Potential+of+Bitcoin+in+Our+Market

=** Introduction **=

toc Cryptocurrencies have begun developing in the masses, leaving those who are witnessing this movement to question the use of these digital currencies. The idea surrounding cryptocurrencies is that one can have an alternative currency with features that are non-existent for other currencies, such as anonymity. For investors, as well as the average American, bitcoin is considered to be the most prominent cryptocurrency in our market. Judging by various reports conducted by researchers, it seems as though bitcoin has a future in the economy. Investors and researchers are intrigued by the potential of bitcoin, thus leading to a heightened interest in the cryptocurrency since its inception. For the purpose of understanding the potentials of bitcoin in our economy, it is essential that we have a clear background of bitcoin; furthermore, there are many attributes of bitcoin that must be understood. Examining blockchain technology, bitcoin mining, potential uses of the currency, and competing cryptocurrencies, will help in our understanding of the potentials of Bitcoin.

=** History of Bitcoin **=

Bitcoin was first introduced in October of 2008, by Satoshi Nakamoto, through a scientific journal entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The idea behind Bitcoin, and the reasoning for the development of the currency, was that a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another, without the need for a financial institution. In other words, participants would be able to send money, in an anonymous manner, directly via an online system. Additionally, the hope for bitcoin was to eliminate the risk of money being copied.

Bitcoin has quickly developed into a popular commodity, resulting in some to speculate whether bitcoin is the “new gold.” [1] Still, it wasn’t always like this; in the initial years of bitcoin, the value of the coin was very low. It took until 2010 for the first transaction to oc cur, when bitcoin had been used to purchase a pizza from Papa John’s; the pizza had cost 10,000 BTC at the time to complete (which today would be valued at about $800,000). In 2011, bitcoin was predominantly used for a much different reason: The Silk Road. The Silk Road was an online marketplace that, until being closed by the Government, allowed consumers to purchase illegal firearms and illicit drugs while promising not to be traced. Utilizing Bitcoin as the payment option, users were able to buy and sell these items without the worry of having a confiscated item b eing traced back to them. In other words, both parties on this website would remain anonymous, thanks to the use of Bitcoin. [2] By 2014, however, the US Government had completely shut down the website, and by June of the same year, the US Government had auctioned off approximately $17 million worth of bitcoins that were seized from The Silk Road. [3]

When Bitcoin underwent its first security breach, in 2013, changes had to be made to the cryptocurrency. In response to this hack, which led to over 25,000 Bitcoins being stolen from the Bitcoin Forum founders’ wallet, new security measures had to be taken. Thus, Bitcoin introduced a much more secure network, one that utilized blockchain technologies, to ensure that an attack like this would not happen again. [2]

=** Blockchain Technology **=

Blockchain technologies have become popular as of late, with various cryptocurrencies, as well as significant financial institutions like Goldman Sachs and NASDAQ, experimenting with the new technology. [5] Essentially, the “blockchain” is a public ledger that “contains the entire history of bitcoin transactions.” The purpose of this technology is to verify digital transactions, while creating this public ledger which cannot be altered. [6] Since bitcoin isn’t regulated by some central authority, the use of blockchain technology becomes vital to be able to keep a record of every transaction that takes place. These “blockchains” are stored in the peer-to-peer network that bitcoin operates under, further assuring that no central authority governs over the ledger. Supporters of blockchain technology explain how this technology is much more efficient, while also providing greater security capabilities than what bitcoin used to have. In essence, blockchain technologies nullify the need for humans to actively keep a ledger, thus not only minimizing the cost to do so, but also limiting the mistakes when doing so. Furthermore, the fact that blockchains are accessible from many computers and servers around the world supports the idea that there is no need to centralize this information. [7] While blockchain technologies offer these security features and various benefits, adding blockchains to the ledger is a complex process known as bitcoin mining. [8]

** Bitcoin Mining **
Bitcoin mining is an essential record-keeping service to develop and regulate the bitcoin’s that are created in our economy. The role of bitcoin miners is to ensure that the blockchain is consistent and unalterable; this is quite complicated, however. The process of bitcoin mining involves the use of computer processing power, as well as solving complex problems. Specifically, each node, which independently identify the transaction received, builds a “pool of valid transactions.” Once each node has collected a certain number of valid transactions into a block, the node attempts to compute a cryptographic hash that meets the restraints set forth by the ideas of Hashcash. The process of finding this cryptographic hash is done by using high-powered computer systems, while also embracing the strategy of trial-and-error. In essence, this becomes a race to find a valid hash; whoever finds such hash wins the block, and thus the block is added to the blockchain. Furthermore, bitcoin mining offers a financial incentive; “for each block mined, the miner receives a block reward as well as the transaction fees of the transactions in the block.” [6] [10]

=** Potential Uses of Bitcoin **=

While specific uses for bitcoin have been hard to come by, as still not every institution or company accepts the cryptocurrency as a form of payment, potential uses have become evident. Examining the similarities between bitcoin and other established currencies allows one to infer what bitcoin could be in our economy. Such similarities are examined by Anne Dyhrberg in multiple studies; in her report, “Bitcoin, gold, and the dollar --- A GARCH volatility analysis”, Dyhrberg compares variables of bitcoin to the variables of gold and the American dollar when examining their trends along the GARCH framework. Specifically, Dyhrberg analyzed how these variables react to various changes in the market, making connections between similarities amongst these variables. The connections made between bitcoin and established currencies allows financial analysts to use bitcoin as a tool in the market; furthermore, the potential for portfolio management and risk analysis exists with bitcoin, due to these variables in the GARCH models. [11]

Dyhrberg further studied potential impacts of bitcoin in our market in her report “Hedging capabilities of bitcoin. Is it the virtual gold?”. In the report, Dyhrberg notes that bitcoin has shown the potential to hedge against the American dollar, similarly to how gold has done for years. [12] Forbes further examined this possibility, and even went to the extent of claiming that bitcoin was the “new gold” due to these capabilities. If bitcoin is able to hedge against the American dollar like gold is able to, this creates another exciting use for the cryptocurrency. [1]

=** Competition **=

Bitcoin isn’t the only cryptocurrency gaining steam, especially in the year 2017. As bitcoin has seen a dramatic increase in the price of each coin, so too have other cryptocurrencies that are competing with bitcoin. Such an example of this is Litecoin, a peer-to-peer cryptocurrency created by Charlie Lee, a former Google employee and Ex-Director of Engineering at Coinbase. Litecoin is very similar to bitcoin in nature, as both are peer-to-peer networks that utilize mining and blockchain technologies; furthermore, Litecoin is currently cheaper than bitcoin is, making it an appealing option for those interested in cryptocurrencies. It’s apparent that others are beginning to realize the potential of Litecoin, as the price of each coin has risen from $85 in November of 2017 to over $300 in December. [14]

Litecoin isn’t the only cryptocurrency garnering attention right now, as another competitor of bitcoin has seen its value raise as well. Ripple has seen large gains over the course of 2017, utilizing what is known as XRP. XRP aims to speed up the process of international transfers, while using blockchain technology. Valued at the beginning of the year at less than a penny, the currency has experienced a quick increase in value; as of December, the currency is valued at $0.50. While this may not seem like a huge price increase, it’s important to note the market cap of the currency, currently set at $32.029 billion; in turn, Ripple’s XRP is the third-largest digital currency, overtaking bitcoin cash. [15]

=** Criticism **=

While bitcoin clearly has the potential to make a revolutionary change in our economy, analysts and critics believe that there are still many risks to consider. Alina Dibrova believes that, in the case of bitcoin, the risks outweigh the potentials; Dibrova notes that one of the biggest assets of bitcoin is also one of the bigger risks surround the cryptocurrency. The fact that there is no central authority to govern the transactions that take place concerns Dibrova, while she also points to past uses of the cryptocurrency as reasons to be wary. Such uses include money laundering and the purchase of illegal drugs and weapons from black market websites, like The Silk Road. [16]

Dibrova isn’t the only one who shares these thoughts; Tyler Moore believes that the biggest risk associated with bitcoin is the potential for it to be abused by criminals. Moore notes that criminals don’t only use bitcoin for purchasing illegal items, but also to abuse bitcoin, and other digital currencies, as a platform for exchange. Furthermore, Moore explains that the risks of bitcoin extend beyond criminals, and in fact effect the consumers of the cryptocurrency; Moore is a believer that bitcoin is still susceptible to hackers, thus creating the risk of a loss of funds at the hands of these hackers. [17] Other analysts explain that there are flaws in the process of bitcoin mining. [18]

=** Conclusion **=

As bitcoin, and cryptocurrencies as a whole, are gaining popularity, one thing is evident: bitcoin offers a promising future, as much as an uncertain one. While researchers are constantly conducting tests to develop a clear sense of what bitcoin will be in the next 20 years, others are pouncing on the opportunity to invest. It’s clear that bitcoin is no sure thing, as evidenced by the critics of the cryptocurrency. Still, the potentials of bitcoin, both as a tool for financial analysts to use in the market, as well as a currency to hedge against the American dollar, are promising. Bitcoin will continue to grow as the public continues to invest in it; it remains to be seen whether the cryptocurrency will continue to avoid the various obstacles it faces.

=** References **=

[1] Mourdoukoutas P. Bitcoin Is the New ‘Gold’. [Internet]. Forbes; 2017 Aug 30 [cited 2017 Dec 13]. Available from [|https://www.forbes.com/sites/panosmourdoukoutas/2017/08/30/bitcoin-is-the-new-gold/#2e37eb863b36]

[2] Jessop N. A Brief History of Bitcoin --- And Where It’s Going Next. [Internet]. TNW; 2015 Mar 29 [cited 2017 Dec 11]. Available from []

[3] Hern A. US Government Prepares to Auction $17M Of Seized Silk Road Bitcoins. [Internet]. Guardian; 2014 Jun 24 [cited 2017 Dec 13]. Available from []

[4] Turk Z, Klinc R. 2017. Potentials of Blockchain Technology for Construction Management. Procedia Eng 196:638-45.

[5] Walch A. 2017. The Bitcoin Blockchain As Financial Market Infrastructure: A Consideration of Operational Risk.  Legislation and Public Policy 18:837-893.

[6] Vranken H. 2017. Sustainability of Bitcoin and Blockchains.  Current Opinion in Environmental Sustainability. 28:1-9.

[7] Li X, Wang C.A. 2017. The technology and economic determinants of cryptocurrency exchange rates: The case of Bitcoin.  Decision Support Systems 95:49-60.

[8] Dwyer G.P. 2015. The economics of Bitcoin and similar private digital currencies. Journal of Financial Stability 17:81-91.

[10] Kroll J, Davey I, Felten E. 2013. The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries. WEIS 7:1-21.

[11] <span style="font-family: Arial,sans-serif; font-size: 10pt;">Dyhrberg A.H. 2016. Bitcoin, gold and the dollar --- A GARCH volatility analysis. Finance Research Letters 16:85-92.

[12] <span style="color: #222222; font-family: Arial,sans-serif; font-size: 10pt;">Dyhrberg A.H. 2016. Hedging capabilities of bitcoin. Is it the virtual gold? Finance Research Letters 16:139-144.

[14] <span style="font-family: Arial,sans-serif; font-size: 10pt;">Oberoi R. This Cryptocurrency With 5,700% Return In 2017 Is Giving Serious Competition to Bitcoin! [Internet]. ETMarkets; 2017 Dec 12 [cited 2017 Dec 12]. Available from <span style="font-family: Arial,sans-serif; font-size: 10pt;"> https://economictimes.indiatimes.com/markets/stocks/news/this-cryptocurrency-with-5700-return-in-2017-is-giving-serious-competition-to-bitcoin/articleshow/62034177.cms

[15] <span style="font-family: Arial,sans-serif; font-size: 10pt;">Rapier G. Ripple’s XRP Overtakes Bitcoin Cash As 3rd Largest Cryptocurrency. [Internet]. Business Insider; 2017 Dec 14 [cited 2017 Dec 14]. Available from []

[16] <span style="font-family: Arial,sans-serif; font-size: 10pt;">Dibrova A. 2016. Virtual Currency: New Step in Monetary Development. Procedia Social and Behavioral Sciences 229:42-49

[17] <span style="font-family: Arial,sans-serif; font-size: 10pt;"> Moore T. 2013. The Promise and Perils of Digital Currencies. ELSEVIER 6:147-149

[18] <span style="font-family: Arial,sans-serif; font-size: 10pt;"> Eyal I, Sirer E. 2014. Majority Is Not Enough: Bitcoin Mining Is Vulnerable. Lecture Notes In Computer Science 8437:436-454