dilbert-chain

The Bitcoin : Introduction and More

The Concept of Cryptocurrency despite being an old one has not found much popularity among common people, probably because of difficulty in understanding technicalities. In this article i have tried to make things a little simpler, and clarify on some myths created around the bitcoin usage. Bitcoin is the new age digital currency used in online only payments, the currency is not physical entitiy and is created by a community of people digitally. This gives the decentralised nature to it, with no central authority in control, all parts of transactions are performed by users of the system. The fact that bitcoin is private system and no central authority controls it makes it very cheap and open on one hand but very risky on the other. You get the freedom of sending money to anybody across the world at negligible transaction costs as compared to conventional methods but you also risk losing your money if you are not careful and make payments to unauthorized personnel.

Anonimity is another blessing in disguise feature of bitcoin, you can perform transaction of all sorts without revealing your real identity, every bitcoin and each user is encrypted with a unique identity. Having said that it is not 100% anonymous system every transaction is recorded intensively in block chains over public ledgers, so eventually people can link your identity to your transaction.

Through Cryptographic techniques, users offer their computing power to verify bitcoin transactions by collecting blocks of new transactions and record payments (blockchain) on public ledgers. Such users are called miners and are duely rewarded by the network’s controlling computer algorithm with 25 newly created Bitcoins. Verification of transactions is very crucial and difficult leading to increasing computational cost of the service. The blockchain records feature has attracted many conventional banks as means of making online international transactions faster and hassel free.

Ofcourse such independent and single authoritative governance free nature of bitcoin system is sore to the eyes of many governments and institutions. They argue over the possible misuses of the bitcoin system without authoritative policing. Also the overuse of bitcoin or other cryptocurrencies will result in multiple monetary units and will threaten the fragmentation of economy’s currency system. But such threats are a bit too futuristic, bitcoin is only a minor medium of exchange and faces volatile prices, it doesn’t threaten the US dollar as principle circulating currency.

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Let us talk about the advantages that bitcoin offers to its users.

  1. Lower Transaction costs – the entire transaction is supported by users without any trusted third party reliance hence the transaction costs are cheaper than traditional payments. Bitcoin sales are one sided hence there is no possible misuse of customer charge backs, which merchants find costly.
  2. Increased privacy – Relatively speaking the identity of the users are efficiently protected saving them from identity thefts, also governments non-intervention from monetary systems has been found attractive by some. But in comparison to cash transactions bitcoin fails to provide equal level of anonymity as the entire transaction is saved in blockchain over the public ledger accessible to everybody.
  3. Purchasing power – Since no government authority is involved, inflation resulting from government’s inefficiency is nil. But inflation can occur if the demand of bitcoin decreases relative to fixed supply. Inflation could also occur if the Bitcoin network develops fractional reserve banking (i.e., banks that hold only a fraction of their deposits in reserve and lend out the rest), which would also be a vehicle that effectively increases the supply of circulating Bitcoins. If these digital banks move to a situation where held reserves stabilize, this source of inflation would diminish.

Bitcoin looks impressive till now atleast to the users, if not governments and central banks. But hey! Remember how every coin has two sides? Bitcoin is no different so in contrast to the brighter side there is a darker side which makes bitcoin a little less attractive to use.

  1. No Legal tender – No government intervention and no accountability to any central authority might not find popularity with many people.
  2. Tough Competition from Dollar – The widespread use of dollar makes it even more attractive thus fuelling its continued use and hindering the use of other currencies like bitcoin.
  3. Volatile nature of price – The volatile price behavior suggests the market for Bitcoin is currently being driven by speculative investors, and that relatively few people are actually making transactions in bitcoin (like buying and selling etc…). This volatile nature of price makes bitcoin’s use unattractive.
  4. Fixed supply – the bitcoin supply is capped for long run to promote deflation, which can result in demand outstripping the supply with bitcoin widespread use causing the bitcoin prices rise. Faced with deflation, there is a strong incentive to hoard Bitcoins and not spend them, causing the current level of transactions to fall.
  5. Uncertain network security – though the bitcoin system is very secure it is not full proof, Bitcoin exchanges and wallet services have at times struggled with security. Bitcoin relative newness in the business makes security imperative.

mf_bitcoin_f.jpgDespite the dark side of the bitcoin companies like Microsoft, Dell and Expedia have started accepting payments in bitcoins. “india’s Reserve Bank, have acknowledged Bitcoin as a currency of the future.” – cointelegraph. The fact that bitcoin is relatively new to the economy and is facing the problem of price volatility has little effect on those who face the undue stress of managing international transactions and long delays in payments hence hampering the business. Though numerous accusations of promoting criminal activity through anonymity are imposed on bitcoin and blockchain, the fact is that blockchain provides the most cheap, consistent, and verified method of payments when other technologies are barely keeping up.

Bitcoin and block chain are fuelling the fourth industrial revolution, because now it is about speedy transactions and time saving executions. The rising price of Bitcoin, reaching $450 at press time, follows several months of steady growth in Bitcoin price and transaction volumes, growing trade activity, particularly in Russia and South America, and continued expansion in the mining industry, all suggesting that Bitcoin is here to stay.

The Wall Street Journal, April 19 article, says:“The last 24 days mark the longest period in which bitcoin prices have been less volatile than gold prices, going back to 2010. Some point to the drop as a sign that investor perception of bitcoin is drawing closer to gold as a safe store of value.”

Resources:

https://bitcoinmagazine.com/articles/despite-naysayers-rising-bitcoin-price-suggests-the-digital-currency-is-alive-and-well-1461346768

https://www.fas.org/sgp/crs/misc/R43339.pdf

http://www.coindesk.com/information/is-bitcoin-legal/

http://cryptome.org/2012/05/fbi-bitcoin.pdf

http://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html

https://www.bitcoin.com/you-need-to-know

http://www.wired.com/2015/11/coinbase-unveils-countrys-first-bitcoin-debit-card/

Originally posted 2016-04-27 09:05:27. Republished by Blog Post Promoter

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