Bitcoin has been making lots of appearances in the news lately. Some people are against it and think it is a complete scam while others think it will be the future of currency around the world in the 21st-century digital revolution. I have spent some time researching about what it is and how it works. Overall, it looks very promising and interesting. Although I still don’t understand it, I like the idea of allowing people to exchange goods and services without relying on third-party banks to facilitate their transactions.; partially or completely phasing out banks and governments.
Will Banks and governments allow it to work? Only the future will tell.
Prominent business CEO’s have publicly opposed to Bitcoin and are very convinced that it is a fraud. Jamie Dimon, CEO of JP Morgan Chase, thinks Bitcoin will blow up and advises people to stay out of it. However, other prominent business CEO’s, who used to be prominent skeptics, have just started investing in Bitcoin. Mark Cuban, another billionaire, just started investing in Bitcoin, which shows that there is potential for this digital currency to work in the future.
For any currency to operate, three main things are very essential.
- Trust: People who use the currency have to be convinced that it is worth using it to exchange with the price of goods and services. Right now, Bitcoin is a currency on the internet. As long as people think it is valuable, it will still work. The moment that trust is gone, Bitcoin becomes worthless and all people who own it, lose their money. This is why Bitcoin is extremely volatile, which scares the banking industry.
- Financial insurance/backing. Other currencies such as $$ or euros are insured by the central banks around the world. In the States, Federal Reserve ( The Fed) ensures the public that whenever any bank fails, The Fed steps in to reimburse people’s money in checkings and savings accounts. This creates trust with the people and keeps the banking system intact. In Europe, the ECB ( European Central Bank) plays the same function as the Fed in the States.
- Quality and quantity of the money supply. With our regular currency system, central banks regulate how much money can be in circulation and they do their best to make sure that nobody else can print out ” hard cash” except them. Bitcoin has this provision but since it is a digital crypto-currency, any hacking or modification of the source code can cause real danger without a central regulator to avoid “fake bitcoins”.
The main issue with Bitcoin is that it lacks the financial backing from any central banking institution. Thus, the moment people don’t believe in the system or some cybersecurity issue ( hacking, source code error, etc) happens, Bitcoin can easily lose its value overnight, which is extremely dangerous and unsustainable.
What is Bitcoin and how did it come about? Banking on Bitcoin, Netflix series
Bitcoin was invented by somebody who called himself, Satoshi Nakamoto but chose to remain anonymous. To this point, nobody knows exactly who the real Satoshi is. The idea of Bitcoin was conceived and programmed in the wake of the 2008 financial crisis. The inventor, who happens to be a computer scientist interested in cryptography, was frustrated by the failure of banks in the wake of the 2008 financial crash and thought he had a way out. His main purpose was to provide an alternative medium of exchange for goods and services without relying on central governments and banks to issue currency in form of money.
In its infancy, BitInstant was one of the popular companies transferring bitcoin currency into regular dollar money. In the end, the company got into troubles after it was discovered that BitInstant was facilitating drug dealers to sell drugs online and helping drug lords to convert bitcoin money into US dollars. The company’s CEO, Charlie Shrem, went to jail for two years, but he is out of prison ( as of now).
At some point, there was a Bitcoin Center in NEW York City, right in front of Wall Street. This center along with another prominent company, MT. GOX acted as Bitcoin exchange, where people were buying and selling their bitcoin values with real money. In its original source code, interestingly enough, there are only 21 million bitcoins, but each bitcoin can be divided into one million pieces as described by the sole-programmer in the code. To this point, nobody knows who owns the source code. Another key concern for Bitcoin due to hacking. What if some genius hacker discovers the source code, and figures out to increase or decrease the number of bitcoins as they see fit to their interest. What if they wipe the whole system down all-together? The Bitcoin system can collapse overnight. The issue of volatility is of a great concern in Bitcoin exchanges around the world. The CEO of MT. GOX, Mark Karpeles, is serving a 10-year jail sentence for losing about 500 million dollars in Bitcoin transactions.
Challenges with Bitcoin Industry, now and in the future.
Regulation and dealing with failures:
- The New York administration issued Bitlicense application, a set of regulations, intended to regulate the industry. However, big players in the industry disagreed with them and found them too restrictive and overwhelming. This Bitlicense prompted Bitcoin Center to close down its operation in New York City. Luckily, the industry is still alive and well. Its future is both challenging and interesting at the same time. See the share price of bitcoin from 2012 to 2017 ( graph below).
- When MT. GOX Inc, one of the companies handling more than 80% of all Bitcoin exchanges, filed for bankruptcy in 2015 after losing half a trillion dollars. This was 6% of all bitcoins in circulation. Lots of people “lost trust” in bitcoin, but the industry has rebounded back its good days as shown by the graph above.
- Dealing with Banks and governments
- Bitcoin Center Foundation was set up to address potential issues with using bitcoin. Abiding by regulations, educating the public and making sure that the bitcoin platform is not a safe heaven for money laundering from the drug industry.
- Banks and governments are getting interesting in the Bitcoin platform and it seems like they would want to control it if it emerges an alternative to regular currency ( dollars, euros, pounds, etc). One would assume that they will probably fight against it especially because it will take away some of the financial power that they currently have.
Bitcoin Share Price starting from $1,000.00 in January 2017 to $4,000.00 in October 2017. Is this a bubble or just massive interest in Bitcoin?
Overall Assessment of Bitcoin and its future potential
Digital Cryptocurrency is going to be involved with the Internet of Things and the next technological revolution that we are going through. We started with hard cash, then electronic cash, and the future will be some form of digital cryptocurrency for sure. This progress is inevitable and it is just a matter of time before cryptocurrency takes over maybe. The good news is that Bitcoin is opensource, so everybody can use the technology and modify it as they see fit to facilitate the needs of customers. This is a block-chain technology that can be incorporated into WallStreet. Governments and Banks want to be in charge and control the system. Wallstreet and Silicon Valley are already embracing it. The government has stepped up with regulations to monitor the system. Silicon Valley and venture capitalists are backing it with their money to make the system better. In this digital and personal data revolution we are experiencing, I have no doubt that some form of digital cryptocurrency is the future of money that people around the world will use to trade with each other, eliminating heavy reliance on banks and central banks. Can they allow it to flourish? or Will they still want to control it? Only the future will tell.
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Your finance nerd, Didier Champion!
References
JP Morgan CEO, Jamie Dimon, on Bitcoin: Bank executives betting on Bitcoin shorting and betting on the failure of Bitcoin.
Mark Cuban, billionaire, and CEO of Dallas Mavericks, investing in Bitcoin: Rich business putting the money where they see potential
Netflix documentary on Bitcoin: Banking on Bitcoin: A comprehensive and a good overview of how Bitcoin came to exist on Netflix.
Bitcoin Center Official website in New York Center: This website will give you a good overview of what is going with Bitcoin around all the exchanges around the world.
MT. GOX, financial troubles and losing a half trillion dollars, big setbacks for the Bitcoin Industry.
Bitcoin Share Price since its inception: Share Prices and trading.
What is Fintech? Early Bitcoin founders along with the mysterious Satoshi Nakamoto ( Nick Szabo & Hal Finney)
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