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.

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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.