Bitcoin as the Gold of the 21st Century
You have probably heard of Bitcoin. It has been one of the most commonly searched words on google for the past 3 years, yet most people still don’t understand what it is or how it works, and when people don’t understand how something works, we tend to stay away from it. Bitcoin has been called the virtual gold, or alternate currency. Due to this and its huge international presence it has a tendency to shift stock markets, and upset foreign currencies. In this research essay I will discuss all the ins and outs of Bitcoin. The benefits it has, and the problems that come with it. In an attempt to help people more fully understand what it is, and how it can affect all our lives. My personal stance is that Bitcoin is a genius idea, that can bring clarity to international trade affairs and currency exchange of goods.
To give only a brief summary Bitcoin is a virtual currency. It has no centralized bank, and is not influenced by any government. Now this means that it is not backed by anything physically, one hundred percent virtual. This tends to scare people because it’s hard to grasp the fact that something isn’t physical, yet that is how we live everyday now. Most people are paid by direct deposit or check. Which goes into their bank account and then they pay for things using a debit or credit card. Never once seeing the money, or touching the cash physically. Yet they know it’s there and know what it is worth. And we know what a dollar is worth because we can take it to the store and exchange it for a good or a service, but what is that really backed by? Up until the 1970’s the U.S dollar was backed by gold, but since then it has not been backed by anything. Economist Simon Black said: “Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money. It’s extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as ‘valuable’”. So, why be scared of Bitcoin not being backed by anything physical? The U.S dollar certainly isn’t. The only reason to be uncertain about the price of Bitcoin is that it is completely controlled by the demand for it in the market, similar to stocks. Which may feel like uncertainty to some, but it truly reflects what its true value is. Because value means what the people are willing to pay for it.
Unlike all other types of currencies, Bitcoin is not printed off by the federal government. It is mined. No, the mining is not physically digging for it like gold and silver, it is mined virtually through computer programs. Now this may seem absurd but it’s really quite interesting. To briefly explain how it works, the coins are put on a block chain, and set to release on a consistent and complete timeline. Using computer programing, and number must be found, also known as nonce. This nonce has to the hash along a number of blocks on the network to verify it. It is relatively easy to do, but extremely time consuming considering it has to try all different types of combinations. Every 2,016 blocks, or once every 14 days, a new coin is released. The miner who has found the right nonce number and block mines the coin. This will continue eventually slowing down, and coming to a halt when 21 million Bitcoins are out in circulation. In case you’re counting, that will happen in year 2140. You may ask what the point of all of this is, and that is what makes Bitcoin so special. The amount that will be released is predictable meaning when there is a shortage of money, or Bitcoins, more can’t simply be printed off. It has a controlled rate of inflation. Which later we will talk about why that affects international business so much.
It is actually unsure who the real creator of Bitcoin is, or if it was a group of people. It was published under the name of Satoshi Nakamoto. Nakamoto published a paper in January of 2009 titled, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. The paper was published and made first available to a group of ‘cypher punks’ who then began mining for the coin. The first purchase ever made using Bitcoin was a year later in 2010, where a man purchased two Papa John’s pizzas for 10,000 ₿. Ironic that Americans would purchase pizza first. It is interesting to think that the value of Bitcoin went up considering normally a valuation of money declines. In the 1990’s a quarter could buy you a lot of items, now all its good for is a gumball maybe. In 2010 10,000 Bitcoin was worth two pizzas, but today that same amount would be worth over 75 million dollars.
As stated earlier, Bitcoin is not controlled by a central government. That was and is the main purpose of Bitcoin. Taken directly from Nakamot’s paper, it says: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”. The third party referred to here is the government. Now government currency has been around for thousands of years what could be so wrong with it? Well, it did not used to be so bad when it was harder to make money, and it had to be backed by gold. Now that it doesn’t, and money can be printed with ease, it is extremely susceptible to being corrupted or manipulated (AAPC). Let’s take an example to explain. Say the United States needs money for a new bill they are funding. They could issue a bond to China asking 98 million dollars with a one-year expiration and 100 million dollars payout. Then in one year when China comes to collect the money the U.S could pay back then 98 million, and then if they don’t have the other 2 million, they owe China for lending them, they can just go and print 2 million dollars. China is none the wiser because they received their full amount of money. Yet the value of the U.S dollar has gone down because more money has been created, with no backing behind it. Now this then affects everyone who has U.S dollars in their bank account because the money they have is now worth less because there is more money in circulation. Now what is stopping a federal government from consistently doing this to pay off debts and fund new activities? Given it may not be that easy to print it off, but real-life instances like the example I gave are happening all the time with our government and with all kinds of governments all around the world.
The term is called hyperinflation and it means exactly what it sounds like. Inflation increasing at an unsustainable rate. Where the excessive printing of money by the government to pay off debt or fund other interest, which can cause crashes and problems in the economy. Hyperinflation causes a vicious cycle to begin where the government runs into a budget deficit, typically it is caused by wars or famines, but can also be because of greed or corruption. Due to the deficit of the government, more money is printed causing the nominal value of money to decrease, and the price of goods to rise. This in turn creates more deficit, and higher prices. Which makes it necessary to print more money. This cycle will continue until the currency has zero value and because it is most likely a ‘fiat currency’ meaning it has no backed physical value. The currency then collapses causing it to mean nothing. Typically, when this has happened that foreign government typically turns to the U.S dollar. But what would we do if this happened to the U.S dollar? What currency would we turn to? One of the most recent examples of this is what happened to Venezuela. The Venezuelan Bolivar began to lose its value mostly in 2014 when its inflation went up by 69 %. In 2015 it was up 181% and at a world high record of 800% in 2016. I wish I could say that was the worst of it, but it continued after that hitting 4000% in 2017, and a whopping 1,698,488% in 2018. Supposedly the government of Venezuela has halted production of the bolivar, but economists say it is on track to be over 5,000% for 2019 (Krauze).
What happened in Venezuela is that the central government da-privatized the oil industry and took it over. Which was good for the government for a while, but privatized industries, or capitalism, is the best thing for the economy because then the government is not assuming all the risks that come with it. Also, when its privately owned the owners and employees are acting in their own best interest to be as profitable as possible, to ensure that they are taken care of and so are all their employees. Well, when the government of Venezuela assumed the risk of the oil industry and it had a recession the government went into a ginormous recession. Causing a budget deficit and a shortage of money. Due to the fact that the Venezuelan government was ran poorly they had little in savings or other resources to pull along through this time causing them to borrow a lot of money. Along with paying back the borrowed money and continuing to loan the banks money, they had to print off more money. Which as we know printing more money than you should causes crashes in your economy (Davies).
Now I am not stating that if Venezuela had been using Bitcoin their problems would have been solved and they wouldn’t have fallen into the state they are in. But there are a few areas where Bitcoin could have helped them. First off, it would not have destroyed the savings of everyone in the country. When the government started printing money and causing the value of the Bolivar to drop if other Venezuelan citizens would have had some of their money in Bitcoin, the value of it would have remained the same across the world. It would take a whole world economy to crash for the Bitcoin to be worth zero, or for everyone in the world to see absolutely zero value in it. Secondly, it is more difficult to create a redistribution of wealth for a nation. Meaning if the government of Venezuela would have been on a Bitcoin currency to redistribute the wealth or to pay back their deficits, they would have had to have the actual Bitcoins. Meaning they would either have to buy them, or tax the people for them. If they would have purchased them it would have caused the price of Bitcoin to rise meaning the people in the country with Bitcoin would have more money. Now this also helps the government from getting into a deficit too deep because there is a limited amount of Bitcoins out there. It would also make it easier to get out of a debt because of the fluidity of having a universal currency. It would make it easier for other governments or private industries to come in and buy Venezuela’s debt and the oil rigs and allow Venezuela to rebuild. No one wants to buy a debt from a country whose currency is losing value every day because what they pay you back with isn’t worth anything to you.
There are several possible concerns about Bitcoin as a centralized currency. First, Bitcoin is a peer-to-peer trading currency. It has no need to go through a bank. It is widely known that Bitcoin has been used as a way to sell drugs, sex trafficking, and human trafficking. This is due to the fact that it is completely untraceable. Anyone can go online and download a virtual wallet, send money to that wallet and then send that money to whoever they please. Now this causes a number of issues. The IRIS would have no idea how much money you have or where it’s going, if you don’t go through a bank or have that money recorded. Meaning tax evasion would be easier. Also, the cops then can’t pull up bank statements in court to show a paper trail proving you committed the crime you were accused of. Which could hurt you if trying to prove your innocence. Now you may be thinking, well, all of this already does happen but with cash. Which is true, but cash has to be exchanged in person. If drugs are purchased from someone in Mexico, then that money has to be laundered and wire transferred there, or it has to be shipped there through smuggling methods not to raise suspicion. With Bitcoin that can all be done in a matter of seconds online while leaving no trace. Second, Bitcoin is an online system meaning it can and has been hacked. Mt. Gox a large exchange service that converts Bitcoin to cash was hacked, and millions of dollars in Bitcoin was stolen. Now the main system that releases the Bitcoin has never been hacked there’s no 100% guarantee saying that it never could be. Third, we live in a time where technology is always changing, and it is often times difficult for the average person to keep up with all the changes. Completely changing the currency in the U.S would be a dramatic change leaving millions of people in the dark on it. There are certain people who have a hard time functioning their smart phone as it, how are you going to explain to them they now need to run their whole life through it? Everyday people are forgetting their email passwords, or getting their Facebook hacked into. What if they lock themselves out of their virtual wallet, or drop their phone in a lake and have no back up saved. There goes all their money. You can’t run down to the centralized bank, because Bitcoin doesn’t have one.
Now we have talked an awful lot about Bitcoin, but we have failed to mention the hundreds of other crypto currencies out there. When Bitcoin first came out, it was the first of its kind, revolutionary. But like any good idea, copy cats are sure to follow, and many did. This is mostly because Bitcoin was beginning to see crazy rates of returns, and others wanted a piece of the pie. The blockchain technology that was introduced with Bitcoin was easy to modify and create your own similar to it. Multiple companies invested in it, and created their own cryptocurrency and began essentially using them like you would a stock. The company would stockpile a whole bunch of them, and then slowly sell them to the public for whatever price people were willing to pay. This caused tons of them to blow up, and Bitcoin started seeing crazy returns as well. It 2017 Bitcoin hit an all-time high of 20,000$ per coin. Remember the two pizzas bought for 10,000 Bitcoin? That was worth 200 million dollars in 2017 (McWhinney). But like any other supply and demand the hype died down, and the price settled to what its market value was, and for the past year it has stayed around 7,000$ per coin. But not before big named people made their own coin. Former Google engineer, Charlie Lee, made a cryptocurrency called Litecoin, which also had a boom and made him and his partners millions of dollars (Aguirre). Companies like Amazon and Facebook have also toyed with the idea of their own cryptocurrency. Facebook even announced it had plans for it, yet they called it a ‘digital currency’.
If you are like me, you are probably wondering if Bitcoin could ever replace the U.S dollar? Well, the founder of Twitter, Jack Dorsey thinks it will in about ten years (Shen). Now I think that is very unrealistic, and a bit of a stretch. Here’s why, first, in ten years there will still be people who were born in the 60’s, 70’s and 80’s, who didn’t even grow up with the Internet. They are far too technologically illiterate to transfer their entire currency online to a virtual one, and be able to keep up with the continuingly changing price of the Bitcoin. Obviously as Bitcoin becomes more widespread it will be much more predictable on what it is worth, but it is not there yet. Second, the United States has too many rural areas for that right now. Rural America is still very much a thing, and 6% of Americans don’t have Wi-Fi, or even have access to it (FCC). Now this could definitely change in the next ten years, but with the pace were going that seems unlikely. Third, way too many other underdeveloped countries around the world rely on the U.S dollar right now. Ecuador for example is a third world country that relies heavily on the dollar, and if 6% of Americans don’t have Wi-Fi, I can’t imagine how many there don’t even have access to the Internet. It would be very nice though when traveling abroad if everywhere would accept a universal currency, and not have to exchange your money and lose some, or try and pay with U.S dollars and not know what the exchange rate is and so forth.
Should you invest now in Bitcoin. As stated at the beginning of the essay, many people still know very little about Bitcoin. They have probably watched one or two YouTube videos, and seen an article in Forbes, but most don’t understand all of it. As any good financial advisor would say, is to make sure you do your own research. Learn and understand the market of it. This is a whole new category of investing, it’s not stocks and bonds, and it’s also not foreign currencies. Don’t invest more than you can afford to lose, and it is always good to diversify. Bitcoin has had some of the highest returns ever seen, and people became overnight millionaires. A lot of people also lost money. It is a high-risk investment. Unlike sticks the market never closes either. You could buy Bitcoin at night and then go to sleep and something major could happen in Korea or China and the price could rise 50% in the eight hours you’re sleeping. So, make sure to stay diligent with it, and keep up on the news and new releases coming out.
For the final question then, do I personally think that Bitcoin or cryptocurrency will ever take over the U.S dollar, or if it will be the sole currency for the world? If you can’t tell from my tone and arguing points in the article, I love the idea of Bitcoin and the new technology that it has brought to the world. It is a step in the right direction of ensuring that people are the ones who are in power, and not the government. I am a strong believer in small government with few regulations. But I do not believe that Bitcoin is in a place to be able to take over the currency all together now, or even in the next twenty years. What I could see happening is the U.S dollar adapting and having a similar property of Bitcoin. Where the aspect of paper and coin is forgotten and a fully electronic version is then adopted. That way we no longer have to worry about all the problems that come with cash such as counterfeit and losing it. We live in a time now where everything paper is going away. More and more countries are following suit and adapting the same habits. This is a good thing, and it’s slowly taking over that part of the currency industry. I love living in a world where Bitcoin can exist and I hope to see the U.S dollar and Bitcoin continue to exist together. Maybe someday sooner than we think we might be asked at the grocery store in we want to pay in cash, card, or Bitcoin.