Like the Tulip Mania of the early 17th century and countless other speculative economic bubbles, Bitcoin underwent a major correction last week after reaching an astounding 19,850 US dollars earlier in December of last year. But what really is Bitcoin? And why is it the talk of the town?

What is Bitcoin?

It would be fair to say that most people are left bewildered by the very concept of digital currencies, primarily because it involves understanding a new tech-savvy paradigm. However, at its foundational level, cryptocurrencies — as they are dubbed — are not altogether very different from the idea of tangible money.

The original cryptocurrency has been a lot in the news lately but what is it and do digital currencies have a future?

A cryptocurrency is a virtual currency which is encrypted and anonymous, making it secure and hard to track. It has no physical manifestation and exists only as a unique string of numbers and characters in the memory of computers. These currencies are traded on online exchanges only geared towards cryptocurrencies.

Bitcoin was the first cryptocurrency which was started in 2009 by an anonymous group or person who go/goes by the name of Satoshi Nakomoto, who vanished from the online community in 2010.

What makes Bitcoin unique is that unlike conventional currencies, no central bank or government issues cryptocurrencies and it is not legal tender — you cannot use it to pay your taxes for example. Instead the value and volume of transactions all depend on the community that trades in them. Like physical currencies, however, digital currencies are backed by trust. Whereas paper currencies require their users to trust that national state banks will stand by the value invested in them, cryptocurrencies require a more dispersed form of trust — that their algorithm will prevent fraud and in the demand and supply from other users.

Bitcoin can also be used anonymously since unlike credit cards or a bank account, there is no associated address or ID registered with your Bitcoin account — and this is all part of the appeal of cryptocurrencies. However, Bitcoin isn’t as anonymous as its fans and suspicious authorities state — it can be possibly traced to you through your IP address, service provider or spending patterns for instance.

There are currently 16.78 million Bitcoins in circulation with a limited number of new Bitcoins added every day. And anyone with a high-powered computer and some know-how can obtain these. Bitcoins are ‘mined’ by powerful algorithm-crunching computers which ‘discover’ new bitcoins — essentially the solving of complex mathematical puzzles through computing power. These are, in turn, validated by the ‘blockchain’ — a virtual grid containing nodes representing users that act as the collective validation system. Think of every Bitcoin transaction as a bank account entry, but instead of the transaction being verified by the two transacting parties, it is recorded and verified by the whole community at once removing any chance of fraud.

Unfortunately, mining Bitcoins requires a lot of electric power. According to a report by PowerCompare, “[Mining Bitcoins] exceeded the energy consumption of 159 countries around the world.” According to Digiconomist, “it takes 29.05 TWh (terawatt hours, equal to one million megawatt hours) annually to operate the energy-hungry computers and networks that power bitcoin transactions.” Furthermore according to the Bitcoin Energy Consumption Index, 10 US households can be powered for a day by the energy consumed by a single Bitcoin transaction.

In China, there are server farms that are taking in more energy than whole cities for mining Bitcoins. The energy required to mine these currencies simply is not sustainable in the long term.

Is Bitcoin and cryptocurrency the future of money?

The biggest hurdle for Bitcoin is that regulators and governments are reluctant to recognise it. Very few real world merchants accept it so far and transactions are cumbersome. Its mysterious origins don’t help its reputation much. For many digital elites, part of the appeal of Bitcoin and other cryptocurrencies is the lack of hurdles and overbearing regulation. Most governments around the world, however, have banned cryptocurrencies in some form or the other, Japan being the standout exception which has legalised it.

For US authorities, Bitcoin is simply a way to evade regulation. According to Ben Bernanke, the former head of the US Federal Reserve “Bitcoin is an attempt to replace fiat currency and evade regulation and government intervention. I don’t think that’s going to be a success.” It’s also worth mentioning that no central banks or international financial institution offer it as of now.

However, the US government doesn’t seem to be following its own advice: recently the Federal Reserve of America announced that it would be launching a cryptocurrency of its own in due time.

The Pakistan government has also outlawed cryptocurrency and the State Bank of Pakistan’s official stance is that it does not intend to legalise bitcoins or cryptocurrencies in the future. However, this hasn’t stopped an underground exchange of cryptocurrencies from mushrooming in Pakistan. One can trade in Bitcoins on websites, Facebook and WhatsApp among other mediums.

China initially promoted Bitcoin before banning all Initial Coin Offerings or ICOs which led to panic in the cryptocurrency exchanges. Initial Coin Offerings are the cryptocurrency equivalent of Initial Public Offerings or IPOs. Instead of equity shares, however, buyers get virtual coins of a soon-to-be-issued cryptocurrency for a pre-set value. Despite its own dire warnings that unregulated cryptocurrencies could threaten global financial stability, however, the People’s Bank of China too announced at the end of December that it had set up a team to design its own sovereign cryptocurrency.

Obviously, the flexibility of digital currencies still carries appeal.

The Pakistan government has also outlawed cryptocurrency and the State Bank of Pakistan’s official stance is that it does not intend to legalise bitcoins or cryptocurrencies in the future. However, this hasn’t stopped an underground exchange of cryptocurrencies from mushrooming in Pakistan. One can trade in Bitcoins on websites, Facebook and WhatsApp among other mediums.

The other hurdle for Bitcoin is its volatility. Although initially put forward as an eventual global substitute for sovereign currency, speculation saw its value jump more than 1900 percent in 2017 — at the beginning of the year its value was a mere 1,000 dollars — only to fall to below 12,000 dollars and then recover to around 15,000 dollars in a matter of days in December. As of last Tuesday morning, it was valued at 13,669 dollars. As any economist will point out, such wild fluctuations do not make for a currency that can be a viable financial substitute. Money works best when it can hold its value and consumers can rely on it to know how much they are paying for something.

While we aren’t seeing a full acceptance for Bitcoin or other related currencies anytime soon, it seems that they are here to stay. The market capitalisation for cryptocurrencies as of December 2017 was 600 billion dollars and according to some it will head to the one trillion dollar mark. We may even be looking at a permanent grey area where Bitcoins become the currency equivalent of downloads. Just like torrents, another peer-to-peer (or p2p) sharing technology, Bitcoin might in the future remain on the margins and be used by people who are interested in technology but chased down by regulators and governments.

But given that governments and corporations are still interested in launching their own version of digital currencies, the future of e-money could take a different route. Eventually a more diverse currency basket may take root, one for the digital versions of the real world currencies of governments and another for a whole menagerie of currencies that are currently being traded on the exchanges. A currency may be used only for certain products and service or universally.

Bitcoin’s popularity has had a positive influence on other alternative cryptocurrencies such as ethereum and litecoin and given birth to a whole host of new cryptocurrencies. Clearly there is a great demand for such digital money. Each one has tried to differentiate itself with new features: ZCASH, DASH and Monero lend an extra layer of anonymity, even more than other ‘cryptos’.

Then there are cryptocurrencies that are geared towards specific uses. Ripple, for example, has been tailor-made to facilitate banking transactions. Filecoin and Siacoin are meant to focus on monetary exchanges on ‘distributive storage’ while even the fast-food chain Burger King is coming up with its own cryptocurrency. There even are a few rappers who have issued their own cryptocurrency.

Blockchains, the underlying technology that powers Bitcoin and other cryptocurrencies, shows more promise on the acceptability and legalisation side. It is all set to revolutionise not just transactions but how we store, organise and verify information systems. Imagine not having to rely on a central repository of information for authentication, and instead being able to verify records — banking, revenue, land holding, academic degrees, what have you — from a dispersed global collective that has the exact same, untamperable registers.

A brand new age is upon us and it would be interesting to see in what ways cryptocurrencies and the blockchain evolve in the coming years. For now, however, it seems our obsession with Bitcoin and other cryptocurrencies is here to stay.

By: Raheel Shakeel


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