Bitcoin: Innovative Currency

History of Bitcoin

In 2008, Satoshi Nakamoto invented bitcoin, publishing and releasing this invention as an open-source software platform which could be utilized without intermediary. The idea was of “decentralized digital currency.” The first transaction, performed from Nakamoto to programmer Hal Finney who downloaded the software on October 31, 2008, was 10 bitcoins. While other predecessors did exist (such as bit gold), bit coin has gained traction over time, and despite earlier glitches including issues with verification (in the normal process discussed under “Present” section), eventually adequate confidence has existed such that Expedia, Microsoft, and OKCupid are among the more mainstream sites using bitcoins. Due to concerns about inappropriate transactions occurring with an online black market named “Silk Road,” the bitcoin exchange known as Mt. Gox was shut down in October, 2013. Probably not co-incidentally, around this time, Baidu (a Chinese search engine and more) allowed payment using bitcoins, with the Chinese exchange BTC China now prominent over Mt. Gox (with now 1 bitcoin valued at USD 900). The latest tally of bitcoins as of November, 2013, was 12 million – this resulted in the market capitalization over USD 10 million.

Over time, bitcoin gained popularity with sponsorship of the St. Petersburg Bowl. The first regulated bitcoin exchange named Coinbase was launched in 2015, with 25 states participating and plans to include numerous countries by end-of-year.

Interestingly, despite its initial volatility (some to which bitcoin remains susceptible), bitcoin is increasing in adoption, while the reality of “loss of a private key resulting in complete loss of value” (as discussed later) being a stark reality.

 

Present Bitcoin Use

The structure of bitcoin currency is unique. An entity called the “block chain” is a ledger for this non-centralized record-keeping, refreshed every 10 minutes, recording transactions with bitcoins added and subtracted from respective parties. These bitcoins can be tracked as either a whole bitcoin or a fraction thereof, abbreviated as BTC or XBT. A private key is given to the person spending bitcoins, and must be used – if lost, bitcoins associated become irretrievable.

Entities called “miners” perform mining by collecting new transactions into a “block” chaining it to the previous block; a “proof-of-work” contained in the new block using the SHA-256 hashing algorithm allows a difficulty target and “nonce” which means “a number used only once.” A number assigned in this manner requires at times over 30 qunitillion values tried before finding the “requisite nonce” – with an incentive of bitcoins given to the “finder” who maintains the ledger. As prior blocks add to the new block to form the number, it is increasingly difficult for attacks on this system (which typically takes upto 10 minutes due to the number of calculations involved). Due to the extensive numbers of calculations involved, a large energy drain perceived as an inefficient use of this consumption (i.e. equivalent annually to normal use of about 135,000 American homes) is associated with Bitcoin.   Some strategies to win the “reward” for determining the number include forming pools of individuals/attempts, as well as transaction fees – there is a though that while transaction fees will likely remain, rewards will likely dwindle to nothing by the year 2140. Fees are dependent upon storage size of transaction generated (dependent upon number of unites required to create transaction) – with priority to older unspent inputs, but fees can incentivize a transaction occurring faster (and hence, though optional, may be typically included in the process by those participating in the exchange). “Wallets” are associated with personal accounts, storing both a private and public key each. While privacy is an issue with bitcoins owners not associated by name with bitcoins, some such associations may be either be required for repetitive transactions with same individual or company – with mixing functions available to help with such cases, so a unique code cannot be necessarily traced as easily.

The question of “what to consider” bitcoin as remains controversial – some consider it a commodity, whereas others consider it an investment target. Bitcoin remains a highly volatile commodity, yet risk may be reduced with greater interaction with known companies such as Bloomberg now adding list prices for bitcoin. Wide fluctuations in bitcoin price from $0.30 to $266 (then rising to $600 in August, 2014) within a span of 3 years indicates such volatility. Bitcoin has been called many things – a bubble, a non-bubble with “natural economic forces at work,” a Ponzi scheme, and a delusion… and in that tradition, predictions of bankruptcy and death (of bitcoin with rumors that have been “greatly exaggerated” thusfar, as of March, 2015, where 1 bitcoin is valued at little over $205).

 

Future Bitcoin Expectations and Possibilities

When academicians argue, a generally accepted principle may be to “let the market speak for itself.” With over 100,000 businesses legitimately accepting bitcoin as of the end of 2014, and even PayPal allowing bitcoin interaction, there may be even stabilizing functions in the future that bitcoin may be used towards. For example, Greek and Argentine peoples have used bitcoin against which to stabilize their own currency, with purchases of bitcoins. The widespread fluctuations of bitcoin status (best investment of 2013 per Forbes, worst investment of 2014 per Bloomberg), investment by venture capitalists, and its appeal to be “outside governmental control” to some. Governments may possibly outlaw bitcoin (as some such as Russia, Bangladesh, Vietnam, and Thailand have done, among others), or allow its use as many countries continue to do. With the United States classifying bitcoin as currency per Judge Mazzant of a Texas District Court, and the IRS to provide guidance regarding related taxes,

As recently as 2015, with companies like 21 Inc. raising over $100mm in venture funding, start-up companies aiming to “drive mainstream adoption of bitcoin” are on the horizon.

Proposals for future of bitcoin have involved consideration for stocks, swaps, and other instruments – with a strong warning of risk, but still allowance to some extent by U.S. regulatory agencies. This creative digital currency, after its open-source introduction from Japan, may have its place in the world after all, and at that perhaps a valuable one.

(Information above has been acquired from numerous sources, including www.bitcoin.org, www.wsj.com, www.wikipedia.org, and www.theeconomist.com, among others)