Bitcoins: Pros and Cons to Conventional Currency By Jayanth Potharaju from Jindal Global Law School
The digital revolution of the 21st century has brought in a new form of currency – the Bitcoin. It was first introduced in 2009 by an entity called Satoshi Nakamoto, which ended up leaving the project in 2010. The Bitcoin is a digital currency, which is an open source, peer to peer and does not involve the interference of any external financial institution in its operation.[i] This article provides a brief rundown on the working of the Bitcoin method of financial transaction and then proceeds to list down its advantages and disadvantages compared to conventional methods of transacting.
The bitcoin network operates in the absence of a financial institution by shifting the load of the work to the users of said system. Users of the system invariably help consolidate and contribute to the longevity of the system by a process called ‘mining’. In this process, users use their computing power to solve complex mathematical problems and thus ‘mine’ 25 Bitcoins every 10 minutes.[ii] The mining process enables the user to engage in recording transactions done using bitcoins on what is known as the Bitcoin block chain. The more the users mine, the greater is the reward of bitcoins received.
An analogy of the term mine can be drawn parallel to mining of gold. Like the precious metal gold, bitcoins too exist only in a limited quantity. Hence, the supply of Bitcoins is not infinite as opposed to traditional currency. More specifically, only 21 million Bitcoins shall ever be produced thus making it a rare commodity.[iii]
The transactions carried out through the Bitcoin method of payment are recorded on a public ledger along with the user’s encrypted identity. The user has the option of not revealing his entire identity, hence making the transaction almost anonymous. The transaction itself uses the method of cryptography to control its creation, administration and security. The recorded transactions are open to public viewing along with the user’s bank account balance, as this information is stored on the bitcoin network.[iv]
Assuming that the readers have a basic understanding of the working of a Bitcoin transaction, the advantages and disadvantages of bitcoins over traditional currency are as follows-
Security is a very important feature in money-based transactions as participants are conscious of their hard-earned money. The bitcoin has been both brilliant and sketchy on this front. In March 2014, a bitcoin exchange Mt. Gox reportedly lost $460 million to hackers and went on to declare bankruptcy. This incident brought into light a public debate about the safety of bitcoins.[v]
But, at the same time bitcoins guarantee a huge degree of anonymity to the individuals taking part in these transactions. Bitcoin makes it very hard to figure out the identity of users involved in transactions by allowing for the separation of private and public personas. This does, though, increase the possibility of a rise in the incidence of illegal transactions due to the relative anonymity.
Also, bitcoins are not controlled by any centralized financial system unlike traditional currencies. The Bitcoin, being an open source project, purely survives on the efforts of its users to mine and consolidate the existing financial system. This saves the Bitcoin system from being a potential victim of political interference and consequently saves the users from freezing or seizing of assets by governmental or similar agencies.[vi]
The Bitcoin has a huge degree of liquidity compared to traditional currencies and is not generally affected by inflation rates. It also is susceptible to huge change within its own varying parameters, which is influenced by traditional notions of demand and supply. Further, due to the constant depreciation of the value of bitcoins over time and its volatile nature; the end users face difficulty in attempting to spend them at an appropriate time. For example 1 Bitcoin was $9.9 on June 2nd 2011 but was less than $1, 6 months previous to that.[vii]
Finally, Bitcoins can be bought and sold in return for conventional currency or can even be directly transferred. Due to its decentralized nature, there is the added benefit of the dismissal of the worry of exchange rate considerations during such transactions.[viii]
The view on Bitcoins by the Indian State is dismal to say the least. On May 26 2016, the members of the Parliamentary Standing Committee of Finance raised fears of illegal transactions that could be potentially carried out through this system.[ix] Further, the RBI has issued caution to users of this method of transaction due to security risks.[x]
The relative privacy, lack of institutional interference and open-source nature offered by this crypto-currency, makes it an attractive option to individuals compared to the traditional form. Considering the inevitable rise of crypto-currency, Bitcoins or anything else, organizations must commit themselves to making it as secure as possible to make it a legitimate alternative to the tangible currency.
[i] Nakamoto, Satoshi. "Bitcoin: A peer-to-peer electronic cash system." (2008): 28.
[ii] Rosic, Ameer. "What Is Bitcoin Mining? A Step-by-Step Guide." The Huffington Post. TheHuffingtonPost.com, 21 Dec. 2016. Web. 25 July 2017.
[iii] Staff, Investopedia. "How Bitcoin Works." Forbes. Forbes Magazine, 03 Feb. 2014. Web. 26 July 2017.
[iv] Murphy, Edward, Maureen Murphy, and Michael Seitzinger. "Bitcoin: Questions, answers, and analysis of legal issues." Congressional Research Service (2015).
[v] McMillan, Robert. "The Inside Story of Mt. Gox, Bitcoin's $460 Million Disaster." Wired. Conde Nast, 03 June 2017. Web. 25 July 2017.
[vi] Martucci, Brian. "Topics." What Is Bitcoin – History, How It Works, Pros & Cons. Moneycrashers.com, n.d. Web. 27 July 2017.
[vii] "Disadvantages." Bitcoin. N.p., n.d. Web. 26 July 2017. <http://cs.stanford.edu/people/eroberts/cs201/projects/2010-11/DigitalCurrencies/disadvantages/index.html>.
[viii] "How Does Bitcoin Work?" The Economist. The Economist Newspaper, 11 Apr. 2013. Web. 26 July 2017.
[ix] Manoj, CL. "Bitcoin Can Be Misused for Cycling Black Money and Financing Terror, Warn House Panel MPs." The Economic Times. Economictimes.indiatimes.com, 26 May 2017. Web. 25 July 2017.
[x] Staff, Inc42. "RBI Issues Warning Against Usage Of Bitcoins; Terms It As Breach Of Anti-Money Laundering Provisions." Inc42 Media. Inc42.com, 29 Mar. 2017. Web. 25 July 2017.
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