BITCOIN

By Rishi Shah

The new digital currency is taking the financial world by storm. With an unprecedented exponential rise in value since is conception, from a meagre $0.07 in 2009 to $20,000 in 2017, Bitcoin has taken investors on a rollercoaster.

It was produced due to the doubt that existed in the minds of many about the effectiveness and safety of the current monetary system. It was created to decentralise currency and get rid of the need of banks. It has hugely grown in popularity since and is now widely used as a viable alternate possibility to banks and paper currency.

The economic advantages of Bitcoin are that standard wire transfers and any foreign purchases will involve fees and exchange costs, due to fluctuating exchange rates. Therefore, since Bitcoin transactions have no middle institutions or government involvement and are solely based on cloud servers, the costs of transacting are kept very low. Thus, people will spend less money during conversions and have an increased disposable income. This can be a major advantage for people who travel a lot or run multi-national businesses. Another benefit to firms is that it is a lot faster than any other monetary transactions, and therefore transfers happen faster and the productivity of a firm rapidly increases. Another benefit is the anonymity it provides, whereby on the server you are just a number. This is very different to a bank, where they intrude into your personal life and carry out background checks. This means that people who require privacy have it and their identity is fully protected. Additionally, the Bitcoin supply is capped at a finite 21 million Bitcoins and the code will prevent anymore from ever being produced. This is very different to any other paper currency which can and is printed at will. This makes Bitcoin similar to Gold, and ensures that its value will always appreciate. This is a great incentive to purchase it as it is more probable to increase than decrease in value.

However, on the other hand there are also many negatives, there is a risk of theft through exploiting wallet vulnerability, attacking the marketplace vulnerabilities directly, sealing private keys and so on. These can all be hacked and therefore it is harder for governments to protect this currency. There is also a lot of black market activity, with illegal practises using Bitcoin to transfer money as it protects their identity. This means that it provides negative publicity and if it cannot be easily monitored by law enforcement, it will be disregarded. It also has very high price volatility, seen in the graph below.

It shows how just over 4 years the price can hugely fluctuate and hit rock bottom lows, and huge highs within days of each other. It is therefore not attractive to long term investors and will only attract a small group of people. Moreover, another disadvantage is that once a transaction is complete there is no possibility of going back. This means that refunds are impossible here, and it will not be able to arbitrate disputes. If someone buys a product using Bitcoin it is impossible to get a refund or Bitcoin back if they don’t receive the product. These are all very serious disadvantages that need to be considered.

Overall, Bitcoin is a currency to be watched and the regulation to come in the future will be interesting to see. It could be a rising threat to the dollar, pound and euro however it may not take-off further than this niche product as an accessory to the main currency instead of an competitor. There are many shortfalls with it and this could be dissuading people from jumping in. The Bitcoin digital currency has many possible paths it can take, and I for one, like many other, am very interested to see where it ends up.