On September 1st, the value of Bitcoin, an online digital currency, hit an all time high of $4,950.72. Bitcoin has skyrocketed in value almost 870% in one year since September 1, 2016. While this peer to peer online currency has only been in circulation since 2009, created by an unknown individual using the name Satoshi Nakamoto, it has reached a current market capitalization of $66.1 Billion (as of 9/18/17). Bitcoin claims to offer a number of advantages over traditional currency, specifically not being processed through traditional banking platforms leading to lower processing fees. All transactions are blockchain, recorded on a public ledger held within the cloud. This allows everything to be constantly up to date and leads to total transparency within Bitcoin exchanges. This is all accomplished through mining, what Bitcoin explains “is distributed consensus system that is used to confirm waiting transactions by including them in the blockchain.”
Currently, the largest threat to Bitcoin is the aggressive actions taken by the Chinese government in order to stop the trading of the digital currency. The Chinese Government has stated that it plans to close all commercial Bitcoin exchanges operating within China and has gone further saying that it will be pursuing a comprehensive ban on all trading channels including peer to peer platforms. This would be a MAJOR blow to Bitcoin as a whole and has already had a massive impact on Bitcoin’s value. It plummeted from it high of close to $5,000 USD on September 1 to just above $3,000 earlier this month. The Chinese government feels that the decentralized currency is a direct threat to their official currency, the Yuan. The graphic below displays the massive share the Chinese market has on the Mining and trading of Bitcoins. Clearly, the Chinese are the leaders in Mining, or verifying transactions, in which miners are rewarded with new Bitcoins for their work in confirming transactions. This loss of usership will have a massive impact on the market and with a downturn in the number of miners transaction times and costs may rise making the currency less desirable. A sharp decline in volume of daily trading per currency occurred in early 2017 as China has attempted to close down the markets.
As recently as this morning, reports have been written suggesting that central banks should introduce their own forms of digital currency in order to, “to counter the risks from the explosive growth in bitcoin and other virtual currencies,” according to the Bank for International Settlements. If sovereign central banks opted to create unique national digital currencies similar to Bitcoin it would allow them to take advantage of the block chaining but also mean that individuals money could be held outside conventional banking establishments allowing individuals to bypass them altogether leading to the potential for massive losses in revenues for banks.
While it is important to highlight the potential gains for consumers by utilizing cryptocurrencies, it must be clear that they pose a risk to the conventional financial system as a whole and have large implications for the international monetary policy evidenced in China already.
Despite the threats to Bitcoin, it is apparent that it has enormous global opportunity. A poll published by Lendedu.com stated that while 78% of American have heard of Bitcoin less than 14% of those polled have ever owned the currency. One thing is very clear-cut about the currency, Americans do not know much about it. Close to 50% of those interviewed stated that they were unsure if Bitcoin is legal (it is FYI, 10% believed that it was illegal.) This information displays the vast opportunity to expose Americans to Bitcoin, educate them on the potential benefits of the currency to consumers yet allow them to be leary of the potential bubble of Bitcoin. JPMorgan Chief Executive, Jamie Dimon called bitcoin “fraud’ that will ‘blow up.” Investors believe the currency is extremely overvalued, with one expert saying it its value should realistically be cut in half.
While saying that investors are leery of the crypto-currency would be a massive understatement, the potential benefits this type of financial system cannot be understated. In today’s highly digitalized global society, the benefit of the speed of Bitcoin is a huge asset to the currency. Its utilization of blockchain, recording all transactions on the cloud, if properly protected give it a unique advantage in transparency. These aspects coupled with the low transaction costs make it very attractive for international transactions as doing business across borders with financial institutions involved can quickly become very expensive. The use of Bitcoin could facilitate small scale global trading at never before seen levels due to the ability to remove the costs and time of traditional banks. One specific area I could see Bitcoins being extremely useful in is crowdsourcing and what Amazon calls Human Intelligence Tasks. The use of Bitcoins could allow transactions to occur instantaneously making accomplishing simple tasks much more efficient.
For those interested in learning more about Bitcoin, check out the original paper by the founder here.