Bitcoin: Boom or Bust?

In January 2014, Bitcoin turned half-a-decade old. But the past five years have not been without their highs and lows. We take a look back at how the crypto-currency has fared over the last year and whether it can survive the road ahead.

BITCOIN'S ROLLERCOASTER RIDE

In the new age everything is digital. is our currency also going to be bits and bytes floating aound the internet?

The fact that the value of bitcoins is volatile is undoubtable. It seems every year the crypto-currency reaches a new peak just before crashing horribly and then climbing its way back up. Is bitcoin doomed to repeat this cycle ad infinitum or can it eventually fulfil its original purpose and become a decentralised, digital currency for the internet age?

A year ago, bitcoin made waves and surged to the forefront of the tech world - for all the wrong reasons. On 10th April 2013, the bitcoin bubble burst with the fourth largest bitcoin exchange, Bitfloor, shutting down. From a peak value of around US$300, bitcoin tumbled before stabilising at a value of around US$100.

At the time, many predicted that this would be the beginning of the end for the most successful crypto-currency to date. But it was only the start of the roller coaster road that bitcoin has taken and continues on to this day. Rather than dissuading users, the crash of April 2013 seemed to draw more speculators to the scene. So much so that the price of bitcoin started to make its way back up until it crossed the US$1000 mark on major exchanges such as Mt. Gox.

Why Do People Want Bitcoin?

Bitcoin's allure lies in its characteristics. The crypto-currency does not have a central regulatory body. Instead, new bitcoins are generated by a process dubbed 'mining', where computers race to solve puzzles based on transaction data. Successfully submitting a solution not only helps keep a public ledger of all bitcoin transactions up to date, but also results in the award of new bitcoins.

When bitcoins were first introduced mining could deliver significant returns. But the more bitcoins there are already, the less bitcoins are awarded for work. Mining is so computationally intense now that it's only viable if you're willing to invest in a serious farming rig, and work it with patience.

How bitcoins are created presents the unique opportunity of retaining assets anonymously. While traditional bank accounts require proof of identity, users can own bitcoins just by having an email address and signing up for a bitcoin wallet service. In the information age, privacy is an attractive trait.

As can be imagined, the same characteristics of anonymity disconcert some parties. In December 2013, the People's Bank of China issued a statement telling Chinese financial institutions that they should abstain from conducting business using bitcoins, even though private citizens were free to trade it as they please. The result was a 29 per cent drop in the crypto-currency's value to below US$800.

The volatility of bitcoin draws a crowd of speculators who feel like they can play the game and make big money. So it makes one ask: Is bitcoin a commodity or a currency? Money, cash or currency has no intrinsic value but is valuable only because it can be exchanged for goods and services. Similarly, bitcoin can only function as a currency if it is accepted by third parties as payment.

Next >> Bitcoin becomes real money

Bitcoin Becomes Real Money

The first monetary transactions involving bitcoins were contained amongst the community that sprung up around the young crypto-currency. Arguably, the first items bought with bitcoins were two Papa John's pizzas, purchased for a programmer in the US by a volunteer in England for real money, who received 10,000 bitcoins in return. As bitcoin became more popular, the shadier elements of the internet were drawn to it, and it became an alluring medium for transactions requiring anonymity.

Bitcoin became the de facto currency for Silk Road, an online portal for contraband material and illicit services. The association with illegal activities no doubt closed more doors of opportunities than it opened. Near the tail end of 2013 however, the FBI were able to take down Silk Road and apprehend the owner of the site, Dread Pirate Robert, who had made approximately US$80 million in commissions, according to current bitcoin exchange rates.

Ironically, while China is warning its businesses against bitcoin, other parties seem to be warming up to the crypto-currency. Overstock.com, an online retail store has announced that it will be accepting bitcoins as payment from 2014 onwards. While it isn't Amazon, it's still a mainstream business that is recognising bitcoin as a legitimate currency. In the same vein, a Lamborghini dealership in the United States sold a Tesla Model S for bitcoin.

Bitcoin's Velocity Measured

Due to there being a public ledger, there is a large amount of data related to bitcoin available for examination at blockchain.info. In macroeconomics, the velocity of money is an important metric to gauge the performance of a currency. The velocity of money is defined as the frequency at which one unit of currency is used to purchase a domestic product or service within a given period of time. In simpler terms, it measures how many times a single unit of money is spent for goods or services in a limited time frame.

Over the course of 2013, the average number of bitcoins in circulation was 11,275,182 while the total number amount of transactions conducted with bitcoin was 76,390,490. This gives bitcoins a velocity of money of 6.775, a figure that is actually quite similar to the US Dollar's velocity of money over the course of 2013. Worryingly for bitcoin though, this velocity of money seems to remain constant, which suggests no increase in the circulation of the crypto-currency as time is progressing.

Next >> How anonymous is Bitcoin?

HOW ANONYMOUS IS BITCOIN?

At present the major players in the bitcoin market, such as Mt. Gox, one of the largest bitcoin exchanges in the world, require personal information for users to register. This personal information can be shared if it is subpoenaed. Furthermore, it is important to note that bitcoin is still taxable. In order to remain within the realm of legality, bitcoin owners are required to declare their ownership for the purpose of tax calculations. You should also know that Bitcoin's transaction log, the blockchain, is public. The blockchain keeps a record of all transactions and ownership. While Bitcoin addresses (a unique identifier for each Bitcoin owner) don't directly identify their owners, it's conceivably possible to track users through the flow of transactions.

Bitcoin: The Rocky Road Ahead

Having a look at the trend of bitcoin transactions per US Dollar of bitcoin's total market capitalisation from December 2012 to December 2013 shows a downturn. While the total number of bitcoins available has increased, the number of transactions conducted with bitcoin has fluctuated. And most of the transactions generally involve a swap between US dollar to bitcoin or vice versa.

A mixture of the volatile value of bitcoins and the narrow field of financial institutions that accept it as payment has meant that for the most part, bitcoin has been treated as more of a commodity to now. But as more parties begin accepting it as payment, there is a chance that the crypto-currency may become a viable alternative to traditional currency systems. Unfortunately, there is still a long way to go before bitcoin is adopted across the globe.

One thing is certain, the rocky road bitcoin has travelled isn't ending soon, and if you're betting on bitcoin be prepared to join the rough ride.

WHO REALLY CREATED BITCOIN?

Little is known about the creator of Bitcoin, who is known only by his, her, or their pseudonym 'Satoshi Nakamoto'. With the identity of the inventor of bitcoin remaining a mystery, it is hard to discern what the goal behind the crypto-currency might be. But a researcher named Skye Grey has run the rule over the scraps of information available and has claimed to unmask Satoshi. Following detailed analysis based on the diction and textual bias of the bitcoin creator, Skye Grey has postulated that Satoshi Nakamoto is actually a researcher at Washington University by the name of Nick Szabo. This claim has still not been verified or disproved.

DOGECOIN

Some say imitation is the best form of flattery. If this is true then the Dogecoin is paying homage to Bitcoin. One of the newest crypto-currencies on the block, the Dogecoin takes its name from a popular meme featuring a Shiba Inu dog and its misspelled, clueless inner monologue. With the genesis of the name being an internet meme it's hard to take the Dogecoin - worth US$0.00059 per coin at the moment - seriously. But it might also be prudent to remember that the bitcoin began its journey from similar origins. Who knows, maybe in a couple of years' time, we could all be using a cute doggy coin emblazoned with the lyrical words "wow much coin how money so crypto".

Next >> Bitcoin FAQ

BITCOIN FAQ

01. WHAT IS BITCOIN?

Created anonymously by 'Satoshi Nakamoto', bitcoin is digital, decentralized cryptocurrency. The supply of bitcoins is not controlled, and the transactions for bitcoins are registered in a public ledger.

02. WHAT CAN BITCOINS BE USED FOR?

Bitcoin was intended to be used as standard currency, at present this is not the case. A total of 10,000 parties worldwide accept bitcoin as payment. As the currency is digital, it is primarily used to make payments online.

03. HOW DO I GET BITCOINS?

There are two ways. The first is simply to exchange bitcoin for another currency with a willing party. The second, an option which is becoming less viable with every passing day, is to use 'mining' software to 'mine' for bitcoins.

04. WHAT ARE THE BENEFITS OF BITCOIN?

Bitcoin is a digital currency for the internet age. Each bitcoin carries with it its own history of transactions, but it also offers a certain degree of anonymity, since all you need to own bitcoins is an online wallet.

05. WHAT ARE THE DRAWBACKS OF BITCOIN?

The main drawback of Bitcoin at present is the limited number of financial institutions willing to accept it as payment. The value of bitcoin is also volatile, and this is a deterrent for its function as a currency.

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