In 2008, the aftermath of subprime mortgage crisis led to quantitative easing by the Federal Reserve, global recession and the European sovereign debt crisis. Confidence in government issued currencies began to come into question. It was the perfect storm for the emergence of a new crypto currency: BITCOIN.
Since the birth of the internet, there have been movements to create virtual cash. However, the early attempts could not solve the Double Spending problem. The way around this is to verify whether a token has been sent or not by a trusted source. While a central authority can be used, it also creates weakness in the system by having a Single Breaking Point.
Bitcoin bypassed this by using the Block Chain, a public ledger of transactions where each transaction is verified by extensive decentralised network of computers. Bitcoin is a digital currency that enables an individual to transfer money and make payments to anyone across the globe. However, the first thing to understand about Bitcoin is that it is not just money transfer or upgraded money. It is instead a programming environment, a publicly audited ledger which accounts for all transaction in terms of property, ownership and contracts
Case for Bitcoin
Transacting on a Bitcoin platform is easy and hassle-free. The user can start as soon as he/she obtains a Bitcoin wallet which takes only a few minutes. As compared to other currencies, Bitcoins offer several advantages:
i. Not Inflationary
Bitcoin was designed to have a maximum number of coins. According to the original specification, only 21 million will ever be created. After that, the number of Bitcoins won’t grow, so inflation won’t be a problem. Many inflation hit countries like Argentina and Cyprus are seeing an increased use of Bitcoins.
ii. Decentralisation
Bitcoin environment uses Peer-to-Peer (P2P) exchange so there is no bank or intermediary that can be a gatekeeper or rent seeker. When a transaction is initiated, it is digitally signed and secured. Verification would be done by an unknown miner and then the transaction is complete. The user is anonymous to the merchant, unless an arrangement is made to inform about the user.
iii. Impossible to counterfeit
Bitcoin is designed to be a huge step forward in making money more secure and could also act as a significant protection against many forms of financial crime. Bitcoin allows money to be secured against theft and loss using very strong and useful mechanisms such as backups, encryption and multiple signatures making it completely impossible to counterfeit. Users can fully control their payments and cannot receive unapproved charges such as with credit card fraud. These transactions are irreversible and immune to fraudulent chargebacks.
iv. Reduced Prices
Currently, credit and debit card companies charge very high commissions for their services. This seems fit as these companies spend approximately 30%- 40% of their profits fighting lawsuits on fraud. This commission cost is transferred to end consumers leading to high prices. But if there is a way of transferring these kind of transactions to Bitcoins – through smartphones or Bitcoin cards – the costs would reduce substantially. Bitcoin transaction fees are minimal, or in some cases free.
Case against Bitcoin
i. Volatility
The number of businesses using Bitcoin and those in circulation are very small compared to the potential use of Bitcoins. So, small events or business activities can significantly affect the price. In addition, as people are still experimenting with the currency and trying to identify the advantages of using this virtual currency, it would take time for the currency to stabilise. Volatility would reduce as Bitcoin markets and technology matures. Since it is a start-up currency, it is difficult to imagine how it will eventually play out.
ii. Illegal activity
Bitcoin network is seen as a haven for money laundering and many other criminal activities. Recently, Silk Road, an online market which used Bitcoins as a medium of exchange was closed under the federal law. It turned out that this clandestine currency was being used for many nefarious purposes. What further aggravates the situation is the fact that it is not possible to trace the source or the destination of money, much less what is being traded.
iii. No Backing
A government is required to back the money supply with assets like gold. But Bitcoins are neither backed by hard assets nor by faith of the government. This makes them a risky proposition during bankruptcy. Some analysts, however, argue that Bitcoins are backed by the “processing power”. This seems illogical as there is no fundamental means of repayment in case the process crashes.
The Future
Although Bitcoins have several advantages, it’s not very easy to convert Indian rupees to other currencies since the Indian currency is not fully convertible. Due to this hindrance, obtaining Bitcoins in India is not as hassle free as it is in other countries. Another problem with obtaining Bitcoins in India is that there is no electronic method to transfer funds safely; most transfers happen through NEFT. Due to these hindrances, liquidity of Bitcoins is relatively scarce in India, though it is picking up.
The future of Bitcoin is still clouded as the entire economic and financial community has mixed opinions about its viability as a currency. However, going by the current trend of growth in its use, the potential of Bitcoins as a currency seems to be rising. We can only expect Bitcoin’s meteoric rise in popularity to continue. It will challenge the way in which people and governments think of money and currency.
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