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Understanding Bitcoin and Its Implications

February 21, 2018

 

Since the creation of the first decentralized digital currency in 2009, Bitcoin has disrupted the financial world and cryptomanians have seized it. Bitcoin, created by Satoshi Nakamoto, was thought of as a “passing technology fad”. Now, it’s 2018, and cryptocurrency can be used to buy fried chicken at KFC.  Large companies such as Microsoft, Expedia, and Tesla are also accepting Bitcoin as a form of currency.

 

Bitcoin will effectively change people’s spending habits and the way they store money. One of the biggest reasons why Bitcoin has become a public concern is due to the fad and “bubble effect.” From an interview with Warren Buffet, the digital currency’s massive 1,400% surge this year has all the signs pointing to a speculative bubble. Referring back to history, the bitcoin fad consists of many elements that are similar to the tulip mania in the 1600s. Tulips became a prized commodity that many people sought to buy during the Dutch Golden Age, but that bubble burst in 1637 and left people in financial ruin. With Bitcoin, it has been a record-breaking year from transaction to trading volume, with every statistic surpassed - a record high of 200 million active users. Although it takes just a few clicks of a button to make a transaction, these transactions use about 32 terawatts of energy annually. This energy consumption comes from the “mining” process that is behind the “Proof of Work” concept.  Proof of work is the algorithmic system that requires users to mine and solve difficult math calculations to obtain bitcoins.  The total energy used to verify transactions is almost enough to power 3 million households in the United States!   “All that glitters isn't gold“  is the perfect phrase in describing Bitcoin’s negative impacts.  Even as the value of Bitcoin continues to grow, that dollar value comes at a massive cost. It contributes to climate change, one of the biggest problems we face today. While we simultaneously scramble to find a solution to this crisis, Bitcoin continues to escalate it.

 

The underlying problem of all the Bitcoin debates is that, for the average person, Bitcoin isn’t easy to understand.  Echoing from before, the current popularity of Bitcoin lies in the “promise” of wealth. There are almost 28.5 million Bitcoin wallets and users, many of whom are all wagering their wallets and savings in hopes that their cryptocurrency assets will increase over time. However, we must keep in mind that Bitcoin is fuelled entirely by its users and the “speculations” of its price rise has made it incredibly volatile. As shown in the graph below taken from Coindesk, from December 18, 2017, to February 5, 2018, the value of a bitcoin dropped from $19,343.04 down to $6,914.26.

 

 

This volatility leads me into Bitcoin’s unregulated platform. The system is secure only to a certain extent, as even Bitcoin’s platform has an Achilles’ heel. In 2014, Mt. Gox was known to be the largest Bitcoin exchange in the world - they handled over 70% of Bitcoin transactions worldwide. Then, it all came crashing down in 2014 after a massive hack. The hack resulted in a loss of 850,000 bitcoins, worth an estimated $450 million at the time (February 2014). Incidents like Mt. Gox and many others have demonstrated that there are flaws within the regulation and centralization of these exchanges.

 

In the age where technology is rapidly evolving, the prospect of digital currency is no longer a surprise. Based on Bitcoin, however, it’s a complicated process that’s hard to understand, and the lack of regulation in North America has rendered Bitcoin unsafe for mainstream use.  For now, because of its flaws, Bitcoin is unlikely to become an official currency. Despite that, I believe that the overall concept of cryptocurrency is here to stay. The real advance behind cryptocurrency is not the “currency” itself, but rather the underlying technology of blockchain that was created. This kind of disruption will definitely entail international changes, but in the long run, it’ll be beneficial to our economy. Even in my own life, my younger brother has made the move to invest in multiple cryptocurrency platforms. From that, it is clear that cryptocurrency has already made its mark in the world, and we need to start taking notice now!

 

 

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