The Bitcoin program was developed by an unknown programmer who referred himself as Satoshi Nakamoto, and it was released to the public domain in 2009 (Lockett, 2017). In the system, the Bitcoins act as the electronic currency and they are created through complex mathematical computations (Lockett, 2017). The users, who are referred to as miners try to solve complex problems and the results are converted into long strings of code which have money value attached to them. The coins are entirely virtual, and their value is self-contained. Therefore, there is no need for a bank to provide a framework for the transfer and storage of money. Therefore, the coins, just like gold nuggets have value and the users can store them in their virtual wallets (Lockett, 2017).
For many users who are used to the conventionalcurrencies, the nature of Bitcoins and what constitutes them is a major controversy that requires an in-depthanalysis. At its core, a Bitcoin consists of simple data ledger which is referred to as a block chain (Jury, 2014). The size of the file is similar to a long text message (Jury, 2014). The blockchain has three parts. The first involves identifying an address that has approximately 34 characters nd the second involves determining the history of who bought or sold it (Jury, 2014).
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The third part is complicated, and it involves generating the private key header log. The users develop a sophisticated digital signature which is captured and confirmed in the transaction of each Bitcoin (Jury, 2014). The signatures act as the security feature or authentication during the trading process. To make the process decentralized, the blockchain is tracked and presented to the public and fit can be followed closely (Jury, 2014). However, the signatures act as the identifying feature of the source of the Bitcoins, and this prevents duplication and the forging of Bitcoins. Nonetheless, the system is preferred by many users for their ability to retain the users’ anonymity since it does not record the actual names of the users. It is, therefore, noteworthy that when every Bitcoin transaction detail is publicly availed, the users remain completely anonymous (Jury, 2014).
By solving the complex programs, the miners accumulate Bitcoins which they can use to purchase goods and services from the online market. They can also be stored, just like shares, with the hope of their value increasing in future. Currently, one Bitcoin is currently worth about $1,500 which more than the value of a troy of gold (Nadeau, 2015). Also, there are approximate $1.9 billion in circulation, and it approximated that another $2 billion will be created in the next one decade.
Figure1: Graph showing the growing use of Bitcoins
Programmers believe that the Bitcoins will stop being created when the number hits $21 billion by the year 2040. Currently, only half of the total number is in circulation.
It is also noteworthy that Bitcoin currency is unregulated and itis entirely decentralized to the users who do not have to go to a third party while trading. Therefore, there are no banks or insurance companiesinvolved in the protection of the virtual coins. Furthermore, the values of the Bitcoins exist in the virtual nuggets, and the miners do not have any access to physical coins.
Benefits, Demerits, and Risks Associated with Bitcoins
There are various advantages of Bitcoin trading. First, by using Bitcoins, it is possible for users to send and get money from different parts of the world without experiencing barriers and lengthy bureaucracies that can be instituted by the financial institutions (Meiklejohn et al., 2013). Secondly, the users are in control of their coins, and they can choose the security of the networks that they use. The control also extends to the users controlling the extra fees charged by the merchants and avoiding the unseen charges that can be applied by the merchants. The system is also secure since the users use codes and pseudo names and this protects them from identity theft.
Bitcoin trading information is available to for all the users, and this assists the miners to trace the sources of Bitcoins. However, they cannot reveal the real identity of the users despite seeing their address. Therefore, anyone can verify a particular transaction, and this promotes transparency. Also, the system is cryptographically secure, and it cannot be subject to the manipulation of other parties. Borroni (2016) also indicates that, unlike other platforms that have embraced the digital technology, Bitcoins attract small fees.
Currently, the Bitcoin payments are free, and this has attracted a large number of users. During processing payments, users can choose their priority. Although there are very little fees on such transactions, users with urgency can resolve to pay more to the merchants to be given priority instead of waiting in the queue. The coins earned can also be exchanged into fiat money depending on the country in which one resides or the preferences. For instance, the coins can be changedintoAmerican dollars. This is dependent on the prevailing value of a single Bitcoin. For instance, tradewith one Bitcoin can exchange it with the current rate of $1,500.
Despite the benefits associated with Bitcoins, there are various challenges that users encounter. First, there lacks awareness on the use of Bitcoins, and most of the people are not aware of how they can apply them in their lives. This makes them vulnerable to exploitation by individualsposing as merchants from non-existent companies. It is noteworthy that some trading companies are accepting Bitcoins as payments for goods and services and they later convert them into fiat coins. The insufficient knowledge hasresulted in a slow growth in the industry.
Secondly, Bitcoin trading has become volatile and risky due to the limited number of coins and their increased demand. Those who have accumulated the coins are at the risk of having their wallets accessed by other persons who can access theircomputers. The price has also not stabilized, and it highly fluctuates due to the events in the digital platforms that occasionally accept Bitcoins as a method of payment. As Brière, Oosterlinck&Szafarz(2013), outline, some countries includingthe United States and China have raised concerns over the possibility of criminal cartelstransferring money from the countries to other destinations by purchasing Bitcoins. The lack of regulation by the monetary and government agencies makes it difficult to know the real identity of the persons using Bitcoins and theirreal physical addresses. Although the method of the future of online trading and moment transfer, its lack of control and regulation by third parties provide a large loophole for misuse by cartels and criminal gangs.
A comparison with the Currency Issued by the Government
Unlike the currency issued by the government, Bitcoins are not in any physical form and they value is attached to virtual coins. They only become tangible after being converted into fiat currency and retrieved. The value attached to the currencyissued by the government is to a great extent stable, and it is not highly affected by the demand and supply. Although it may be affected by inflation, the process is gradual and predictable. This is different in the case of Bitcoins whereby the value can appreciate or fall depending on the prevailing demand at any given hour (Martins & Yang, 2011). Also, the currency issued by the government is regulated by the Federal Reserve Bank which protects it from unnecessary monetary policies and external implications as well as monitoring its transfer. The amount of money deposited in a given account can be traced back to the involved parties. In Bitcoins, this ii different since there is no regulating body and the market is free to trade and use the accumulated coins.
The Perception that Miners have on the use of Bitcoins
Miners believe that Bitcoins are the future of making online payments and transferring money due to the retained anonymity of the users. The high demand for the coins has triggered them to engage in a frantic race for coins whose value is increasing by the day. The high possibility of new coins being generated for the next two decades makes the venture promising. According to Bornholdt&Sneppen (2014), most of them are after producing more coins accumulating them for future use, once the extraction is exhausted, the demand for the coins will likely stabilize, and those who have many coins in their virtual wallets would exchange them at high prices.
Conclusively, Bitcoins are gaining popularity as an alternative method of transferring money virtually. The program uses virtual nuggets that have monetary value and can be used to make payments to various companies that have embraced the technology. They have become popular due to the ability of the users to remain anonymous while transacting and the efficient conversion of the coins into fiat money. However, the little information on the nature of Bitcoins makes some users vulnerable to exploitation. Also, due to high demand for the coins, hackers are targeting people’s virtual wallets to extract the coins. The method has also been eyed by cartels and criminal gangs who can buy the coins and transfer money using pseudo names without the government agencies monitoring their activities. However, the miners believe that Bitcoins hold the future of virtual money transferand virtual payments since they are generated everyday, and it will take at least two decades before the mines are exhausted.
References
Bornholdt, S., &Sneppen, K. (2014). Do Bitcoins make the world go round? On the dynamics of competing crypto-currencies. arXiv preprint arXiv:1403.6378 .
Borroni, A. (2016). Bitcoins: Regulatory Patterns. Banking & Finance Law Review , 32 (1), 47.
Brière, M., Oosterlinck, K., &Szafarz, A. (2013). Virtual currency, tangible return: Portfolio diversification with Bitcoins.
Jury, L. (2014).What are bitcoins? The Sunday Morning Herald . Retrieved from http://www.smh.com.au/business/what-are-bitcoins-20140805-100lql.html
Lockett, J. (2017). GEEK'S GOLD What is Bitcoin, what is its price and value, and how much are the NHS cyber-attackransomware hackers demanding? The Sun . Retrieved from https://www.thesun.co.uk/news/3000715/what-is-bitcoin-nhs-cyber-attack-ransomeware-worth-more-gold/
Martins, S., & Yang, Y. (2011, November). Introduction to Bitcoins: a pseudo-anonymous electronic currency system. In Proceedings of the 2011 Conference of the Center for Advanced Studies on Collaborative Research (pp. 349-350). IBM Corp.
Meiklejohn, S., Pomarole, M., Jordan, G., Levchenko, K., McCoy, D., Voelker, G. M., & Savage, S. (2013, October). A fistful of bitcoins: characterizing payments among men with no names. In Proceedings of the 2013 conference on Internet measurement conference (pp. 127-140).ACM.
Nadeau, B. (2015). Is Bitcoins Money? (Doctoral dissertation, Texas A&M University).
