Hello readers! I believe that this is going to be my last civic issues blog post of the year. I’ve been looking around for a while for a topic that really peaked my interest. There’s so much going on in the world, but for this post I thought I would talk about something a bit more firmly rooted in economics rather than international relations. This topic is something that was recently introduced to me as a part of a case study in my international economics course. This topic is…Bitcoin.
Before we really talked about it in class, I had passed Bitcoin off as just another intermediary in online currency transactions. But apparently, this new and bizarre economic phenomenon is much much more interesting than Paypal or Google wallet. The thing that makes Bitcoin so revolutionary is that it can be described as a truly “decentralized” currency. With most (I’d guess every, but I’m sure there are exceptions) currencies, the currency note (like our dollars and coins) gains its value from the fact that a stable national government has said that it has value and is, in some cases, backed by something valuable like gold. Most currencies can be called “centralized” because they are centrally controlled and regulated by a government’s central bank.
The same cannot be said of Bitcoin. Bitcoin exists only in digital form, it has no form of central control, and the computer processing power needed to create them is the only thing that initially lends them value. Allow to me explain how this works. In 2008, a man under the pseudonym Satoshi Nakamoto published a paper online describing his vision for a currency that could solely exist online, outside the influence of any banks or national governments. In 2009, he (or she) again anonymously released open-source software that allowed anybody with a powerful enough computer to begin “mining” Bitcoins (I’ll explain this later). After the mining of Bitcoins, online transactions and exchanges of the decentralized currency would be logged by a peer-to-peer network of computers that allows users to collectively organize the currency’s virtual “checkbook”.
The processing power needed to facilitate the logging of Bitcoin transactions is what gives the currency value. Participants who lend the most processing power to the collective network are rewarded with Bitcoins. At the current rate, every ten minutes, the machine that contributes the most processing power to the network receives approximately 25 Bitcoins. At the current exchange rate, this is the equivalent of $11,390. Needless to say, if you have a powerful computer, Bitcoin mining can be a very lucrative enterprise. However, pleased understand that the computers needed to do this cannot be bought on the market. The computers needed to compete at the highest levels of mining only exist in laboratories and in the hands of custom hardware builders.
The investment in Bitcoin currency has also become a major financial activity. If you bought a Bitcoin for $2 in 2009 and sold it for $1,200 at its peak in 2013, you can see how you could make a pretty penny on riding the ups and downs of this very volatile currency market. Despite the volatility of the Bitcoin currency, though, its decentralized nature has made it a very popular currency in which to store financial assets in times of trouble. For example, in 2012-2013, during the Cypriot financial crisis when banks were barricaded to prevent runs, Bitcoin came into very high demand as people in Cyprus elected to take their money out the rapidly failing Cypriot currency. This sudden spike in demand is what blasted the currency up to its phenomenally high value in 2013.
Unfortunately, the life of this new currency has a checked history. Being completely decentralized and untraceable by any organization with legal authority, Bitcoin has become a popular currency on the black market. Contraband sites like Silk Road (which was actually started by a Penn State grad. Woot!) and organized crime have started accepted Bitcoins enmasse so that transactions can be completed anonymously and without fear of being traced.
The future of Bitcoin depends on the willingness of consumers and businesses to put their faith in this admittedly shady currency. For government conspiracy theorists, the idea of a currency completely outside of the controls of a possibly corrupt government or central bank is certainly appealing. The real sell, however will be for average Joes who just want to be able to make an honest living. I’d say that the currency is still too new to make any judgement calls just yet, but it certainly is pretty interesting to learn about.
http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-how-does-bitcoin-work