Bitins - Bubble or Bn - Literature review Example

Bitсоins: Bubble or Bооn By [Student’s Name] [Code + Course Name] [Name of Tutor] [Name of University] [City, State] [Date of Submission] Word count: 1531 Introduction Economic bubble and boon are common to all currencies and other financial instruments world over. In many instances, after the economic bubble, a bubble burst is experienced. Bursts always have a negative effect to the economy and it takes time before recovery. Bubble period witness an increase in speculation. About Bitcoins currency The current wave in the financial world is a currency called Bitcoins. Bitcoins bubble has swept all nations across the Globe. Bitcoins is a virtual currency and involves no exchange banks. Transactions are carried out online through computer networks. Bitcoins currency was launched in 2008 the year which financial crisis was sweeping across major countries. The currency gained prominence from 2012. A paper on the same has already been published by Satoshi Nakamoto. The currency utilizes what is known as digital tokens and transactions are cryptographically verified. Transactions can be carried out anonymously without involvement of third parties. Instead, public and private keys are used by either party to transact. The networked system use free web based open-source software. Bitcoins wallet software makes it possible to transact over network. To prevent Bitcoins being spent twice, transactions are always broadcast over the network. Mainstream entities have started accepting the currency as a transactional tool. A number of organizations in countries like US, Canada and China accept Bitcoins in financial transactions. In Vancouver Canada, Bitcoins ATM’s were introduced in 2013. The surge in the increase of Bitcoins usage has seen several Bitcoins bubbles and bubble busts (Forbes, 2013). Bitcoins prices changed drastically to reach considerably below $70 in July 2013, and then rising again to hit $600 in November. Although Bitcoins is used as a currency, its constant variations in value make it an unreliable currency. As a result, it’s predominantly used for speculative purposes rather than as a medium of exchange (Guardian, 2013). There was a significant growth of Bitcoins usage in 2013. However, this was viewed with skepticism. In China for instance, the main e-commerce website Baidu had been accepting Bitcoins. This, however, has not continued seamlessly as Baidu does not accept Bitcoins for some specified transactions any more. The People's Bank of China has gone ahead to prohibit financial institutions in China from transacting on Bitcoins. This made Bitcoins values depreciate further and organizations dealing in Bitcoins had to put restrictions on Bitcoins transactions, a case example being Baidu. Other downsides include the seizure of Mt. Gox assets and the closure of Silk Road website by FBI. Bitcoins market capitalization is estimated to be over US$ 10 billon and still growing. In the US, Bitcoins exchanges exist and are regulated as other money related services business. This is in order to avoid cases of money laundering using Bitcoins. Bitcoins transactions are prone to money laundering since transactions are carried out without identity of participants being revealed. The heads of BitInstant and Bitcoins Foundation were charged in January 2014 for Bitcoins irregularities. Benjamin Lawsky, who is the superintendent of New York’s Department of Financial Services, concurs that Bitcoins currency will become a big thing in the near future. The backdrop, however, is its appeal to money laundering due to its anonymity nature. Money launderers and terrorists find the currency very appealing. There have been calls by industry regulators to the banks to close Bitcoins accounts. Several closures of Bitcoins accounts and transactions have been closed in the US. This includes the Internet Archive Federal Credit Union and the Wells Fargo accounts. Wells Fargo was transacting through Mt.Gox – a Japan exchange service company. The Banks also have an apprehensive attitude to Bitcoins, they remain skeptical about the currency. Pros and cons of Bitcoins Bitcoins currency utilizes peer-to-peer network systems to transact without a central authority like exchange banks. The open source network performs transactions seamlessly without involving intermediaries. This means that there is no control or ownership and all intervention is carried out by the network. This makes joining or operating Bitcoins account pretty easy and anybody can participate. The advantage to this is that anybody can operate from any location in the world. There are no restrictions e.g. nationality or age limits to account holders. This too has its down side as research has shown that Bitcoins has become a haven for drug dealers and money launderers. Bitcoins theft has also been reported and has resulted to collapse of Bitcoins exchange companies. Silk Road Company which deals on illicit commodities traded using Bitcoins was closed in October 2013 though the company has reopened. The America Federal Bureau of Investigation monitors its activities continuously. This year in February, Mt. Gox’s website was shut down after reports that Bitcoins worth $360 million had been stolen (Robert, 2014). Bitcoins transactions in a way cushion clients from fraud. This is because, during peer-to-peer transactions, the rule is that a transaction cannot be reversed. When a transaction is sealed the Bitcoins wallet is responsible for authentication through existing certificates. Thus, the merchant don’t have any responsibility to counteract fraud, instead, the network platform is fully in charge. Unlike other online systems like PayPal which have high transaction fees, this system allows clients to set the fees or no fee at all. BitPay are used to process Bitcoins payments at a flat rate of 1% or even 0% as the client may wish. It is anticipated that in future charges for faster transactions will attract higher premiums to be determined by the market forces. This will in the long run make transactions fees unpredictable and costly. Setting up Bitcoins payment is easy and one needs only to sign up and download Bitcoins processor. Experience from digital-tunes.net indicates a positive impact on its business after adopting Bitcoins payments. The system is super simple, the transaction fees are low as well as fraud risks are minimized. The major challenge with Bitcoins is its volatility. According to Williams (2013), Bitcoins is over seven times as volatile as gold. The problem with this kind of volatility is that there are a lot of speculative behaviors. People tend to hoard the currency hoping for a bubble. If the bubble is realized, what follows later is a bubble crush. There are winners and losers in course of the two price swings, but that makes the currency too unreliable. There are, however, mixed feelings about the volatility of Bitcoins. It’s argued that the currency is still at the growth phase and with time it will mature and stabilize. According to Heidi (2013), the volatility nature of Bitcoins has led people to question its ability to function as a currency. The volatility nature if Bitcoins is linked to uncertainty about its long-term value as per Lee (2014) assertions. Analysis and opinion: Bitcoins future Bitcoins suffer regulatory issues unlike other formal financial sectors. The entities involved in Bitcoins transactions are non-financial companies and traditional financial sector regulations are not applicable (Main, 2012). There was an effort by the US government in 2011 to regulate the sector but as at March 2014, no guidance on the same existed. In China, the banking institutions have been authorized not to handle any Bitcoins transactions. The major impediment to digital currency is not about its authenticity, credibility or volatility. Bitcoins currency should be incorporated to other mainstream currencies. To do that, a proper policies and regulations must be formulated by the involved relevant Government arms. A good example is Canada whereby the federal government has made an announcement that it will regulate Bitcoins. That will be undertaken under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The U.S. has also stated that it will regulate digital currencies through its Commodity Futures Trading Commission. Investors have now backing Bitcoins startups. The finance ministry in German has begun to recognize Bitcoins a currency. It is envisaged that Bitcoins could be a revolution in the financial world. The new platform offers an exciting way of transacting currency. Preference for Bitcoins may supersede that of credit cards. This because of anonymity which credit cards do not offer and the higher transaction costs involved in credit card transactions. In Bitcoins transactions, no personal identifiable information is handled unlike in credit cards which make them prone to fraud when card numbers are stolen. In this respect, Bitcoins may become a choice currency for digital transactions. Bitcoins can also supplement the other traditional forms of investment vehicles such as stocks and Forex. Investors can buy Bitcoins for long-term, high-risk investment (Robert, 2013). Bitcoins money supply as expounded by King (2014) in the Bitcoins protocol is bound to continue growing. Although they are more than twelve million in number, Bitcoins are generated at the rate of 25 per minute. By embracing Bitcoins, sending of remittances will increase due to lower costs of transaction. This will improve the quality of living to the beneficiaries who in most cases are from the poorest countries. Bitcoins will herald the coming of the modern economy, it will usher a borderless economic system. Conclusion Any commodity can be regularized to act as a medium of exchange. Bitcoins seems to be a revolutionary money transfer system. Innovative currency transfer platforms enhance financial transactions. Further research on the viability of Bitcoins and a solid policy is required to guide and streamline the industry. References Forbes, T. 2013. Bitcoins May Be Following This Classic Bubble Stages Chart. Retrieved 2014-01-07. Guardian, W. 2014. Bitcoins: more than just the currency of digital vice. Archived from the original on 29 April 2013. Retrieved 20 April 2013. Lee, Timothy B. 2013. "Bitcoins Doesn't Have a Deflation Problem." Forbes. Retrieved 27 January 2014. Main. F. 2012. European Central Bank "1" (PDF). Virtual Currency Schemes. European Central Bank. p. 5. ISBN 978-92-899-0862-7. Retrieved 5 March 2014. Mark, W. 2013. Ritchie S. King. 2013. "By reading this article, you're mining Bitcoins." Qz.com. Atlantic Media Co. Retrieved 17 December 2013. Robert. M. 2014. "Bitcoins Exchange Mt. Gox Goes Offline Amid Allegations of $350 Million Hack." Wired. Retrieved 2014-02-24. Robert. M. 2013. "Bitcoins Exchange. Wired. Retrieved 2013-06-19. Read More