Bitcoin: Emerging Global Currency or a Bubble
May 2014
May 2014
Bitcoin: Emerging Global Currency or a Bubble Introduction to Bitcoin Bitcoin is a decentralised, peer-to-peer, electronic payment system. Bitcoin payment network was created in open-source C++ programming code in early 2009 by the programmer or group of programmers known as Satoshi Nakamoto. There is no central body controlling the Bitcoin network, and it is managed and regulated by its users. The Bitcoin generation algorithm is designed to limit the number of Bitcoins in existence at 21 Mn. The algorithm has predefined how currency will be created and at what rate. At present, around 13 Mn Bitcoins are in circulation and 8 Mn more will be gradually released into the system by the end of 2140. Bitcoin’s price volatility is higher compared to conventional currencies and it is widely considered as its biggest disadvantage. For e.g., in 2013, the price of one Bitcoin surged from USD 13 to over USD 1,100 and as of 1st May, 2014 the price of one Bitcoin is down to USD 460.
How Bitcoin Works? In terms of the infrastructure, Bitcoin is a public, internet-wide ledger. The ledger contains every transaction ever processed. A Bitcoin transaction involves transferring the ownership of a specified number of slots of the Internet-wide ledger from one party to another. This ledger, called the blockchain, is confirmed through network consensus and secured using advanced cryptography to prevent counterfeiting, double spending or any later alteration. The transfer of Bitcoins is enabled using a Bitcoin wallet, options for which could be a computer-based program or mobile device-based application, which can be used to send and receive Bitcoins. Wallet addresses also have a private key, which is similar to a password and known only to its owner. While anyone can send Bitcoins to any public key address, sending Bitcoins from an address requires both the public and private keys. Total Bitcoins In Circulation
Market Price (USD)
Number of Transactions Per Day
13,000,000
1,400
120,000
12,750,000
1,200
100,000
12,500,000
1,000
12,250,000
80,000
800
12,000,000
60,000
600
11,750,000 11,500,000 11,250,000 11,000,000 5/5/2013
2/9/2013
31/12/2013
1/5/2014
400
40,000
200
20,000
0 5/5/2013
2/9/2013
31/12/2013
1/5/2014
0 5/5/2013
2/9/2013
31/12/2013
1/5/2014
Source: blockchain.info
2
Acceptability of Bitcoin is Growing Growing number of merchants have started accepting Bitcoins in exchange of goods and services. Till recently, it was mainly used to purchase services online, but now its acceptability has grown to buy or sell physical products offline and in high-street businesses. In terms of merchant usage, according to coinmap.org, there are currently around 4,100 physical businesses accepting Bitcoins globally. Bitcoins can also be converted into a gift card which then can be used at large number of major retailers including Wal-Mart, Amazon etc. Bitcoin is also touted as the next big thing in remittance. For example, sending money to African countries cost an average 12.4% through the commonly used money transfer agents like Western Union and MoneyGram. With Bitcoins this cost can be brought down, since transactions via Bitcoin generally take place at very low cost.
Bitnodes Active Bitnodes by Country (Nov 2013) Bitcoin nodes are critical parts of the Bitcoin network. These nodes are typically run by ordinary people or mining groups and are responsible for updating the ledger (block chain) with the latest transactions. Their reward for doing so is discovering new Bitcoin. The top 10 countries as on November 2013 with their respective number of active nodes are presented in the adjacent table.
1 2 3 4 5 6 7 8 9
United States China Germany United Kingdom Russian Federation Canada Netherlands Australia France
10
Spain
32,843 12,249 11,474 8,048 7,246 5,882 3,596 3,518 2,994 2,559
Advantages and Disadvantages of Bitcoin
3
Conclusion Bitcoin has created a lot of excitement and acceptability for a currency which is only half decade old. Recent volatility in price and the controversies surrounding the bankruptcy filled by Bitcoin Exchanges indicate that this (Bitcoin) independent currency is not matured yet. Since the start of 2014, Bitcoin has exponentially increased its visibility and is experiencing the advantages and disadvantages of the glare of publicity, which includes increased acceptance with vendors and shoppers alongside scrutiny, regulations and fluctuating prices. Thus, the question of Bitcoin being the future currency or a media bubble still remains unanswered.
4