Bitcoin's path to stability uncertain due to regulatory hurdles and speculation
Bitcoin is perceived as a revolutionizing idea to the way digital currency works. The virtual money has gained public endorsements from the likes of Federal Reserve Chairman Ben Bernanke and Wall Street-listed banks. It also garnered speculative interest from China. The digital currency reached its crescendo when it crossed $1,200 on in late November , fuelled assumptions that Bitcoin could soon surpass the price of an ounce of gold. After the meteoric rise, came the great fall. Bitcoin has moved into a downward spiral since last week, shedding more than 50% of its value in a single day following a surprise move from China. The trend has continued with the price of Bitcoin taking another beating after rumors regarding China's ban on third party payments .Bitcoin was trading at $493.20 down by more than 31% at the time of reporting.
Virtual currency decrypted
Bitcoin is nothing but a decentralized virtual currency that uses a peer-to-peer consensus system to confirm and verify transactions. In January 2009, Satoshi Nakomoto (possibly a real person or a pseudonym for one or a group of programmers) invented Bitcoin, based on the concept of open-source cryptocurrency described by cryptographer Wei Dai in 1998. Nakomoto's innovation used math-heavy cryptography techniques to create a medium of exchange that doesn't require a central authority or physical tangibility (like gold) to deter counterfeiters and regulate the money supply.
The process of obtaining new bitcoins is called mining, and those who devote their computing resources to the process are called miners. The rate at which the supply of bitcoins grows is hard-wired into the system. The total number of bitcoins is programmed to approach 21 million over time. The money supply is programmed to grow as a geometric series every 210,000 blocks roughly every four years; by 2013, 50% of the total Bitcoin supply will have been generated, and by 2017, 3/4 would be generated.
Why the dollar when you have Bitcoin
Bitcoins can serve as payment mode for products or services for a growing number of businesses. Firstly,one needs to convert US dollars into Bitcoins, Mt.Gox being the most commonly used one. With Bitcoins,one can anonymously purchase anything on the internet. The seller, the recipient of those Bitcoins, can anonymously sell anything, and then convert those Bitcoins back to US dollars. Buyers and sellers can only be tracked byconverting dollars into Bitcoins and vice versa. However, the actual transaction is theoretically impossible to track.
Another major advantage is that users can create unlimitedBitcoin accounts without having to validate their true identity. Bitcoin account information is stored in digital wallets that can be downloaded as software on computers or smartphones; the wallets can be encrypted to keep their contents secure. Thewalletcontains private keys (or cryptographic signatures)and islinked to other Bitcoin account addresses of the users.
The meteoric rise
At the start of November 2013, one Bitcoin was worth about $213 on Japan-based Mt. Gox, the world's second-largest Bitcoin exchange. The Bitcoin value reached to the high of $1,242 on 29November 2013, making the overall value at more than $12 billion;this phenomenal rise was mostly triggered by gestures from financial authorities in the form of quasi endorsements.For instance, Bank of America Merrill Lynch started covering Bitcoin, stating in a research report that it could be useful in e-commerce and money transfers. One can buy anything with Bitcoin, even a Tesla Model S worth $103,000!
And soon enough the bubble bursts
The inevitable crash happened on 7 December, a few days after Wall Street embraced Bitcoin, with analysts from the Bank of America, Citigroup, and others showing the thumbs up. And what a crash that was! Overnight, following news that China's Baidu would follow the People's Bank ofChina (PBOC) diktat to halt acceptance of Bitcoin payment, Bitcoin's value tumbled from $1,155 to $576, a whopping 50% fall, before a dead cat bounce levitated the currency back to the $800 range. As for Bitcoin, all it would take is for another vocal institutional rejection to lower its value. The chart below shows the fall from $1,155 to $576 in hours.
Role of China
China's role in the rise and decline of Bitcoin is anything but clear, but it all started in October 2013 when Baidu,China's Google, started accepting Bitcoin as alternative mode of payment.The move was crucial as would not have come without the approval from the Beijing authorities.
A year ago, China had nothing to do with Bitcoin. However, the situation changed with Chinese transactions in Bitcoin far out stripping euro transactions, with more than $60million in daily transaction as of November 2013.China now accounts for 62% of the global Bitcoin transaction volumes. The surge in demand recently led China-basedBTC China to overtake Mt. Gox as the world's the largest Bitcoin exchange by volume.
Things changed dramatically in a matter of days. Just before Baidu banned music service payments, China's central bank brought the hammer down on Bitcoin. This news in combination of speculation sent Bitcoin's value falling below $900. There were reports coming from China that it has stopped third party payment for Bitcoin which added fuel to the fire.
Why the sudden change in China's stance towards Bitcoin after taking it to dizzying heights and dropping it back like a hot potato?
Since there are no limits on who can buy Bitcoins, the value of existing Bitcoins is now more than $12 billion, after a volatile surge increased the value by more than 1,000% over the last month. This rapid surge in demand has led to security threats for investors. In the recent past, more than 30 incidents have come to light where at least 1,000 Bitcoins or $1 million at the current rate of exchange, were stolen or transferred illegally. Bitcoin Internet Payment System (BIPS), the largest Bitcoin payment processor in Europe, said last month that its website was hacked. As a result, BIPS lost about $1 million worth of Bitcoins, includingthe ones that were in the personal online wallets of customers.
Currency of the future?
Bitcoin's recent meteoric rise in value and profile has put the spotlight on alternative currencies like AnonCoin to Zeuscoin, with around 44 being publicly traded. Like Bitcoins, most of these currencies are mined by computers solving hard mathematical problems. The "coins" do not exist physically, of course, as the currencies are virtual existing only as computer files.
The fundamental question is whether the digital currency will eventually become a widely accepted means of exchange.Will businesses and individuals routinely be able to use Bitcoins to purchase goods and services? Can they store their savings in Bitcoins, not because they are betting on gains versus the dollar, but because they regard it as a safe and?
On a final note, I can only opine that Bitcoin is more of an experiment than an alternative.It would, however,be an exaggeration to say that many people have gravitated toward this virtual currency. Bitcoin will have to overcome major hurdles before it goes mainstream.
As earlier mentioned,digital currency alternatives are essentially based on the same technology.A time may come where a nation declares its own version of Bitcoin as a legal tender. Hence, even if the currency of the future looks like Bitcoin, it might end up being a distant successor of the pioneer. Bitcoin provides a window in tomorrow's world of finance, would it be Bitcoin itself? I don't think so.