In September 2008, the notorious financial crisis hit the world’s financial market. Following the collapse of once one of the biggest global banks in the world—Lehman Brothers, the world’s financial system was faced with the most fatal recession ever. GDP, interest rates, America’s housing market, and countless companies despite their sizes all failed to avoid the fate of being brought down by the financial crisis tsunami.
The immense pressure from worldwide, both socially and financially, urged governments and central banks to react. ‘They created money and credit on a scale unprecedented in human history. Banks were bailed out, interest rates were slashed to levels never seen before and the process of creating money electronically known as quantitative easing was begun’ .
But the crisis also revealed the fundamental problem of all financial crisis, which is money itself as well as its ‘creator’. The way money is created means that central banks and governments will have all the control over it that even though everyone else is losing during the event, the governments and the banks are actually profiting enormously from it. This is also the cause of inequality which makes the rich even richer and the poor poorer. However, the governments did not react to this opportunity to change; instead, they decided to not abandon the old system, but to save it.
Yet it is almost crystal that we need a new form of money, money that is free from control from anyone.
On August 18th 2008, a domain name is registered—bitcoin.org. No one knows who created this website, and at that time no one really wanted to find out.
Two weeks later, a nine-page white paper outlining a design for ‘Bitcoin: A Peer-To Peer Electronic cash system’ is published on the internet; still no one pays any attention.
It was probably the greatest trade in all of recorded history. In October 2009, the first bitcoin exchange rate was published. 1309 bitcoins to one dollar was the original price. Even so, Liberty Standard was still criticized for over-valuing bitcoin’ value.
Four years later, one bitcoin was $1242—over 1.6 million times higher and is reaching the value of gold.
However, the creator of bitcoin is still a mystery.
The name Satoshi Nakamoto is used. But this Japanese name has a German email address with British spelling. He gave birth to the new form of money that has the potential to change the world. He has computer programmers the world over-purring at the unhackable genius of his tech. Half of the internet combining with government officials and forensic scientists are trying to find out who he is, yet still nobody knows any information about his identity.
How are bitcoins made:
The procedure of mining is used to process Bitcoin transactions. Mining involves a computer solving a math problem that is found in each block. People who use their computers for mining are called miners. Once a problem is solved, one block of bitcoins is added to the block chain— as known as saving a block. Miners who solve the problems are rewarded with bitcoins. This is their incentive for lending their computer’s processing power to mining. The problems are adjusted over time for difficulty so that a new block is produced every 10 minutes.
When a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain at that point in time.
Miners aren’t supposed to meddle with the transaction data in a block, but they must change the data they’re using to create a different hash. They do this using another, random piece of data called a ‘nonce’. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the whole thing is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.
The benefits and flaws of Bitcoins:
In the 21st century, with wide spread and popular adaptations to wire transfers, credit cards, latest mobile technology like Apple pay, why would people use bitcoin?
Transaction fees have been touted as one of the best reasons to use Bitcoin. As merchants will need to adapt their prices to meet the charges they must pay for using payment system, credit card transactions fees are likely to affect consumptions of consumer. This is because the transaction fees itself often would cost more than the revenue earned from selling something at a low price for the merchants, therefore the transaction fees reduce the potential profits of selling a low-priced goods from a supplier, hence likely to urge the supplier to increase the price of the goods or services. This is also why it is sometimes cheaper to trade in cash rather than digital transaction. Yet the transaction fees in bitcoin are considerably lower than the transaction fees of other payment system such as credit cards, despite the fact that these fees still have been rising over time. This allows many transactions with small amount of money involved to take place. ‘Transaction fees are processed by and received by the Bitcoin miner every time a new Bitcoin block is created. While voluntary, transaction fees can determine how quickly a transaction is processed. By paying transaction fees, a sender provides incentive for a miner to include a transaction into a particular block. Blocks are created each ten minutes approximately. Many wallets, like Bitcoin Core, use floating fees.’ For a long time since the birth of bitcoins, there is simply no transaction fees involved for bitcoin transactions. However due to the overall volume of the network and to avoid spamming of the Bitcoin network, all miners today will expect transactions to include fees due to the overall volume of the network and to avoid spamming of the Bitcoin network.
The average transaction fees of outgoing domestic wire offered by many banks are approximately $20, with sometimes additional wire transfer fees for incoming domestic wire. Although there is no transaction fee for many other payment methods such as cheques, it takes a long time for the payment to process. Sometimes, banking institutions even charge on cash deposits plus It’s illegal to send cash in the mail. Therefore above all, the benefits of bitcoin transactions are very obvious in many cases. This is one of the greatest attractions offered by bitcoin.
Moreover, the equipments required for bitcoin transactions to take place are also very simple. All bitcoin transactions only require a digital device with a free bitcoin software and an internet connection. You can transfer bitcoins to anyone and anywhere with ease. Unlike the traditional payments methods such as cheques, which in many occasions require a physical bank to complete the transfer, the locations which are available to bitcoin transactions are simply unlimited. This allows suppliers and merchants to connect with customers who do not have access to credit card payment systems, or with customers who live in less developed locations where the infrastructures are not well-equipped enough to support wire transfers of traditional currencies. What’s more, unlike bank transfers which take a period of time for the money to be transferred to its destination, bitcoins can be instantaneously transferred to any place in the world and become available almost straight away. There is no bank account or even personal information needed.
This leads to another benefits of bitcoins. Personal privacy is fully protected during bitcoin transfers. A bitcoin address is the only compulsory information needed for the transfer of bitcoins. Each address is generated by cryptographic methods which keeps the information secure with its integrity and confidentiality. This process involves substantial mathematics and is all handled by the bitcoin “wallet” software, where all the bitcoin addresses are stored. Each address works similar to an account number, or even an email address. It consists 27-34 letters and numbers, for instance ‘1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2’. ‘Creating addresses can be done without an Internet connection and does not require any contact or registration with the Bitcoin network. It is possible to create large batches of addresses offline using freely available software tools. Generating batches of addresses is useful in several scenarios, such as e-commerce websites where a unique pre-generated address is dispensed to each customer who chooses a “pay with Bitcoin” option’.
Apart from the bitcoin address, nothing else is needed for the transactions to take place. This is perhaps the greatest cause of bitcoin’s complete independence, which is also one of the most widely publicized benefits of Bitcoin that governments, banks and other financial intermediaries have no way to interrupt user transactions or place freezes on Bitcoin accounts. The system is purely peer-to-peer; users experience a greater degree of freedom than with national currencies.
Since there is no way for third parties to identify, track or intercept transactions that are denominated in Bitcoins, one of the major advantages of Bitcoin is that sales taxes are not added onto any purchases. This greatly reduces the consumer surplus and producer surplus as all profits are gained solely by the participants of the transaction without third party involvement; which greatly reduces the cost of goods and services.
However, although there is no third party involved within the transaction of bitcoins, there are still regulations set by the government targeting the use of bitcoins in some countries.
Regulation and control provide a significant challenge to the growth and survival of Bitcoin.
Countries around the world hold rather contrasting views upon cryptocurrencies, more specifically, on Bitcoins. Western developed countries like the United States and United Kingdom have shown a positive attitude towards the new technology. Countries like Canada and Australia are still deciding on the regulations and control of bitcoins. Whereas many other countries simply banned Bitcoins from being transacted or used domestically. In Thailand, for instance, it is illegal to “buy and sell Bitcoins, buy or sell any goods or services in exchange for Bitcoins, send any Bitcoins to anyone outside of Thailand, or receive Bitcoins from anyone outside the country”. Foreign exchange trading with Bitcoin is illegal in Iceland. Bitcoin ATMs are banned in Taiwan because the country’s Financial Supervisory Commission believes Bitcoin is not a currency and should not be accepted by individuals or banks as payment. In Russia, bitcoins still are not able to escape the fact of being banned. ‘Even with the recent legal victory in Ural recently, setting a legal precedent to lift the banning of websites related to bitcoin and other digital currencies, bitcoin is banned in practice, if not officially legal yet. With the Russian ruble rebounding, but still down over 30% from January 2014, banks and the national government aren’t looking kindly on those who are investing in other currencies, digital or not’.
This is mainly because effectively bitcoins create an alternative economy outside a nation’s economy. As bitcoins are free from governmental control and can circulate and circumvent the state’s financial institutions, it is highly likely to imagine the use of bitcoins in illegal activities (drugs, banned weapons, terrorism, prostitutions).
The biggest obstacle that causes the bitcoin’s limited use is almost certainly Bitcoin’s volatility.
Currency volatility, also known as foreign exchange or FX volatility, is the unpredictable movement of exchange rates in the global foreign exchange market. This volatility can lead to large losses (or gains) in the foreign exchange market. It is the principal cause of foreign currency risk.
So why is the volatility of bitcoin so spectacular that it attracts and repels investors simultaneously?
A recent example can be used to explain. As shown in the graph below, on 5th December 2016, one bitcoin is worth approximately $750. However, on 4th January, 2017, one bitcoin is worth $1129. This means that if you invested $750 in December 2016, you will earn $379 in not even a month. You may think $379 is not a significant amount, but do bear in mind that this is only 1 bitcoin. What happens if the investor invested in 10 bitcoins, 100 bitcoins?
However, within the huge amount of potential profit behind these bitcoins lies equal amount of risks. Let’s take another recent example: On 4th January 2017, one bitcoin is worth roughly $1129. After just over a week, on 11th January 2017, the value of a bitcoin decreases dramatically to $776. In other words, the value of a single bitcoin decreases by $353 in just over a single week.
Yet this is only an example of the volatility of bitcoin; in fact , Bitcoin is capable of volatility in the form of 10x changes in price versus the U.S. dollar, in a relatively short period of time.
These all bring to us to the principle question: how do we measure the volatility and why do bitcoins have such abnormal volatility that segregates itself from all other traditional currencies?
Price fluctuations in the Bitcoin spot rate on the Bitcoin exchanges is driven by many factors. Volatility is measured in traditional markets by the Volatility Index, also known as the CBOE Volatility Index (VIX). Volatility in Bitcoin does not yet have a generally accepted index since cryptocurrency as an asset class is still in its nascent stages.
There are also many factors which determine Bitcoin’s volatility.
The biggest factor is certainly its relatively poor rate of adoption comparing to traditional currencies due to media and press influence. As there bitcoin is a ‘free’ currency, which means there is no authority behind it, making it simple, fast and free to use. However, these qualities also attract the attentions of certain criminal activities. In 2013, after two and a half years running the booming anonymous narcotics bazaar known as the Silk Road, the drug kingpin who called himself the Dread Pirate Roberts has allegedly been unmasked. Ulbricht has been charged with engaging in a money laundering and narcotics trafficking conspiracy as well as computer hacking. The Department of Justice has seized the Silk Road’s website as well as somewhere between $3.5 to 4 million in bitcoins, the cryptographic currency used to buy drugs on the Silk Road. The worldwide influence of this particular event is also the first time for many people to encounter with the term ‘bitcoin’; leaving a negative impression for bitcoins and causing many to automatically associate it with crime and danger.
Behind the core of any system of money, there is trust. Confidence level directly determines the aggregate demand hence the popularity of a currency. The Silk Road incidence caused many people feel unconfident that bitcoin will be held in the right esteem by others—this is why before we enter the bitcoin era we have to change the social conventions that we are used to, and explore the notion of trust in more depth as it has evolved through history.
Case Studies:
Some countries regard bitcoins as an affliction, rejecting it outside the country, while others open the door to the development of a positive legal tax policy to encourage people to use this latest currency. In the United States, Bitcoin has made legal status in some states, such as California; and the New York Financial Services Department (DFS) has issued a proposal for rules, rules and regulations on the purchase and sale of cryptocurrency. Most countries are on the sidelines, neither support nor oppose, it seems that the size of Bitcoin is not large enough to cause the attention of regulators. However, regardless Bitcoin’s popularity, it seems clear that different countries have very different views and actions upon the spread of bitcoins.
Countries that support the development of bitcoins:
The United States:
The acceptance of Bitcoin is generally highest in the United States. The United States hopes to create a world-dominated currency with the help of the huge potential within online trading, creating another world-dominated world currency next to the dollar.
On Friday, May 9, 2014, the US Federal Advisory Council (FAC) and the US Federal Reserve Board held quarterly meetings in Washington, DC. The meeting has traditionally been secret until Bloomberg News has won the right to freedom of information in accordance with the Freedom of Information Act, asking the Federal Reserve to make the conference open to the public.
The meeting records show that there are seven issues in this meeting, while the Bitcoin issue is No. 5, accounting for two or half or nearly 25% of the report, or about a quarter of the meeting is about Bitcoin discuss. The meeting focused on the potential benefits of Bitcoin, and regarded it as a gospel, while protecting the consumer, resolving illegal use, and avoiding separatism, the Federal Reserve is clearly in favour of the bitcoin developments and regulations.
Moreover, on June 29, 2014, California Governor Jerry Brown has signed the AB-129 bill, recognizing the legal status of Bitcoels and other digital currencies in California.
The governor signed a total of 15 legislation into law, including changing the California business model of technology (digital currency). The AB-129 bill allows other currency, such as Bitcoin, to be legally consumed in California.
“In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives,” Assemblyman Roger Dickinson said in a recent statement.
France:
Bitcoin is also extraordinary popular in Europe. According to Business Insider, so far millions of residents to download Bitcover software are mostly residents of the European countries.
The French economy and financial sector will implement regulatory measures at the end of the year on foreign currency and other digital currency financial institutions and individual users. According to the French budget and government revenue and expenditure minister Michel Sapin.
Sapin said in a statement: ‘This report shows that even if the existing volumes of virtual currencies are not likely to destabilize the financial system, these unofficial currencies are developing and have risks of illegal or fraudulent use’.
Regulation is a means of promoting greater transparency in the French market. Due to the anonymity of Bitcoin, the document also requires the regulator to discuss and propose the upper limit of the expenditure of the digital currency transaction, thus consistent with the current cash payment rules.
Ultimately, in the European context, the French government is now monitoring more and more foreign currency and currency transactions. Specifically, it is required to report each transaction, and to verify the identity of those who participate in Bitcoin.
rance’s Bitcoin community is playing a role at the federal level with words and actions, and LA MAISON DU Bitcoin opened in May as the first bit of currency in Europe. It provides a flexible collaborative work space to assist Bitcoin’s start-up companies, workstations, hackers marathons, offline gatherings, and offers Lamassu Bitcoin ATM machines.
However, As a result of the legal definition of digital currency uncertainty, the taxation of special currency in France is a controversial topic. Earlier this year, the French government said that although the official does not recognize Bitcoin as a currency, it can still be levied on income tax.
Italy:
Sergio Boccadutri, a member of the Italian parliament, said that a law amendment had been raised, and that the bill would target Bitcoin and begin to recognize and regulate digital money.
This amendment is a supplement to a bill that is more budgeted, known as the “Italian destination”. It will try to track bitcoin transfers with 1000 euros or more, requiring the identity of the participants in the transaction. This would make the transfer of Bitcoin in line with the country’s anti-money laundering laws, and the Italian banks were asked to formulate measures within six months
The Italians have proven that they like cash, partly because there are 7.5 million Italians who have never had a bank account, let alone those complicated financial instruments.
From this point of view, the Italian Bitcoin client and wallet download volume ranked 12th in the world is not surprising, behind the Netherlands, in front of Australia and Brazil.
However, further studies have shown that there is a technical problem with the widespread use of Bitcoin. A report by US business services points out that Italy is far behind mobile payments in other EU countries.
UK
The UK, especially London, is considered a global center for financial services and new technologies. So you may assume that the UK will be a good home for receiving Bitcoin and other digital currencies. The digital currency is, after all, a mixture of finance and technology. The British public has a strong interest in Bitcoin – London Bitcoin meet-up is perhaps the world’s largest meet-up site, and there are many other events and activities about Bitcoin in the UK.
Britain is also home to the world’s most popular Bitcoin products and services. What’s more is that the Bank of England has been closely looking at Bitcoin technology and has even requested the public to pitch ideas on how to improve its monetary system. Currently, Bitcoin is treated as “private money,” where VAT is imposed in a normal way from suppliers of any goods or services sold in exchange for bitcoin or other cryptocurrencies. While profits and losses on cryptocurrencies are subject to capital gains tax, similar to the US.
UK’s Barclays bank writes: ‘It is becoming increasingly clear that Bitcoin is part of an even bigger story: financial institutions, including barclays are now considering how the technology underpinning digital currencies – the blockchain – could itself revolutionize finance.’
UK’s LocalBitcoins volume has reflected this sentiment, showing steady growth.