Bitcoin: Too Early to Talk About Future of the Currency?

By: Soeun (Sarah) Lee

The price of Bitcoin hit $17,000 on Thursday, December 7. Starting from below $1,000 at the beginning of the year, it has reached $14,000, $15,000, and even $19,000 all in seven days. The market value of Bitcoin has passed $271 billion, which is greater than 488 of the Standard & Poor’s 500 companies. The Bitcoin has many fascinating features, such as enablement of decentralized and anonymous transactions as well as blockchain technology, but its sharply rising price is dangerous and worrisome. Although some believe Bitcoin to be the future of currency, its merit is not widely acknowledged due to its fluctuating prices.

Bitcoin is a digital “cryptocurrency,” meaning that it is a digital “money” that secures itself using cryptography. Since bitcoin uses a lot of computing power to work through the cryptographic security algorithms – a process called ‘mining’ –  only a limited amount of bitcoin can be created at a time. While currencies and transactions have traditionally been controlled and tracked by the government or central bank, the cryptocurrency uses blockchain technology, connecting individuals directly and allowing them to make transactions without the help of middlemen, thus providing a degree of transparency in the currency’s usage. Also, it is not affected by the foreign exchange rate, and thus, can be move freely across borders. Therefore, blockchain technology is believed to have a huge potential to be applied in many fields, such as international banking, commercials, voting or healthcare, without privacy issues. For example, some central banks within China and Sweden have said that they have reviewed the application of blockchain technology to publishing digital currencies. Its decentralized and anonymous characteristics have attracted many people as they believed that cryptocurrency can be the future of money outside of from government or bank control.

Bitcoin was initially meant to act as a digital currency that would allow people to escape from government or bank control. However, it has become a means of speculation, where people make an investment using fluctuating prices rather than investing in its value. Because Bitcoin lacks a regulatory body, its price can fluctuate rapidly. Many investors find this vacillation appealing, believing they can make profits out of rapid price changes.

These rapid price changes are supposed to stabilize, which is where Bitcoin has a merit as the future of currency, once Bitcoin mining is completed and the set amount of Bitcoin is all mined. The number of Bitcoin is limited to 21 million by the year of 2140, and 16.7 million of them have already been mined to stabilize the value of the currency. As there are only about 4.3 million left to be mined, people buy Bitcoin in the exchange market instead of mining the Bitcoin. Since the number of Bitcoin is limited, its price is supposed to have stabilized. However, although much of Bitcoin’s value comes from its supposed stability, its price has continued to fluctuate. Moreover, Bitcoin does not have a social function yet as it cannot be used to purchase many products. The majority of Bitcoin owners do not buy things with Bitcoin and instead keep it digitally, waiting for the moment they can make the maximum profits. This is the reason why some people call Bitcoin a “crypto-asset” rather than cryptocurrency. Therefore, some analysts categorize this boom as similar to that of Dutch tulip bulbs or dot.com bubbles, in which people bought in tulip bulbs or IT stocks at extraordinary prices, only to experience financial ruin when these prices plummeted.

Despite the risks involved with cryptocurrency frenzy, however, more and more people are buying Bitcoin. Japanese Yen, U.S. Dollar, and South Korean Won have three largest currencies used in exchange market; Japan takes up to 49% of trade volume, followed by the U.S. of 27%, and South Korea’s 12%.  South Korean buyers are especially eager to buy this currency, despite having to pay more than 20% of premiums, compared to 9% in Japan. For South Koreans, Bitcoin provides a seeming safe harbor to invest their money, as increasing tension with North Korea and political turmoil at home have led people away from the Korean Won. The skyrocketing price of Bitcoin is even attracting young students, who are suffering from a highly competitive society, to the Bitcoin exchange market. Instead of studying and working, they are trying and failing to earn money from Bitcoin. Therefore, the Financial Services Commission decided to “ban all forms of initial coin offerings.” Since there is no regulation pertaining to cryptocurrency market, investing in Bitcoin involves great risk. It is also problematic in Korea that people are investing all their savings into Bitcoin, which includes high risks, and that Bitcoin is used in illegal activities, including drugs purchase or tax evasion.

Some leaders see potential in growing cryptocurrency markets to break through debt crises. Nicolas Maduro, president of Venezuela, announced on December 3rd his plan to create “Petro” – a  cryptocurrency backed by crude reserves, gold, gas and diamond and based in Blockchain Observatory – as a part of efforts to break through a debt crisis brought on, in part, by US sanctions. According to Maduro, it is expected to “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.” In the same way that cryptocurrency is controlled by the government and bank, Petro would be independent of the U.S. dollar, allowing Venezuela to circumvent the U.S. sanctions. However, it seems difficult to solve Venezuelan crisis with Petro as the drastic depreciation of the Bolivar implies the lack of investors’ confidence in the Venezuelan economy. Venezuela is unlikely to overcome their economic crisis by creating Petro when it currently does not have the credibility to attract investors. Furthermore, it is questionable how far Petro will be transparent and independent from the government.

Overall, although investors argue that Bitcoin controls the future of currency, Bitcoin in its present state only serves as the means of speculation. It does not act as actual currency, as people cannot buy anything with Bitcoin. Also, about 90% of Bitcoin transactions are happening in three countries while “whales,” the moniker for those who hold a large amount of Bitcoin, are so powerful that they can influence the Bitcoin price. Since few Bitcoin holders are setting the price and can influence the market, ordinary investors can easily be damaged. Therefore, the overarching global digital currency that Bitcoin investors are expecting would not likely to be realized unless its price is stabilized and the governments across the world accept the use of cryptocurrency. Although Bitcoin uses a new technology that has great potential, it does not necessarily mean that Bitcoin has as much potential as blockchain technology. The future of technology is not same as the future of Bitcoin. Therefore, it seems to be too early to discuss the future of currency, yet there are potentials to have digital currencies under the government or bank control.

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