BitCoin and Blockchain
The world has never been enchanted with the world economy being artificially structured with digital money and with a total rejection of the anchor that physical money has provided for several years. Paper money is still used to facilitate transactions as a medium of payment. Technological advancement and change of circumstances have contributed to the lack of a universal agreement on what constitutes money. The current use of digital money in the form of BitCoins and blockchain by some companies and individuals has caused significant controversy. Economists support different views on the practicality of replacing coin, paper, and plastic money with BitCoins. A critical analysis of the applicability and economies of BitCoins shows that they are far from replacing physical money in the modern economy.
Features of BitCoins and Blockchain
BitCoin is defined as an online communication protocol that allows the use of a virtual currency and electronic payments to make transactions. The public network that records all BitCoin transactions is referred to as a blockchain. The creation of new BitCoins is known as mining. One person succeeds to create new BitCoins in every ten minutes. Mining is dynamically adjusted by the BitCoin network protocol. Bitcoin mining is global. It decentralizes the functions of currency issuance and clearance provided by central banks.
BitCoin currency is deflationary in the long-term due to its diminishing rate of issuance. Thus, it cannot be inflated because new BitCoins exceeding the expected rate of issuance cannot be created. BitCoin currency allows people to propagate value and secure the ownership of digital assets using a network of distributed computation. It is difficult to rule out double spending in BitCoins technology. It is also difficult to prevent the creation of counterfeit BitCoins using sophisticated papers and printing technology.
Asymmetric Cryptography and Distributed Systems
Asymmetric cryptography is a public-key concept that secures the internet. It allows the user to access a pair of related keys, the public key and the secret key, which are mathematically bound and cannot be interchanged. The public key is available to everyone while the secret key is concealed by the user. Therefore, asymmetry arises from the concealment of the secret key. Only users can decrypt a message through their secret key because digital signatures are designed using the secret key and anyone can check whether a given signature corresponds to a given message or public key. Therefore, only legitimate BitCoin owners can send them from their wallets. Thus, unauthorized parties cannot transact on one’s BitCoin account. Asymmetric cryptographic enhances claims of explicit and undeniable ownership of BitCoins and prevents double spending.
A distributed time-stamping service that is based on proof-of-work helps proves that one deserves to earn BitCoins. BitCoin miners are awarded with BitCoins when they discover a new valid block. Regular BitCoin clients can also track the transaction history to ensure that the BitCoin they want to purchase has never been spent before. The BitCoin is a completely distributed system because it is freely replicated and stored in different nodes of the network. BitCoin clients should have online access to the blockchain in order to verify any transaction. Thus BitCoins are unsuitable for offline payments.
Economics of Cryptocurrencies
Traditional transfer of money entails transaction costs. Such costs include currency conversion fees and authorization charges by an intermediary, and interchange costs. However, the transaction costs of the transfer of cryptocurrencies such as BitCoins are low because they are peer-to-peer. Moreover, intermediaries and clearing banks are not required to facilitate transactions. Therefore, cryptocurrencies are inexpensive funds-transfer systems as users and merchants only incur operating costs for authorization and verification of payments.
The Impact of Cryptocurrencies on Business
Cryptocurrency transactions enhance the speed of transactions between globally-interconnected financial systems because they are conducted in real time. Therefore, merchants and users can make instantaneous payments. However, monitoring of accounts and ongoing transactions is very difficult while the suspension of suspicious transactions is impossible. Acceptability of cryptocurrencies is still low because of trust issues. Moreover, authentication levels are low because the blockchain has no identifying information of the involved parties. Thus, the blockchain cannot identify particular individuals, creating a loop hole for criminals to open multiple accounts and hide the true value of their deposits.
Separately, cryptocurrencies are characterized by a high level of price volatility. Consequently, businesses are discouraged from using such transactions. Additionally, the cryptocurency transactions cannot be revoked. Once a transfer has been confirmed, it cannot be reversed as the protocol does not have any fund-charge-back functionality. Only the receiver can issue a new transaction. Therefore, senders depend on receivers’ mercy to get refund their money if they authorize payments to unintended people. Consequently, most businesses are afraid of using BitCoin transactions as they do not guarantee them an opportunity to claim refunds in case they authorize erroneous exchanges.
People’s Trust for Currencies
BitCoins can serve some of the functions of money. For instance, transfer of value can be enhanced by BitCoins because miners can use them to purchase commodities or services. However, people trust physical money more than digital currency. BitCoins can also be used to buy shares in the stock market. Therefore, a BitCoin holder transfer or remit them, through the network system, to another person in a different location. However, the recipient should accept BitCoins as a medium of value that can be used to purchase goods and services and make payments. Unfortunately, most people do not accept digital money as a medium of value.
Secondly, BitCoins can be used as a common measure of value. It requires senders and receivers of BitCoins to accept them a measure of value of their goods and services, but there are very few businesses that accept BitCoins. Therefore, most people do not value their services and goods in BitCoins terms. Conversely, people are used to valuing their commodities in monetary terms. BitCoins can only act as a medium of exchange in few cases where they are accepted as a means of payment. Generally, the common acceptance of BitCoins by most people in exchange for goods and services is still low since physical money takes precedence.
The Social Impact of Cryptocurrencies
Cryptocurrencies can contribute positively to social life because they provide people with voluntary transactions. Therefore, it will enable people to access credit, eradicate global poverty and shield them from oppressive regimes. People will be free from monetary monopolies of the current money system. Thus, there will be no prejudice or privilege due to racial backgrounds, economic power, and place of birth. However, BitCoins might allow people to lead double lives, in which they will secretly engage in criminal activities such as money laundering and drug trafficking.
Negative Aspects of BitCoins
BitCoins cannot replace money as they are characterized by some economic drawbacks and risks. Money is a medium of exchange and a stable store of value while BitCoins cannot be a stable store of value as their value is expected to increase or decrease drastically over time. Therefore, they cannot be regulated to prevent deflation and inflation in the economy. Secondly, the use of BitCoins lacks trust and accountability. Anonymous financial networks without third party arbiters may develop if cryptocurrencies are adopted. Cryptocurrencies are characterized by a lack of central control in their use. Consequently, double spending may occur as there is no way of establishing the time of the transaction to note past transactions. The existing method of proof of works is too complex to be used by ordinary investors. BitCoins may be hoarded and sold at higher prices because their production is constant. Finally, with the use of BitCoins, the need to seek reserves will be eliminated. However, this will be problematic as BitCoin transactions cannot be regulated.
It has been established that BitCoins are far from replacing physical money as a medium of exchange, store of value, and unit of account because they are decentralized. Therefore, it is impossible to control their creation and distribution. Conversely, commercial banks are controlled by central banks because they require real currency to make payments while there is no real currency required in transactions with the BitCoin technology. Consequently, it will be possible to falsify transactions. Finally, most people feel that BitCoins are not real money and cannot be a standard of deferred payment as they cannot facilitate future transactions. Therefore, BitCoins cannot be widely used in the place of physical money in the current economy.