed to selling it at times of lower demand or negative pricing. This creates a de facto energy storage market in various energy sectors. The addition of energy storage resources yields benefits through empirically reducing the cost of energy production and increasing total energy provision. Flexcoin is a system aiming to match electricity supply and demand on the grid by employing real-time energy pricing. It focuses on decreasing electricity costs by shifting non-essential energy usage to different times of the day. It benefits renewable energy providers by providing demand response that may smooth out intermittency and price differences in the market. By employing cost-effective energy storage, excess energy created from renewables can be stored in the most efficient manner by cryptocoin assets as opposed to selling it at a loss in the current energy markets. This can be achieved through using battery technology and possibly by creating an ‘annuity’ to fund an eco-friendly crypto-asset before and during the energy production timeframe.
9. Bitcoin’s Influence on Other Cryptocurrencies
9.2 The competition among cryptocurrencies has served to provide a market mechanism for trying new ideas presented by coins, with the newly hatched idea often being a modification of the original. The refinement of these new ideas has at times led to collaboration between different development teams. An example of this would be the four ‘CryptoHorse’ organizations, which each represent a different race horse cryptocurrency and aim to add a decentralized horse racing betting market to Ethereum. The competing organizations have each agreed to contribute funds to an open-source code base which will serve as the underlying framework for their systems. Collectively, these means of competition and collaboration are very much a real-world parallel to the expansion at build-out of features of any given piece of software. The fact that the software being built here is a directly tradable and redeemable asset only serves to improve the speed, efficiency, and quality with which these ideas are executed.
9.1 In 2011, less than two years after the name was changed to Bitcoin, a man by the name of Charlie Lee, a former Google employee, forked the code of Bitcoin and created the first alternative cryptocurrency called Litecoin. The primary differences with Litecoin to Bitcoin were the decreased block generation time, increased maximum number of coins, and a different hashing algorithm. The creation of Litecoin served to provide a solid development platform and increased test bed for trying out new innovations to code to the core protocol. Since then, there have been scores of altcoins, all bringing a variety of features, designed with the sole purpose of trying to be ‘better’ than Bitcoin. This feature experimentation is something which has led to a high degree of innovation in the cryptocurrency space.
9.1. Altcoins and the Cryptocurrency Market
Altcoins are cryptocurrencies other than Bitcoin. The burgeoning number of altcoins in the marketplace represents a variety of features and innovations in cryptocurrency. Altcoins function as an alternative to bitcoins and offer various alterations in the code which provide a diverse range of characteristics compared to bitcoins. There are several thousand altcoins available in the market at the time of writing. Often, these coins can be perceived as an attempt to improve upon the shortcomings of BTC, or to offer something which is only possible by making changes that Bitcoin would not allow for. Usually, the creation of a new altcoin is attributed to a specific improvement or idea not found in Bitcoin’s code. Other altcoins simply offer variations in the areas of trade, issuance, and distribution of digital currency. These are generally treated by the broader population as a speculative commodity which is traded in hopes of profit and are popular in market-based economies.
The massive amount of altcoins available can create a complicated and tedious process for someone seeking to get involved in the world of cryptocurrency. These potential cryptocurrency enthusiasts are faced with the daunting task of choosing the right coin to invest in or use for their purposes. With such a vast range of options, it can be difficult to determine an appropriate decision. Consideration of the specific features and benefits of each coin is a time-consuming task which may involve understanding technical white papers and building an understanding of various consensus methods and cryptographic terminology.
If one has not previously owned any cryptocurrency, the task is further complicated by the fact that the easiest way to acquire most altcoins is to first buy bitcoins and then trade those for the intended alternative digital currency. Although gaining a comprehensive understanding of how to navigate cryptocurrency markets can be considered a rite of passage for an enthusiast, the need for acquiring bitcoins as an entry point represents added inconvenience for those who would prefer to obtain their desired altcoin using more familiar and established methods of purchase. Lastly, the task of simply finding a place to store a recently acquired altcoin might lead a new owner back to the search engines, inquiring where to obtain a wallet client for a coin and how to safely secure it.
9.2. Competition and Collaboration among Cryptocurrencies
These two pieces of data generated much interest in a comparison between the three safe haven currencies: USD and the two digital currencies, leading to research into the correlation of Bitcoin and other currencies and Bitcoin’s role as a Forex.
An example of this would be the Cyprus financial crisis in 2013. During this time, the Cypriot government froze bank accounts and restricted the amount of cash that could be withdrawn from ATMs. Cypriots restricted to a limited cash supply went to Bitcoin. This increased the demand for Bitcoin and raised the price, as seen in this graph. An increase in the demand for Bitcoin will more than likely lead to an increase in Bitcoin’s price. During this time, there was also a large increase in the price of gold. The price of gold and Bitcoin are somewhat correlated because they are both liquid alternatives to fiat currency. This data supports the idea of Bitcoin being a safe haven asset during times of economic uncertainty. Gold is often used as a hedge against currencies.
Altcoin trading will often lead to the increase or decrease in the value of the original Bitcoin. An increase in the price of an altcoin will often cause a decrease in the price of Bitcoin, as speculators transfer their funds from Bitcoin to an altcoin. This is somewhat of a threat to Bitcoin, because in a world where any digital currency can be converted into another or into fiat currency, Bitcoin is no longer the sole liquid currency option. High liquidity on an altcoin can vastly reduce Bitcoin’s price and thus its market cap.
This was followed by the rise of altcoins, introducing the concept of a cryptocurrency that is modified from Bitcoin’s open-source protocol. An altcoin has different features of Bitcoin, with some additional changes. This brought a large number of clones of the Bitcoin software, and a large number of pump and dump schemes. The idea of an airdrop, as many called it, was used to raise a large amount of awareness of an altcoin. Imagine this as a dividend payment, but in the form of the new cryptocurrency.
During the early days of Bitcoin, there was little competition in the world of cryptocurrencies. As we already mentioned, there were other currencies like e-gold and Liberty Reserve, but they were easily shut down by the government. The first real competition to Bitcoin was Namecoin, a modified version of Bitcoin that was created in April 2011. Soon after that, in October 2011, Litecoin was released. Litecoin is a modified version of Bitcoin that uses scrypt instead of SHA-256 as its proof of work algorithm.
The complex landscape of cryptocurrencies has been a rapidly evolving one. There are currently more than 600 different cryptocurrencies competing in this space. Many are just slightly different versions of Bitcoin, while others are attempting to do something fundamentally different. This section will be exploring the dynamic between Bitcoin and its competitors and imitators.
9.3. Bitcoin’s Dominance in the Cryptocurrency Space
Statistical data and empirical evidence presented within this paper lead us to establish the model that best explains Bitcoin price formation after the currency’s first couple of years in existence, attempt to correct common misconception about Bitcoin’s deflationary-driven instability, and layout a theory to answer the key question of why agents choosing between Bitcoin and alternative cryptocurrencies always prefer Bitcoin. In order to investigate the emergence of other cryptocurrencies, it is first necessary to understand the nature of the Bitcoin price factor model. This model enabled BTC/USD exchange rate to be estimated as a function of specific and potentially time-variant information sets. The model and information can be broadly categorized into two types: (1) ‘internal’ information and (2) external ‘market’ information. ‘Internal’ information incorporates factors specific to Bitcoin, such as network hash rate or market trading volume. ‘External’ market information pertains to investor expectation of future global or domestic financial and real economic events effects government financial decisions and expected level of inflation on the value of real money, and with Bitcoin acting a close substitute to both fiat currency and currency hedges, alternative cryptocurrency. Expectations of market information are influenced by the known and expected future real economic time series variables, political events, and government decisions. From the identified information sets, we build and estimated time series autoregressive error model with exogenous variables (ARIMAX). This framework allowed for complete hypothesis testing and in-sample and out-of-sample forecasting of the BTC/USD exchange rate. The resulting model had an R2 value of 0.9612 and accurately represented the effect Bitcoin specific and persisting market factors had exchange rate movement. A more detailed account of the time series model and its results is included in Appendix 1. The ARIMA model presented strongly contradicts the hypothesis that Bitcoin has random or a ‘purely speculative’ intrinsic value. Combined results from time series modelling, impartial causal tracking test analysis and sample period comparison suggest Bitcoin as having speculative value that varies in response to different scenarios of a world changing real economic event. This speculative value drives the demand for Bitcoin as a proxy to fiat currency, gold and foreign exchange hedge trade captured in the model by Bitcoin MRER deviation from its expected value given an inflation rate difference and an ARIMA residual. MMM results indicate speculation of global effects and demand for cryptocurrency hedge trades have negative income elasticities and relatively low bitcoin a.m.e.i Compared to the above phenomenon and occurring around the natural desired level of money graph information, it is clear that the emergence alternative cryptocurrencies will be motivated by an arbitrage an attempt to capture Bitcoin’s profit wherein these currencies are exchanged for Bitcoin. A speculative value expectation and absence profit taker regulation alternative cryptocurrencies to potentially fluctuate and differentially affect Bitcoin internal and extern exchange rate factors cited in our price formation model. Reach for the outcome cryptocurrency competition results a fragmentation attempt Bitcoin like explanation, or too high opportunity cost benefit marginal rate unit Bitcoin, will see said factors differential rates relative changes increase or decrease compared what they would been had alternative currency never been introduced succumb relative influenced by informational differentials possible future study these event effects types cryptocurrency. Dynamic price factor illogical stability among all rates recommended one two more opposing choice measures will lead general theory that current dynamic inflationary expectation specific expectational demand variables are best the marginal rates unit money to this point has been.
10. Bitcoin’s Social Impact
In an age of global and totalizing neoliberal economic policy, it is no secret that the marginal tax rates of high earners have lowered, and in some cases, evasive tax strategies have left the more financially mobile echelons of society paying less of a percentage of tax than those lower down the pyramid. Bitcoin provides a chance to redirect some of the money that has been siphoned from the lower classes, and through mechanisms such as encrypted offshore accounts, it offers a tool for the savvy individual to retain an increased proportion of their earnings.
Gramsci stated that “anyone who is subaltern is innocent,” and in the same vein, the poor and financially marginalized are almost never responsible for the malaise positions that they find themselves in. More than this, it’s often the case that those who are most in need of an escape route are prevented from doing so under high barriers to exit caused by indebtedness. The tool of inflation, while being a “hidden tax” on everyone, can act irrevocably against those at the bottom of the pile, still impacted by increased prices while having limited wage bargaining power. Inflation is still a difficult concept in an era where monetarist economic theory is the norm, though the potential price of escaping from it is economic ruin, regularly seen in countries where the solution has been wholesale default on foreign currency-denominated debt.
Bitcoin is able to allow the would-be financially dispossessed to control their own wealth for the first time in history without the need for expensive mediation in the form of financial instruments and government-imposed restrictions. This ability has particular salience at a time when more people are seeking to take control over their own financial future. The influence of deleterious global macroeconomic policies has caused a growing number of people to seek financial sanctuary in “safe haven” assets. Realistically though, access to these assets may be few and far between for those without connections and significant capital. And as seen in the case of Cyprus, such assets may still be subject to capital controls. Bitcoin presents a reachable alternative to these people, and it’s a system where wealth is fully controlled by its owner without the risk of arbitrary confiscation. From a personal perspective, this may range from a middle-class individual seeking to protect their savings to an international worker sending remittances to support his family back in the home country.
Bitcoin has often been colloquially referred to as a “people’s currency” due to its potential to be borderless, and its influence is designed to be wielded by the masses rather than a select few. In this section, we will explore how Bitcoin has and can fundamentally shift the established global economic order, and the profound impacts that this may have.
10.1. Empowering Financial Freedom
One of the most critical reasons why this use of Bitcoin’s social impact has the potential to create great positive change is it will place downward pressure on global prices for sending remittances, potentially improving the lives of millions of people if the cost of living decrease exceeds the wealth lost from jobs in the banking sector. The broad problem of people living under failing monetary policy, high inflation rates, and detrimental capital controls can be solved by individuals moving their wealth to a more promising currency or store of value. Step one is earning money, an activity that is often made more difficult in countries with high inflation rates as the population’s purchasing power decreases. Step two is keeping the money in a system that doesn’t eat it away through inflation or impose a tax on holding foreign currencies or assets. Bitcoin has had a well-documented history of wild price swings. But on the whole and in the long term, it is a deflationary currency. This is programmed into the system via the controlled supply schedule and cannot be tampered with. Bitcoin’s price volatility is expected to decrease as adoption grows, and this is in stark contrast to some of today’s fiat currencies which can experience persistent and ruinous inflation.
The liberty to transact without requiring permission from an intermediary is a key driver behind much of Bitcoin’s social impact. Remittance, being a typical example where the poor and migrant workers are frequently charged an extreme amount to send money to their loved ones in their home country. Enabling financial transactions to take place across borders with no need to convert currencies and potentially being able to save a considerable amount in the process presents a compelling use case to those struggling under the weight of today’s financial system.
10.2. Bitcoin and Wealth Redistribution
Bitcoin has the potential to promote a more economically rational and less exploitative US foreign policy.
Bitcoin clearly has the potential to significantly alter global foreign currency markets and cause a reduction in the US dollar’s real exchange value. This makes it harder to justify the fact that the USA keeps on consuming more than it produces and carries out high levels of wealth redistribution from the rest of the world through inflation and taking advantage of artificially cheap loans. If the supply of US Treasuries to foreign nations decreases, it will be harder for the US to finance budget deficits, and there will be less loss from opportunity cost for nations holding physical cash equivalents. It’s possible that the rise in the relative value of other currencies will force the USA to live within its means and cause a flow of real resources out of the USA and back to the nations from which they were taken.
This is a bitter pill for the USA to swallow after having received exorbitant economic rent from the rest of the world as the issuer of the global fiat currency. The ability to print money at will and require that other nations hold USD as a risk-free asset for international trade has afforded the USA substantial economic and financial benefits. The exorbitant privilege has allowed a substantial flow of real resources into the USA, especially from the third world, as they exchange commodities for the highly inflated global reserve currency.
Bitcoin is unique in that, mining apart, it requires no direct production and hence its value can be said to be based purely on its desirability relative to another currency. It can be posited that the rise of Bitcoin signifies a diversification away from the US dollar as the global reserve currency. In November 2013, China overtook the USA as the world’s largest importer, and Bitcoin has played a substantial role in circumventing capital controls and essentially providing a better store of value than the yuan by allowing Chinese to buy cheap bitcoins with their yuan and sending those bitcoins abroad to be sold for a more stable currency.
Moving on to Bitcoin and wealth redistribution. So far, the discussion has centered on apparent social and economic utility by providing stable currencies and low-cost asset transfer. A pertinent question that arises is whether the advent of Bitcoin can bring to fruition the possibility of more equitable global wealth distribution.
10.3. Bitcoin’s Role in Challenging Traditional Power Structures
The exchange rate between two currencies is the price of one currency in terms of another, i.e the supply of one currency is being exchanged for the demand of the other. Therefore, we may analyze the market for Bitcoin by considering the exchange rate between USD and Bitcoin. Let us consider the case in which Bitcoin is a success and its value increases compared to the USD. This would lead to an appreciation of Bitcoin, as with a fixed supply of 21 million, an increase in demand will lead to a higher price.
The demand for a particular currency is derived from the demand for a particular good. The analysis of the market for a good is a very general and simple economic framework but this is the beauty of it. It sets a clear foundation from which more complex analysis may build, and it often yields very clear implications. The market for a good is in equilibrium when the supply of the good is equal to the demand.
Bitcoin is a digital currency that was launched in 2009, and it has attracted much attention recently. This article uses the simple economic framework of the market for a particular good to discuss the implications of the success of Bitcoin in terms of economic theory. This article is written for the interested public and Bitcoin users, and its intention is to foster a deeper understanding of the market for Bitcoin and the implications its success may have for the global economy.
The literature on Bitcoin is dominated by speculative and economic works. The following analysis presents a review on the use of Bitcoin in developing markets, wealth distribution, the potential for illicit activity and fraud, and the global factors intertwined with traditional power structures. These sections have some overlap, but this organization should give the best flow to the reader in understanding the potential impact of Bitcoin in developing markets and traditional power structures.
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11. Future Prospects of Bitcoin
The vast majority of people still do not own any bitcoins. If bitcoin is to become a global currency used by common people, it must not only be able to be used to purchase real-world goods and services, it must provide a way for ordinary people to obtain them. There are a number of services that allow individuals to obtain bitcoins. Some of them allow for trading of bitcoins with other assets, as well as purchasing them using a credit card. But, these services must often comply with laws of various countries requiring detailed information on the identity of the users. This could prevent a large number of people from using bitcoin. Step-by-step improvements to the user interface and shopping experience will attract more people to the bitcoin ecosystem. Bitcoin is still not very user friendly even for technically inclined people. User interfaces are often unintuitive, building and securing bitcoin wallets can be daunting for newcomers, and the jargon of the ecosystem can be offputting. It is not unusual for users to accidentally lose bitcoins, because of a misunderstanding of change addresses or for other reasons. Uncertainty about the ability to secure an adequate income from bitcoin mining could discourage the continued expansion of the bitcoin money supply. Finally, the measures taken by people to increase in value of their currency by speculative investment could hinder its use as a medium of exchange.
11.1. Bitcoin’s Potential for Mass Adoption
The possibilities of Bitcoin being truly adopted on a large scale worldwide are significant. At this point, the currency is growing fast and holds a lot of promise, having the potential to become truly life-changing for many people. With the instability of many national currencies around the world, failing working programs, and other issues that make life more difficult than it should be, Bitcoin stands to provide an alternative that people can rely on. The more unstable an economy, the more people will start to see the benefits of having a global currency like Bitcoin that is less affected by changes in the local currency and is less likely to be lost or devalued. With the truly global nature of Bitcoin, people who rely on money from relatives in other countries can stop being affected by excessive bank fees and exchange rates. Also, there are still surprisingly large numbers of people in developed countries like the USA who are simply unbanked. The reasons for this can vary from previous financial troubles to immigration status or just the high number of fees for a person who doesn’t keep much money. In this case, Bitcoin provides these people a way to participate in the economy with a method of moving and storing funds that is drastically superior to hiding large amounts of cash under a mattress.
11.2. Technological Innovations Driving Bitcoin’s Future
Now in 2017, platform and fork choice have become an option to bootstrapping developmental effort. The debatable scalability of off-chain transactions is a huge field of unexplored UX design for all aspects of Bitcoin, likely leading to marketable secondary layer applications inviting more capital and talent to the space. A saturated scaling solution could also allow secondary applications of the blockchain technology to compete in a free market via BTC or an alternative cryptocurrency, constituting that much of blockchain’s competition is a zero-sum game. All these factors combined equal to a motorist driving to various forks in the road, but with technological innovation as the ultimate fuel for industry, there exists a direction for innovation without persuasion.
The usefulness of Bitcoin’s core function at present is represented by the whopping $8.9bn market cap of BTC, the revolutionary blockchain technology, and the capital pouring into a digital currency ecosystem teeming with innovation. Yet with the centralization of Bitcoin mining, the constrained 1MB block size, the rising consensus on Bitcoin Core to implement Segregated Witness, and the recent consensus to pursue a UASF at August 1, 2017, the true future of Bitcoin is still in question.
The future technical capabilities of Bitcoin were introduced by a discussion of how Bitcoin is trying to scale to a global, mass market, comparing it to an early stage technology firm seeking venture capital. Investors are willing to fund companies in the hope that they will one day achieve market domination through lucrative network effects. At this stage, Bitcoin provides a global, open financial network of fast, cheap, apolitical money transfer. This is a value proposition compared to the current banking system and remittance markets, where the transfer of money domestically and especially internationally is slow and costly. But Bitcoin’s efficiency can still be greatly improved. Chris Dixon, an Andreessen Horowitz general partner writing about why Bitcoin matters, put it simply, “Bitcoin today is a P2P protocol for sending and storing digital money. Most of the other stuff people are trying to do with it are secondary, and will mostly depend on how useful this core function can become.”
11.3. Potential Obstacles and Risks Ahead
The main thing Bitcoin has going against it are the other alternative cryptocurrencies that appear to get stronger with each passing year. The notion that an emerging altcoin will overtake Bitcoin is a troubling one. As seen on websites such as ‘coingecko’, there are many altcoins that share similar or the same ideas as Bitcoin, simply aiming to improve on the idea and take it for themselves. This has been an ongoing issue and an incredible amount of wealth has been lost from failed cryptocurrencies and poorly managed investments. Companies or individuals with vast resources could also develop their own specific cryptocurrency tailored for a certain purpose, the likes of which could potentially be game changing. An extreme example would be a cryptocurrency developed by a major financial institution, the purpose of which would be used for market manipulation techniques to further enrich themselves. This may eventually lead to a cold war like scenario as described by Jon Matonis, with rival currencies used as a form of economic warfare and a means to fight for global financial supremacy.
The future of Bitcoin is exceptionally bright. The digital currency is clearly ‘growing up’ and is at a stage where it has the potential to change the world and how wealth is distributed. The innovation and progress Bitcoin has made in just 7 years is remarkable. The pace at which the currency has been developing (as seen in chapter 6/7) is also an issue for this section, as any obstacles that arise will inadvertently slow the progress of Bitcoin down, or could even lead to failure. In summary, there is no turning back for Bitcoin now, it will continue to grow and develop, however the path is still fraught with danger. It is both an exciting and frightening time for all those involved in the Bitcoin industry.
12. Conclusion
The more recent perception that Bitcoin has notable value to be compared with fiat currency, being viewed as an investment and a global form of money, has established Bitcoin as something with influence. This is furthered by the ongoing impact of Bitcoin on a global scale mentioned previously, culminating in it providing motivation for the establishment of the Bitcoin category in the history books.
Today, Bitcoin is widely used for both legal and illegal trades on the deep web and is now accepted as part of normal online business for an array of goods and services. The next obvious step for Bitcoin is to utilize it as a means of conventional payment. This will require marketing and an incentive to either keep or value Bitcoin, a conversation for another time.
At first, those in dodgy businesses such as weapons or drugs found Bitcoin to be an effective means of transaction due to its quasi-anonymous nature. As Bitcoin gained notoriety, this primary usage was fraught with uncertainty and the changing rates often incurred losses, which led to a decreased value and an association with the likes of online gambling. However, the rate of growth and acceptance has been such that these early moments of Bitcoin utilization have been rendered quite inconsequential in comparison.
Recapping the journey of Bitcoin as a revolutionary force is nothing less than a rollercoaster ride. From being developed initially as an alternative to government-issued currency to being one of the most sought after investments, Bitcoin has come a long way. It has evolved from being a way of conducting deep web trades, its initial use in the market, to something everyone has at least heard about by now. The distinction from a shady/deceptive form of currency to one that has gained trust and popularity facilitated its assimilation into numerous facets of online business. Now the question that often gets posed is whether it will ever replace conventional currency?
12.1. Recap of Bitcoin’s Evolutionary Journey
“The beginnings of Bitcoin can be traced to 2008, around the time of the global financial crisis. It was created by an unknown person using the pseudonym “Satoshi Nakamoto.” This person published a paper under what could be seen as an alias, outlining the idea and concept of Bitcoin. The following year, Nakamoto released the first known Bitcoin software that launched the network and the first units of the Bitcoin’s cryptocurrency, called Bitcoins. Satoshi Nakamoto was active in the development of bitcoin up until December 2010. Many have speculated that his motivation was to create a currency uncontrolled by the government, which could be used in an environment that is anonymous and doesn’t involve intermediaries. A key piece of evidence that supports this theory is that when the global financial crisis and its impact on the world are considered, it’s obvious that the crisis was rooted in the mismanagement of currencies and the spread of uncontrolled credit, which is what he has stated in the bitcointalk forum about his aim in the development of Bitcoin. During his time working on Bitcoin, he was said to have written over 80 blogs in his WordPress account detailing various aspects of Bitcoin and commented on posts. In his early developments in bitcoin, he worked with people to improve the Bitcoin software, but what would be surprising is that there was limited discussion about the project and direction it was heading. The majority of the work was done behind closed doors, after which the new implementation was then offered as open-source software. He also took steps to ensure that he was protecting Bitcoin. In mid-2010, he handed over control of the source code repository and network alert key functions to Gavin Andresen, and then ensured that his access to the Bitcoin Core was removed. He then disappeared with no trace.” (CoinDesk) During his time in charge of Bitcoin, Nakamoto has implemented changes to the software and in instances refused ideas proposed by other developers, which inherently caused disagreements and conflicts, something that would carry on even after his departure. The impact from the various things he has done throughout his time in Bitcoin is something that is not underestimated, and his creation of Bitcoin and the software is something that will be endearing, even to this current day.
12.2. The Ongoing Impact of Bitcoin
There are aspects of Bitcoin that will also continue to evolve as various technologies are tested and adopted. For example, whether or not Bitcoin should adopt privacy features, and if so, to what extent, is a topic of much debate. We have seen proposals and existing external technologies that range from simple mixing services to fully trustless and anonymous currencies. Polling results suggest that the community remains divided on how to proceed with this issue. Another contentious issue is that of scaling. As Bitcoin grows, its scaling properties must be continually evaluated, and if necessary, improvements should be made to ensure that it continues to be cost effective to transact across the globe. Currently, there are many proposed solutions to this problem ranging from the “status quo” to radical changes in Bitcoin’s software and protocols. While the success of future technologies cannot be predicted, it is likely that the competition for new developments will continue to drive the state of the art in Bitcoin in many areas. By exploring the projects in this section, and by keeping an open mind on the infinitely many possibilities for future development, we hope that the Bitcoin community can continue to build and support new and innovative features and enhancements to the network… all to pave the way for a robust, trustless, and decentralized global financial system!
Some of these projects are in the early stages of development, while others have been in operation for several years. The proposed models presented in this section are not meant to be exhaustive nor prescriptive; rather, our goal is to help the Bitcoin community generate more ideas on how it might incorporate additional features and functionality into Bitcoin. We encourage members of the community to get involved in these projects and help us “pave the road” for the next set of innovative features to be built into Bitcoin!
12.3. Bitcoin’s Role in Shaping the Future of Finance
The progression has parity with any other aspect of human evolution or technological progress and seems to be driven by the same implicit and unconscious striving towards perfection that Aristotle described long ago. Bitcoin is still in its infancy, an extremely volatile currency at the base of the S-curve. It is now extremely likely that it will continue to grow, develop and morph into a very important aspect of the future global economy. It is beyond the scope of this work to ascertain the future path of Bitcoin, but in order for the reader to fully understand what follows, we shall lay down some conjectures as to the most probable next steps in Bitcoin’s evolution.
Let us pause for a moment and reflect on the significance of the events of the previous chapters. A coherent pattern begins to emerge: a new tool for commerce has been introduced which reduces the cost of transaction and facilitates local and international trade. This tool is significantly superior to the one it displaced and has the potential to replace it entirely. The displaced tool was itself once a new innovation which was markedly superior to the one before it, yet what it displaced was never an earlier form of money, but rather barter – direct exchange of one good for another.
