August 25, 2016    5 minute read

Bitcoin: The Currency Of The Future?

The New Way To Trade    August 25, 2016    5 minute read

Bitcoin: The Currency Of The Future?

Nakamoto, the inventor of Bitcoin, states that, as a peer-to-peer currency, this virtual exchange could signal the end of the need for traditional financial institutions and systems. It has been broadly discussed that the current requirement for trusted intermediaries to act as payment processors demonstrates the weakness of the existing system of payments. Furthermore, the problem inherent in traditional systems is that payments are reversible, forcing financial institutions to incur mediation costs, which are then passed on in the form of transaction costs. The Bitcoin system appears to be superior as it facilitates non-reversible transactions, enabling traders to interact without third party involvement.

Is This The Future?

On Bitcoin.org, the official website of Bitcoin, it is explicitly said that this virtual currency could become the currency of the future, dispensing with intermediaries by utilising cryptography as a control mechanism. Many advantages of the virtual currency have been considered: controllability, freedom from time or border constraints, lower fees than competitors, low merchant risk and cost and increased security, transparency and neutrality.

Nonetheless, many have acknowledged the disadvantages, which include volatility, low public awareness and the fact that the currency is still being developed. Moreover, Izabella Kaminska, a journalist with the New York Times, has highlighted the importance of being more cautious, suggesting that the Bitcoin community has listed many major incidences of hacking of Bitcoin exchanges since the currency’s inception. Indeed, this author is yet to be convinced that this is the currency of the future.

Unveiling The Frailty

The severity of the recent $60m Bitcoin theft which has caused turmoil among dealers and commentators, It has been highlighted by many researchers. Indeed, it should be noted that Bitfinex exchange, the latest hack victim, was previously well-respected, the largest in terms of dollar value and a trader development leader. Many have asserted that Bitfinex’s existence is now threatened. This is due to the fact that the hack leaves the exchange in an uncertain position. On top of that, the company’s decision to spread its losses among its customers, with all taking a mandatory 36% haircut, has seen criticism. For instance one of the editors of coindesk.com, also commented on this solution, suggesting grave effects on public confidence.

It must be noted that this is the second time that Bitfinex has been hacked in the last two years. Therefore, the event appears to have a negative impact on the confidence in the supposedly unhackable currency. Furthermore, it could be said that this theft might also lead the banking industry to reconsider its position on the use of Bitcoin and related technology.

Explaining The Strength

All that said, the price of Bitcoin dropped from around $600 before the theft, to $480. Afterwards, a rapid recovery took place, and the currency’s price went back to $560 within a day, and traded between $560 and $580 the following week. The confidence in the virtual currency appears to be a key element in understanding this contradictory response of the financial market. Petar Zivkovski, director of the Bitcoin trading platform Whaleclub, stated that this quick price recovery was due to a market correction, as the post-hack price fell “too quickly.” He also highlighted the importance of market confidence, which has led to bullish trading and a sudden and significant price recovery. Many have agreed that the Bitcoin theft set a “low bar,” from which it had to rebound, mainly because the 20% fall in value was excessive.

$600 was the price of Bitcoin before the Bitfinex hack

Nonetheless, the value Bitfinex’ positive reaction must be acknowledged, as it refused to contemplate bankruptcy as an option, thus boosting the confidence in the virtual currency. Indeed, many have stressed the importance of the robust response from Bitfinex in the recovery of Bitcoin’s market price. By refusing to consider bankruptcy, and ensuring that the exchange was quickly reopened, the damaged company helped significantly the swift price recovery. Another key element in explaining the sudden recovery of the virtual currency’s value appears to be company’s decision to offer tradable vouchers, issued with a promise of future shares in its parent company iFinex, to all its loss-bearing customers. It could be argued that this was a decisive and timely move, which boosted trader confidence in both Bitfinex and Bitcoin, aiding the currency’s post-theft recovery.

Conclusion

To sum up, Bitcoin may be seen as the currency of the future. Although the virtual currency is volatile, still in development, and exposed to various risks, its strength is an element that should not be overlooked. The confidence in its value and, even more, in its potential is a key element in outlining the traits of this currency. Therefore, even if not clearly on the pathway of becoming the currency of the future, Bitcoin has the potential to achieve this long-term objective.

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