Money plays an integral role in our lives. It influences almost every decision that we make. Everyday we spend money without really thinking about what actually makes money valuable. A dollar bill for example. What makes a dollar bill valuable? Many can agree that a dollar is worth this much time and energy. This assumption is due to the government regulating the currency. The US government determines how much a dollar bill is worth. It can change the strength of the dollar by changing the amount of currency that they print which is called inflation. The benefits of having a centralized currency is that the government can regulate how much currency is in circulation, keeping the economy stable. While this system works for most of the time, there are instances where an alternative is preferable. For each transaction, there is some money lost to the government and making transactions can be very difficult especially with people who live in foreign countries. A new type of currency called Crypto currency solves this issue. Crypto currency is a medium of exchange using cryptography to secure transactions and control the creation of new units. The most notorious of the crypto currency is Bitcoin. Bitcoin was created in 2009 and has quickly grown worldwide. This is because transactions are made independently meaning no banks, no transaction fees and no requirement to give proper identification meaning transferring money is very simple (What is Bitcoin?, Hamilton).
The value of Bitcoins has increased tremendously over the last 5 years, at one point reaching over a thousand dollars. Currently one Bitcoin is valued at around 225 dollars. Now I know many of you are wondering how does one acquire Bitcoins. One way is to exchange money for Bitcoins. Another is to mine it. Mine it? How do you mine something that’s not physical? Mining is an analogy that Bitcoin users use to describe the process of acquiring Bitcoins. Every ten minutes 25 new Bitcoins are generated, however, Bitcoins are locked by complex mathematical equations that only computers can solve. In order to acquire Bitcoins, a computer has to solve a complex algorithm (Volastro). The first computer to solve this receives the Bitcoins.
The starters of Bitcoin made a limit to the maximum Bitcoins that could be mined which is 21 million. Currently there is more than 12 million in circulation meaning there is less than 9 million left (Volastro). Since its introduction, the number of Bitcoins being mined has significantly increased meaning Bitcoins have become harder and harder to get because only 25 Bitcoins are released every ten minutes. This also means that only the fastest and most powerful computers have a chance at acquiring Bitcoins. Even having the fastest computer in the world may not be worth the hassle because the cost of operation, such as the cost of electricity, is more than the value of the Bitcoins mined (Tillier). Furthermore, Creators have made mining difficult in order to keep the value of the Bitcoin.
Once the Bitcoin is mined, they are stored in digital wallets, which exist on the user’s phone or computer. There are many online apps that offer digital wallets. Wallets are similar to bank accounts and from their wallets they can choose to pay for things. Many online sites have started to accept Bitcoins as a form of currency (What is Bitcoin?). To purchase Bitcoins or complete a transaction, QR codes have been frequently used. Furthermore, linking of a online store to a wallet is also been done However, since there is no regulation fro Bitcoins and wallets, they are prone to attacks and are possible to get stolen without a trace. Even though it can be stolen, there is always a record of who has the Bitcoin. Each person owning a Bitcoin has a ledger of who else owns the other Bitcoins therefore, although Bitcoins are decentralized, people trust in the value making fraud difficult (Murphy).
Since the user determines how much Bitcoin is in the market and how much it is worth, the price is constantly fluctuating like stock. This means that the value of Bitcoin is not constant, but there are rules set in place so that the Bitcoin will keep its value. “The Bitcoin software has a mechanism that is designed to ensure there are always enough miners working to keep the currency operating and to regulate their output. It does that by altering the difficulty of the work that mining software has to do so that their miners’ combined rate of output is always the same” (Simonite). Bitcoins are also easier to use than credit card, which is why it has become so popular. Transactions are direct without any third part interference. Furthermore, it is more anonymous that cash. However, economist Paul Krugman is skeptical of Bitcoins. Economic theory states that a “successful currency has to be both a medium of exchange, meaning a something that is easily transferrable, divisible, and universally valued, and a good which maintains its value reasonably well”(Mathews). The biggest problem associated with Bitcoins is that there has been a huge drop of value in Bitcoins recently. Last winter the value of Bitcoin dropped from $1200 to $600 in a span of 48 hours. Although investing a Bitcoins is risky, the relative simplicity of making a transaction with people far away fast and without any costs is a great value. Moreover, the relative anonymity in making transaction also adds to why people take the risk.
The future for Bitcoins is uncertain. Bitcoin is fairly unknown to the rest of the population and with such volatility it may be difficult for it catch on especially in today’s economy. Furthermore, the government has said very little about Bitcoin demonstrating that some regulations might come to play in the future that might hinder the usage of Bitcoins. But the advantages that Bitcoins give may out value the risks.
Hamilton2, James. “Econbrowser.” Econbrowser. N.p., 2 Feb. 2014. Web. 15Apr. 2015.
Mathews, Christopher. “Why Economists Are Right to Hate on Bitcoin | TIME.com.” Business Money Why Economists Are Right to Hate on Bitcoin Comments. TIME, 3 Jan. 2014. Web. 15 Apr. 2015.
Robert P. Murphy, “The Economics of Bitcoin.” June 3, 2013. Library of Economics and Liberty. 15 April 2015.
Simonite, Tom. “Price Slump Tests Bitcoin’s Self-Correcting Economics.” Technology Review. MIT, 18 Jan. 2015. Web.15 Apr. 2015.
Tillier, Martin. “Bitcoin Basics: The Economics Of Mining.” NASDAQ.com. NASDAQ, 28 Oct. 2014. Web.15 Apr. 2015.
Volastro, Anthony. “CNBC Explains: How to Mine Bitcoins on Your Own.” CNBC. N.p., 23 Jan. 2014. Web. 15 Apr. 2015.
“What Is Bitcoin?” CNNMoney. Cable News Network, n.d. Web. 15 Apr. 2015.