Bitcoin is a digital asset and a payment system created by a software developer who calls himself Satoshi Nakamoto. No one has ever met him, and it is not clear if he is one person or several people. The system used is peer-to-peer; users can transact directly without intermediaries. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. Bitcoin is used as a unit of account. What is relevant to highlight is that this system works without a Central Bank, which has led the U.S. Treasury to categorise bitcoins as a decentralised virtual currency. Bitcoin is also well known as the first cryptocurrency, although prior systems existed. Another interesting thing is that since bitcoins are not issued by a Central Bank, because as I mentioned before there is not one that has control over them, there are three primary ways to obtain them. The first one is to buy bitcoins on an exchange, which acts perfectly as the stock exchange, in this exchange there even buyers or seller that buy or sell bitcoins. The second way is accepting them for goods and services, and the third one and probably the most interesting is that you can create this virtual currency with your computer, in technical language is described as mining the bitcoins because “mining” is lingo for the discovery of new bitcoins just like finding gold.
While it may appear that the number of bitcoins is unlimited, Satoshi Nakamoto set a finite limit on the number of bitcoins that will ever exist: 21 million. Currently, more than 12 million are in circulation. That means that a little less than 9 million bitcoins are waiting to be discovered.
Along with the rise of Internet and the great use of it worldwide, bitcoin as a form of payment for products and services has grown. What are the advantages of using this system? Probably the main important driver that leads to use bitcoin as a form of payment is because of its cheaper fees. Fees are lower than the 2-3% typically imposed by credit card processors but unlike credit cards, the purchaser, not by the vendor, pays any fees. However, there are also a lot of disadvantages that threaten its existence. Bitcoin, by its nature, being digital means that if could be used by terrorists and drug dealers. As Money.com reports bitcoins have become
“The currency of choice for people online buying drugs or other illicit activities”
For example, the Silk Road was the major online market that used bitcoins to sell illegal drugs. It was shut down in 2014 by U.S. regulators. In recent days, ISIS used bitcoins to buy weapons, which were used during the terroristic attacks in Paris and Bruxelles. In fact, the European Union is considering tightening its hold on virtual currencies like bitcoin and prepaid cards. The multinational bloc wants to bring increased regulation in play starting June 2016. The EU admits that these new financial tools such as virtual currencies create new challenges regarding combatting terrorist financing. Highly versatile criminals are quick to switch to new channels if existing ones become too risky.
Along this inconvenient use, many people have been debating whether bitcoin was experiencing a speculative bubble or not. Jesse Colombo explains, in his articles on Forbes, that the parabolic bitcoin surge reminded himself too much of silver’s bubble, which occurred in late 2010 and early 2011. Indeed, in both cases, well-meaning amateur economists and investors who were too fearful of an imminent currency crisis or currency regime change, and were therefore too early in hedging against this scenario drove the initial surges. Eventually, greed became the dominant driver of these markets as speculators clamored in to take advantage of the price mania. He concludes,
“No matter how virtuous the underlying market is, greed-driven manias always end the same way – with a price implosion.”
What will be the future of bitcoin? Is it a currency that offers excellent opportunities or not? Perhaps there is still have a high potential of the cryptocurrency, despite the potential for engaging in illicit activities with the currency. One thing is for sure; it will be a disruptive force in the FinTech space.