current issue in the finance industry

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Sal GrecoCurrent Issues Project: Bitcoin

The birth of bitcoin has caused major controversy leaving many people speculating if thisis the future of money. In 2008, Satoshi Nakamoto developed a new payment system using

electronic cash known as bitcoin, which allows one party to transfer funds to another partyeliminating the mediation of a financial institution. Bitcoins are created and generated through anopen-source network. Each individual is given a unique address known as a wallet ID when theysign up. The wallet Id contains a private key that allows you to make any type of an exchange.Bitcoins can be traded from one owner to another, either physically or electronically. A paperwallet or even an actual coin can be physically exchanged for a bitcoin. Another way bit coin iselectronically traded is through an exchange. Similar to the stock market, a group of buyers andsellers meet to trade at an agreed market price. Every transaction that is recorded is known as a block. Miners need to monitor and verify each transaction using special software to solvecomplicated algorithms, and in return are rewarded 25 bitcoins every 10 minutes (McMillan andMetz, 1). This is how new bitcoins are created. This process influences other people to start

mining, essentially generating growth. As more math problems get solved by the miners, thelevel of difficulty increases. The reward for mining will decrease as time progresses, due to its predetermined limit of 21 million in circulation. This limit is predicted to end in 2140.

Bitcoin is very unique in comparison to other payment and money transfer services likePay Pal and M-Pesa.The main factor that differentiates bitcoin is that it is a form of currency,while the other services just act as intermediaries. Another factor that distinguishes bitcoin apartfrom the others is that one is regulated, while the other is not. Pay Pal and M-Pesa are bothlinked directly to a regulated bank account, and every transaction is over-looked to preventmoney laundering. While on the other hand, bitcoin remains decentralized, which gives usersthe ability to enact anonymous transactions. In connection, they all have the ability to transferfunds electronically at a low cost and a fast pace.

Ultimately, one doesn’t know if, when, and to what extent the public will startadopting this new form of currency. The main disadvantage to the buyers lies in the volatility of bitcoins. Due to the deregulation and immaturity of the bitcoin markets, the prices will change,unpredictably. Under these circumstances, merchants have the ability to set their own price byeither overcharging or underpaying, giving them an ultimate advantage.

The government is taking the necessary precautions in order to protect consumers fromthe unstable fluctuation in the price, due to the non-regulation of the virtual currencies. Forexample, on November 10, 2013, the bitcoin was priced at $309.97. On November 29, 2013, the bitcoin was priced at $1,109.97, shockingly jumping up $800 in 19 days (coinbase, fig. 1). Thistype of volatility causes uncertainty in the market. To offset these types of instabilities, the

government must intervene. Bitcoin has become a favorable market to the consumer who uses it as a method of

payment, as well as the merchant who accepts it as a means of payment. As opposed to banks,the absence of your personal information provides more security. As stated earlier, the only wayto identify your ownership in bitcoins is a through a wallet id or digital wallet. This allows theowners of this currency to be unknown when conducting a trade. Similar to online banking, bitcoins protect your identity by using cryptography. Cryptography, an encoding method, is usedto alter your information into an unreadable code, which limits the susceptibility to identify theft



(Kessler). Due to the unfamiliarity of how the bitcoin exchange works, people have theimpression that the system was safe.

Bitcoins were once believed to be secure through cryptography, but as time progressesevidence only shows that bitcoins are very susceptible to not only thieves, but computer hackersas well. In any circumstance, if someone gains access to your wallet, they are now the rightful

owners of your bitcoins. Anyone can gain access to your wallet by stealing your phone orcomputer that your wallet ID is located. Also, having a physical bitcoin can increase yourchances of burglary. When an individual loses a Casascius bitcoin, the loss is irreplaceable; thesame event occurs when cash is lost or stolen. Although, if cash is placed into a checkingaccount, it’s insured by the FDIC, and if stolen, the bank will give you a refund of your money.With bitcoin there is no insurance. Recently, this has become a real problem for bitcoin owners.Mt. Gox, the most popular bitcoin exchange, filed for bankruptcy protection after allegedlygetting hacked, losing nearly 750,000 of its customers’ bitcoins priced around $473 million.(Stech).Since there is nothing backing your bitcoin, there is little to no guarantee ofreimbursement. Security problems can eventually scare away potential buyers, which willultimately result in merchants not accepting bitcoins anymore.

This unidentifiable system of identification and payment has become a beneficial loop-hole for the dealers (sellers), as well as buyers in the black-market. Silk Road, a popular cyber-underground marketplace, accepted bit coins as a means of payment in exchange for illegalitems. Silk Road used Tor, an internet service, which discombobulates the IP addresses leavingthe transaction completely untraceable (Moore). This could only be possible through bitcoins

This causes a major concern for the government. In an effort to stop illegal drugs andguns from being exchanged for bit coins, the Financial Crimes Enforcement Network (FinCEN)is requiring any business that runs an exchange for virtual currency to follow the Bank SecrecyAct. The Bank Secrecy Act states that information about consumers must be collected, in orderto prevent money laundering through untraceable accounts (Henning).

As a result of not having a centralized location, using bitcoin as a method of paymentallows funds to be transferred at a faster pace. As contrast to banks, transfers can take anextended time period to process a transfer of funds. (Ezeobika M.D.). Additionally, Merchantswho approve taking bitcoins as a payment, also benefit from having a decentralized payment and processing system. Subsequently, resulting in the payment and processing system to be fasterand cost next to nothing, as compared to banks and credit cards. Also, merchant services are becoming more of a demand among the virtual currency holders to help them process, convert,and deposit their funds into their bank accounts. These services can help convert a non-regulatedform of currency, for which is not fully established yet, to fiat money, which is universallyaccepted (Drum). This can be a profitable opportunity if you are successful trader when thedemand for the bitcoin increases.

Although bitcoin was created in 2009, it is still unpredictable to whether or not it will be generally accepted by everyone in the future. It is an ongoing development that is just startedto be taken seriously so investors are holding on to their bitcoins because they are unsure the waythe market will move. There is one advantage to holding on to your bitcoin as a store of value. Ifthe demand eventually goes up, and bitcoins become the future of the economy then it wouldhave been financially advantageous to hold. On the other hand, there are many disadvantages toholding on to your bitcoin. Requirements on bitcoin exchanges to distribute pricing information



are getting stricter. Furthermore, the government may centralize the trading equivalent to howthe S.E.C. regulates the stock exchange, in order so the market is less likely to be manipulated(Henning).

The bitcoin has the potential to survive, but the only question is to what extent. As the popularity continues to increase, so does the involvement of the government. The government

will want to regulate something they can’t control. As a result of future regulation, the bitcoinwill become less attractive to buyers. For example, more fees will be added, the online black-market will disappear, and a price of value will be established. The government is going to use bitcoin to set an example to prevent other types of decentralized digital currency from forming.In conclusion, bitcoin will exist, but not play an increasing role in the future because all of thecharacteristics that made the bitcoin so enticing to buy will be gone.



Works Cited

Coinbase. Bitcoin Charts. N.d. Coinbase, Online. Bitcoin Charts. Web. 20 Apr. 2014.

Drum, Kevin. "Bitcoin is a fiat currency, but that's not its big problem." Mother Jones. N.p., 25

Feb. 2014. Web. 19 Apr. 2014. <http://www.motherjones.com/kevin-

drum/2014/02/bitcoin-fiat-currency-thats-not-its-big-problem>.

Ezeobika M.D., Dr. Chukwumah . "Advantages and Disadvantages of Bitcoin." Yahoo

Contributor Network . N.p., 6 Nov. 2013. Web. 21 Apr. 2014.

<http://voices.yahoo.com/advantags-disadvantages-bitcoin-12385858.html?cat=15>.

Henning, Peter. "More Bitcoin Regulation Is Inevitable." DealBook More Bitcoin Regulation Is

Inevitable Comments. N.p., 3 Feb. 2014. Web. 17 Apr. 2014.

<http://dealbook.nytimes.com/2014/02/03/more-bitcoin-regulation-is-

inevitable/?_php=true&_type=blogs&_r=0>.

Kessler, Gary . "An Overview of Cryptography." An Overview of Cryptography. Auerbach, 9

Mar. 2014. Web. 15 Apr. 2014. <http://www.garykessler.net/library/crypto.html>.

McMillan, Robert , and Cade Metz . "Bitcoin Survival Guide: Everything You Need to Know

About the Future of Money | Enterprise | WIRED." Wired.com. Conde Nast Digital, 13

Nov. 1923. Web. 15 Apr. 2014. <http://www.wired.com/2013/11/bitcoin-survival-

guide/all/>.

Moore, Emma. "Online Subterfuge: Silk Road, Tor and Bitcoins." Brown Political Review RSS .

N.p., 13 Nov. 2013. Web. 19 Apr. 2014.

<http://www.brownpoliticalreview.org/2013/11/online-subterfuge-silk-road-tor-and-

bitcoins/>.

Stech, Katy. "Some Mt. Gox Customers Want CEO Out During Bankruptcy." Wall Street

Journal . N.p., 18 Apr. 2014. Web. 19 Apr. 2014.



<http://online.wsj.com/news/articles/SB100014240527023044184045794636624345204

36?KEYWORDS=mt+gox&mg=reno64-wsj>.

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