Bitcoin: Trendy Payment or Future Currency?

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 only weighty cash and metal coins. Now, virtual currencies are also being introduced into society. The most prevalent and widely accepted of these is bitcoin, a private and non-governmental currency transacted entirely through the Internet. However, bitcoin’s inherent technological traits and relatively limited use in the consumer market will prevent it from becoming a prominent currency in modern society.

The bitcoin computer program was developed by Satoshi Nakamoto, although this is believed to be a pseudonym leaving the real developer unknown. Bitcoin serves as the creator and manager of a virtual supply of currency, “bitcoins,” which can be used as payment through online transactions. Bitcoin is a unique currency in its anonymity and public nature. The definite classification of bitcoin as either a currency or investment is greatly contended, though, partially due to its failure to fulfill the three main characteristics of money. The regulation of bitcoin is also under debate, especially because its digital design creates the possibility of money laundering and theft.

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. Bitcoin faces obstacles in fulfilling all three of these functions.

As a medium of exchange, bitcoin’s main hurdle 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. The online bitcoin service site Bitcoinstore.com boasts over 100,000 merchants that accept bitcoin. Although many of these are small companies, a few larger retailers such as Overstock.com and Expedia are also included. Ultimately, the most widely used merchants to accept the currency are computer-based software companies which specialize in bitcoin applications, or actual bitcoin exchanges and marketplaces. It is estimated that only about 20% of bitcoin transactions are purchases of goods or services, and the remaining 80% is comprised of speculative exchanges between investors, proving bitcoin’s “extraordinarily negligible market presence” (Yermack 10). While bitcoin is certainly growing in its merchant base, it is far from achieving success as a widespread medium of exchange.

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. Ideally, the monetary value at the time of the bitcoin purchase should be equitable to the value when the currency is used to make a purchase. 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. Over an eight-month period during 2013-2014, the purchasing power of bitcoin ranged from approximately 60% above to 40% below that of the U.S. dollar (“Bitcoin and Beyond” 7). This variability can at least partially be attributed to the dependence of the bitcoin value on demand and supply. It is most definitely not a commodity-backed currency, because it is merely a computer file without any intrinsic value. It also fails to fit the classifications of a fiat money, though, because the value is not regulated or ensured by the government. Consequently, a steady bitcoin value relies solely on a steady supply and demand.

Bitcoin’s inability to be held in physical form also lessens its security of value. The currency exists only in the form of digital files, which are much more susceptible to theft and, therefore, loss of value. Some virtual wallet service providers are offering increased security features, although the protection will never be as reliable as that of the Federal Deposit Insurance Corporation for U.S. dollars. This causes bitcoin to lack a steady store of value and thus prevents it from serving as a reputable form of currency.

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. There are numerous costs which arise from a fluctuation in value. Merchants that accept bitcoin are forced to repeatedly recalculate and record prices to fit the current bitcoin exchange rate. In addition, the frequent change in value prevents both retailers and consumers from acquiring a good idea of how equitable a price is when stated in U.S. dollars and bitcoins. There are also discrepancies between “current market prices” on various bitcoin exchanges (Yermack 12). Widely-ranging prices invite the possibility of arbitrage, as the currency could easily be purchased at one price and instantly traded around the globe for a higher value.

Another barrier to being a successful unit of account is bitcoin’s relatively high price per unit compared to the price of most goods being purchased. For example, the price of one bitcoin at the time of this writing is $235.93. This means that if a consumer wanted to buy a gallon of milk for $5, the equivalent would be 0.0212 bitcoins. This very small number makes transacting with the virtual currency more complex and creates confusion for both merchants and consumers. As a consequence of bitcoin’s price disparity and inconvenient exchange mechanism, it fails to serve as a reliable unit of account.

Bitcoin’s inherent basis on technology also creates issues with becoming more widely accepted within society. One of the primary obstacles is protecting its user anonymity. The bitcoin system is designed to be completely anonymous; all transactions are recorded in a public register, but specific transfers cannot be traced to a single user’s identity. However, it is always possible that this anonymity could be breached through computer hackers (Grinberg 179). Accidental user errors or negligent use of personal information could easily expose a customer’s identification. A second caveat is the potential for theft. Just as keeping large amounts of cash on hand can be a dangerous invitation for thieves, bitcoins can only have so much technological protection. As with any digital file, a bad virus or computer hacker can cause the complete loss of a bitcoin supply.

In addition to issues with anonymity and theft, bitcoin could also fail by way of a denial of service. Because there does not exist a central entity that controls bitcoin, the production of the currency is left to the individual “mining” computers. Essentially, these miners have the ability to block any given bitcoin transaction. In an extreme case, and with the necessary hi-tech computer equipment, a single individual could cause the destruction of the entire bitcoin system. Although seemingly unlikely, this scenario is plausible given governments who wish to implement regulation, or people attempting to blackmail bitcoin-accepting merchants (Grinberg 181).

The unique thing about bitcoin is that it lacks a governing body. Without a company to oversee it, bitcoin operates solely through users and their computers, and value is based on demand and how often bitcoins are being “mined.” The question which arises with this system is whether or not bitcoin will be sustainable without a central organization to monitor and guide it. Langdon Winner, in his work The Whale and the Reactor: A Search for Limits in an Age of High Technology, offers insight into the political aspects of such advanced technologies, and the necessity for either an authoritative power or government regulation.

In Winner’s writing, he analyzes how new forms of technology serve as “political artifacts.” Many advanced technological forms serve as a way to build order in our current society. Winner explains that “Consciously or unconsciously . . . societies choose structures for technologies that influence how people are going to work, communicate . . . and so forth over a very long time” (Winner 28). Bitcoin as a virtual currency can similarly be analyzed. Because currency is traditionally maintained by the government in order to ensure security and stability, there is debate over whether bitcoin should be federally regulated. In fact, some users have confidence in bitcoin specifically for its separation from the government. It offers an alternative for those who mistrust the money supply stability and fear an abrupt and purposeful inflationary period. If bitcoin continues to grow in popularity, it could signal general dissatisfaction with the management of U.S. currency.

The social form of many technological systems can be a major determinant in its effective function. In The Whale and the Reactor, Winner discusses a specific study in which it was found that routine operation of many systems requires “a large-scale centralized, hierarchical organization administered by highly skilled managers” (Winner 34). This hierarchy specifically relies on executives to keep track of and coordinate responsibilities. Bitcoin, however, does not have a central authority and is therefore run by no single person or organization. This also means that there is not a “contractual relationship” between the people mining bitcoins and the initial creator of the system (Kaplanov 130). According to the previously stated theory, bitcoin would consequently not serve as an efficiently-working system with a proper social organization.

Numerous advancements in banking technology have created a system of unprecedented reliance on mere “digital” money. Swiping a credit card, writing a check, or simply paying with bitcoins over the Internet can make currency seem like a virtual concept. Since the first “mining” of bitcoins in 2009, their use and value have increased significantly, although the currency is still mostly used among computer engineers and those who mistrust government-regulated money. After nearly five years in circulation, bitcoin continues to have a very volatile value and consequently fails to fulfill the three main functions of money. A lack of central authority and potential technological downfalls also make it difficult to implement government regulation of bitcoins. Despite these barriers, the virtual currency has shown growth and may be an accurate glimpse of what is in store for the global economy.


“Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies.” Central Banker, Federal Reserve Bank of St. Louis. Fall (2014): 6-7.

Grinberg, Reuben. “Bitcoin: An Innovative Alternative Digital Currency.” Hastings Science & Technology Law Journal 159 (2012): 175-81. Web. 25 Mar. 2015.

Kaplanov, Nikolei M. “Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against its Regulation.” Loyola Consumer Law Review 25:1 (2013). Web.

Yermack, David. “Is Bitcoin a Real Currency? An Economic Appraisal.” National Bureau of Economic Research Working Paper Series. (2013): 2-17. Web.

Winner, Langdon. The Whale and the Reactor: A Search for Limits in an Age of High Technology. Chicago: The University of Chicago Press, 1986.

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Understanding Bitcoin: Key Terms

As technology continues to develop in our society, each new advancement seems to bring with it a new set of complex, technological concepts. Deciphering the terminology can prove to be a tremendous challenge. When I began my research on bitcoin, I discovered this to be true. Because I do not have extensive background knowledge on the workings of computers, it was initially difficult for me to figure out exactly how bitcoin worked. Consequently, an outline of key terms is necessary to fully grasp the concept of the bitcoin system and better understand how it functions.

Firstly, it is important to define the actual term virtual currency. Any form of money that is created and controlled by an online developer and transacted completely digitally could be described as a virtual currency. It is commonly unregulated and caters to a specific virtual community that desires to make exchanges with the currency. Bitcoin clearly falls into this definition; each unit is created and maintained through computer systems, and the currency is not regulated or backed by any governmental body.

The next complexity in understanding bitcoin is the actual process of how the currency is produced. The term mining refers to the creation of bitcoins, similar to “mining” the earth for minerals. Bitcoin is extremely unique in that the units are mined by personal computers, and are not created by a central authority. These voluntary computers work in groups to solve complex mathematical algorithms within the bitcoin encryption function.1 By this method, bitcoins can actually be acquired without purchasing them.

Once bitcoins are mined or purchased, users can exchange them as payment with bitcoin-accepting merchants. All transactions are then recorded in the blockchain. The blockchain is a public ledger that identifies every bitcoin transaction to date, although individual users are still left anonymous.2 The currency is stored in a digital wallet, which each user keeps as merely a file on their computer. This obviously creates a slew of hazards, such as losing the wallet, being vulnerable to theft, or having a user’s identity stolen. Some online digital wallet providers are marketing more high-security digital wallets, which claim to serve as better protection of a user’s own personal bitcoin supply.

Bitcoin is a peer-to-peer electronic cash system, which means that it does not operate with an overarching central authority. Consequently, the production of bitcoins is entirely dependent upon demand and supply in the virtual currency market.1 The network consists of thousands of personal home computers that work in small groups to solve the mathematical equations and produce currency units. This decentralization and lack of chief control is the characteristic that attracts some to bitcoin. Without a prime regulator, the fear of abrupt inflation or a surplus of bitcoins in the market is mostly extinguished.

Finally, a key term that is often associated with bitcoin is money laundering. Running money obtained by illegal actions through other transactions in order to disguise its origin and “clean” it is referred to as money laundering. Skeptics of bitcoin argue that the virtual currency serves as a prime method for laundering. However, the public availability of bitcoin makes access to a user’s identity definitely not impossible to find, and increases the risk of money laundering.


1 Kaplanov, Nikolei M. “Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against its Regulation.” Loyola Consumer Law Review 25:1 (2013). Web.

2“Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies.” Central Banker, Federal Reserve Bank of St. Louis. Fall (2014): 6-7.

Bitcoin and Artifact Politics: Through the Lens of Langdon Winner

Bitcoin is the first virtual currency of its kind: completely conducted through the Internet and transacted anonymously with the use of a peer-to-peer network. But who controls bitcoin? What central authority regulates its value and production? The unique thing about bitcoin is that it lacks a governing body. Without a company to oversee it, bitcoin operates solely through users and their computers, and value is based on demand and how often bitcoins are being “mined.” The question which arises with this system is whether or not bitcoin will be sustainable without a central organization to monitor and guide it. Langdon Winner, in his work The Whale and the Reactor: A Search for Limits in an Age of High Technology, offers insight into the political aspects of such advanced technologies, and the necessity for either an authoritative power or government regulation.

In Winner’s writing, he analyzes how new forms of technology serve as “political artifacts.” Many advanced technological forms serve as a way to build order in our current society.1 Winner explains that “Consciously or unconsciously . . . societies choose structures for technologies that influence how people are going to work, communicate . . . and so forth over a very long time.” Bitcoin as a virtual currency can similarly be analyzed. Because currency is traditionally maintained by the government in order to ensure security and stability, there is debate over whether bitcoin should be federally regulated. In fact, some users have confidence in bitcoin specifically for its separation from the government. It offers an alternative for those who mistrust the money supply stability and fear an abrupt and purposeful inflationary period. If bitcoin continues to grow in popularity, it could signal general dissatisfaction with the management of U.S. currency.

The social form of many technological systems can be a major determinant in its effective function. In The Whale and the Reactor, Winner discusses a specific study in which it was found that routine operation of many systems requires “a large-scale centralized, hierarchical organization administered by highly skilled managers.”1 This hierarchy specifically relies on executives to keep track of and coordinate responsibilities. Bitcoin, however, does not have a central authority and is therefore run by no single person or organization. This also means that there is not a “contractual relationship” between the people mining bitcoins and the initial creator of the system. 2 According to the previously stated theory, bitcoin would consequently not serve as an efficiently-working system with a proper social organization.

Some may argue that the solution to this lack of central authority is simply government regulation. The anonymity of bitcoin transactions creates an additional fear of its use for illegal activity and money laundering. However, some inherent characteristics of bitcoin make regulation difficult. Primarily, its existence as a virtual currency, rather than a physical coin or paper, prevent it from regulation as a “community currency,” or any medium of exchange that is not the national currency.­2 Additionally, an injunction or other action to terminate the use of bitcoin is impossible, given bitcoin’s lack of a central company against which to act. According to Winner’s The Whale and the Reactor, bitcoin’s nonexistent principal authority and resistance to government regulation classifies it outside of the structure of traditional technological advancements.


1Langdon, Winner. The Whale and the Reactor: A Search for Limits in an Age of High Technology. Chicago: The University of Chicago Press, 1986.

2Kaplanov, Nikolei M. “Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against its Regulation.” Loyola Consumer Law Review 25:1 (2013). Web.

Bitcoin: Defining a Societal Role through Virtual Currency Pitfalls

As technology progresses in society, it seems as though each advancement is both a high-tech marvel and an invitation for further complexity. New electronic devices and intricate computers are constantly being introduced. In addition, there is a trend of ever-increasing digitization of files, records, any other systems in society. As technology continues to intertwine itself in nearly every aspect of our daily lives, the potential for technical failures and the need for regulation is imminent. The virtual currency bitcoin is no exception to this foreshadowing. Originally created in 2009, bitcoin is an entirely Internet-based currency without a central operator. The technological nature of bitcoin makes it especially susceptible to system failures, which could have long-term effects on the production of and confidence in the currency. In researching bitcoin, my aim is to discover how this virtual currency optimally fits into society, and evaluating its technological barriers is an integral part of determining this role.

One of the primary obstacles associated with bitcoin is protecting its user anonymity. The bitcoin system is designed to be completely anonymous; all transactions are recorded in a public register, but specific transfers cannot be traced to a single user’s identity. However, it is always possible that this anonymity could be breached through computer hackers. Accidental user errors or negligent use of personal information could also easily expose a customer’s identification.

A second caveat to a virtual currency is the potential for theft. Just as keeping large amounts of cash on hand can be a dangerous invitation for thieves, bitcoins can only have so much technological protection. A user’s bitcoin supply is held in a virtual “wallet,” which can be backed up and secured in various ways, such as using an online wallet securement service. However, as with any digital file, a bad virus or computer hacker can cause the complete loss of a bitcoin supply.

In addition to issues with anonymity and theft, bitcoin could also fail by way of a denial of service. Because there does not exist a central entity that controls bitcoin, the production of the currency is left to the individual “mining” computers. Essentially, these miners have the ability to block any given bitcoin transaction. In an extreme case, and with the necessary hi-tech computer equipment, a single individual could cause the destruction of the entire bitcoin system. Although seemingly unlikely, this scenario is plausible given governments who wish to implement regulation, or people attempting to blackmail bitcoin-accepting merchants.

These three main technological obstacles could have a significant impact on the developing role of bitcoin in society. Any concern over the security and legality of bitcoin will likely decrease the confidence of users. If this loss of confidence causes a panic to ensue, bitcoin users will sell their holdings, and demand will drop lower than supply in the bitcoin market. Additionally, because the supply of bitcoins will eventually be capped at 21 million, the value of the currency will actually increase. However, if industries become heavily reliant upon bitcoin, this will create general decreases in price and a deflationary spiral. The mere potential for this result may be enough for businesses and industries to give up their use of bitcoin. The technological barriers of bitcoin and consequential user reactions offer a way in which its societal role may be defined. The possibility of failure associated with such a new and developing currency reveals a common hesitance in its use, and may also suggest its popularity as more of a speculative investment rather than reliable currency.


 

1Grinberg, Reuben. “Bitcoin: An Innovative Alternative Digital Currency.” Hastings Science & Technology Law Journal 159 (2012): 175-81. Web. 25 Mar. 2015.

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.