Virtual Currency and Bitcoin

Most people do not think twice when making a payment with the quick swipe of a credit card. Whether buying groceries, shopping at the mall, or going out to eat, spending real money now has the convenience of carrying around a single piece of plastic. As science and technology have developed in our society, the money and banking industry has also made considerable advancements. It is hard to even imagine a time when transactions were conducted with weighty cash and metal coins. Now, virtual currencies are also being introduced into the currency realm. The most prevalent and widely accepted of these virtual currencies is bitcoin, a private and non-governmental currency transacted entirely through the Internet.

Bitcoin was originally created in 2009 by Satoshi Nakamoto, although this name is believed to be a pseudonym for the otherwise unknown inventor. The bitcoin system in “peer-to-peer,” meaning there is not a central company or overarching power that regulates it. Rather, bitcoin functions by the continued creation of the currency through a process called “mining.” Bitcoins are mined when computers solve complex algorithmic equations, which become more difficult or easy as a way to maintain a somewhat steady rate of bitcoins going into circulation. The system is impressively self-sustaining for its lack of central regulation. All users and transactions are also kept anonymous, although the transaction and mining data is displayed on a public site.

Since its inception, this innovative form of money has fluctuated in its role. The obvious use for bitcoin is as a currency, which can be used to pay for goods and services. However, bitcoin has encountered multiple flaws that are restricting it from succeeding as a true currency. As an economic definition, currency must serve as three functions: medium of exchange, store of value, and unit of account. As a medium of exchange, bitcoin’s main struggle is gaining wide acceptance. It is true that an increasing number of merchants are agreeing to accept bitcoin as a form of payment, but this use is still small compared to the greater commercial market.

Bitcoin also faces issues with its function as a store of value, which refers to its ability to represent a certain purchasing power that will hold over time. Because of bitcoin’s relatively new creation and the way in which the bitcoins are mined, the value of a single bitcoin fluctuates greatly, even within the course of a single day. This causes bitcoins to lack a steady value and thus prevents them from serving as a reputable form of currency. Consequently, the function of a unit of account is also flawed, as bitcoin’s volatility leads it to be an ineffective standard for comparison in making payments between businesses and consumers.

Bitcoin is certainly a notable mathematic and technological advancement in our society. The mere creation of the bitcoin system and its increasing use proves that it has potential to serve as a future currency. However, because of the inherent flaws with a virtual currency, some scholars argue that bitcoin is more of a speculative investment than a practical money. As bitcoin advances and gains attention from global markets and governments, which must decide if federal regulation of such a currency is necessary, it will continue to morph in its societal role and most assuredly alter the way the population views money.


 

Yermack, David. “Is Bitcoin a Real Currency? An Economic Appraisal,” National Bureau of Economic Research Working Paper Series. December 2013.

 

 

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