MBA Aspirants are expected to know the latest on new happenings in markets which might impact overall Indian economy. Today, you will read on Bitcoins: a virtual money or haven for speculation…
Bitcoin is a new form of currency which is basically virtual and digital in nature. It operates through a peer-to-peer payment network within the context of an open source operation. When paying with bitcoin, there will be no exchange of digital notes or tokens between buyer and seller.
Instead, the buyer requests an update to a public transaction log, the blockchain. This master list of all transactions shows who owns what bitcoins currently and in the past and is maintained by a decentralized network that verifies and timestamps payments. The operators of this network, known as "miners", are rewarded with transaction fees and newly minted Bitcoins.
From the conceptual point of view, it seems a great idea as a replacement to the paper currency, but practically it is mired with a lot of problems. First of all, commercial use of Bitcoins has been comparatively much lesser than its use by speculators.
To understand bitcoin as an instrument of speculation, one needs to answer few questions like is it only a currency or something more than that? Is it only an asset or there are more dimensions to it?
Well, to answer these questions, one needs to observe that when something gets digital, it gets a social touch to it, and therefore becomes a part of free-flowing network.
The intensity of usage of a technology socially than the technology itself makes it more popular. So for example some of the predecessors of facebook were technologically more advanced but facebook became more popular due to its rapidly expanding social network. So the key conclusion is that the fate of bitcoins depends upon how many people around the world starts using it.
Therefore it is safe to conceptualize that bitcoins are basically the hybrid of three things – a currency, social network and equity. Bitcoins were initially conceptualized to be a form of platform where goods and services could be exchanged without using paper currency. But today, it has turned out to be an asset (therefore, subject to speculation) rather than merely a platform.
The exchange rate of bitcoins vis-a-vis a paper currency (say, US dollar) appreciates as the usage of bitcoins increases. But currently its usage has been more for speculation than for proper commercial use which is accepting bitcoins for offering goods or services. So the huge volatility in value of bitcoin has been mainly because of bitcoins being used as an asset to speculate rather than the platform.
Another issue of bitcoins has been that who is actually producing them? Unlike paper currencies being produced, regulated and monitored by central banks backed by sovereign governments, bitcoins are being produced by some organizations and groups called data miners. Who are these data miners? What is the source of their legitimacy? Will they not become parallel to central banks if not regulated? These are some legitimate questions that governments need to address.
Lately, there have been some substitutes to bitcoins offered in market claiming to be technologically superior as far as cryptocurrency is concerned. One of them is Litecoin. It is over and above the 21 million limit set for the production of bitcoins. So, if in future something else becomes popular, bitcoins value may come down. Speculators can use this tactic to play to their advantage causing losses of millions to others.
China has recently banned banks from using or accepting bitcoins. It has happened because during November 2013, the China-based Bitcoin exchange ‘BTC China’ overtook Japan-based Mt.Gox and Europe-based Bitstamp to become the largest Bitcoin trading exchange by trade volume.
It is said that this route has been used by many Chinese to stash away black money outside China. There have been many other reports around the world of usage of bitcoins for illicit activities.Something that looks to be technologically superior may not work well in economics. And bitcoin is no exception.