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Bitcoin, Beyond Modern CurrencyBitcoin, the newest concept of virtual currency,is often referred as gold

 

   
 
   
 

What is money? Ever since concept of using shellfish began, money has been part of the development of human history. Today, the reason why people use paper bills which have no value by themselves, is that people believe others will also accept paper as money. Without the belief in its value, today’s paper bill cannot exist, as people already have seen during the German hyper inflation and other cases. From this perspective, it means that as long as there is firm acceptance of value, anything can become money. Recently, Bitcoin which is a series of codes (called blocks) is gaining acceptance in taking a role of money. Even in Canada, Bitcoin ATMs exist for people who want to change their money to Bitcoin or vice versa.


Bitcoin is made by someone using the pseudonym Satoshi Nakamoto in 2009. Nobody knows who the inventor is, and nothing about the inventor is known.All things speculated about him are just assumptions.

How does Bitcoin work? Simply, Bitcoin is made from answering key codes. When a miner finds an answer key, Bitcoin is given as a reward (because of its characteristics such as limitation in its amount, Bitcoin is often referred as gold. Also participants who seek Bitcoin are called miner.) It can be traded freely. And all the process of Bitcoin is recorded into a system, so that everybody can know how much has been mined. Also, the system automatically calculates the number of miners and the quantity of Bitcoin in the public. Through calculation, the speed of mining is controlled by adjusting the difficulty level of mining every two weeks automatically. Therefore, it is impossible to mine all the available Bitcoin at once, so it keeps the value of Bitcoin constant.


Bitcoin is receiving attention because of some unique characteristics. Firstly, it is independent from an issuer. Bitcoin has no issuer and all of them are mined following the calculation system. It is very different from the modern currency system, which is controlled by governments. For example, the dollar and yen do not have a fixed volume. They are issued from governments and they print their money based on monetary policy. Therefore, the value of money fluctuates depending on government intentions. For instance, the Japanese yen has been devalued a lot by Abenomics monetary policy, and the dollar has also been devalued by the U.S. Federal Reserve Bank’s Q.E. (Quantitive Easing) These monetary policies imply danger to other countries. The weak yen threats to competing export-driven economies.Also, a tapering of Q.E. can damage emerging countries like Indonesia, Turkey, India and others through dramatically changed foreign exchange rate.


Secondly, the volume of Bitcoin is limited. Theoretically, miners can mine Bitcoin a lot at first, but after a certain point the Bitcoin system reduces its reward and in the end, the system barely gives any. This allows Bitcoin to be free of inflation which leads first-time Bitcoin users to be more motivated to mine more and try to use Bitcoin as a currency. Simply because if Bitcoin is used as currency then the Bitcoin they have earned will appreciate. This is why and how Bitcoin can spread fast. Thus, participation is accelerated if the number of users increases until the reward is largely decreased.


For the third point, Bitcoin keeps users’ information in the strictest confidence. While using it, users do not need to provide their personal information. When users install the Bitcoin wallet on their computer or mobile devices, they receive a web address which serves as their ID for using the system. Also, the users can create a “wallet” whenever they need, and as many as they want to.


The Bitcoin system is safe from hackers’ attacks as well. Bitcoin is based on a P2P (Peer To Peer) system with a complex algorithm. Theoretically, to hack Bitcoin networks 51 percent occupation of Bitcoin network is needed, but this is considered to be impossible for modern computing systems, until a quantum mechanics computing system is invented.


Lastly, the main point of Bitcoin is that it actually works in real life. No matter how good the intention is, if unpractical, it cannot maintain its status. But because of its pioneer advantage, security, and independence, Bitcoin is used in many places even now.


Could Bitcoin become a real currency? It is hard to predict the long term future, but in the short term, the answer is “Yes.” In the U.S., there are several official cases. In March, 2013, the U.S. government announced the Banking Act will be applied to a virtual currency.  (Although Bitcoin has various names, in this case, the act includes Bitcoin as well.) Furthermore, on August 7th of this year, a Texas court judged Bitcoin as a usable currency.
In addition, websites such as Pizza for Coins, Craigslist, and Foodler allow the use Bitcoin to pay for transactions. eBay and PayPal also announced that they have plans for introducing a Bitcoin payment system. In addition, many American universities are participating to receive donations as Bitcoin.


Other governments also began to accept Bitcoin as currency. For example, the German Ministry of Finance has defined Bitcoin as “unit of account,” which means Bitcoin can be used in Germany for paying tax and investing. The Canada Revenue Agency has made regulations for taxation of Bitcoin transactions. In China, the finance association has suggested that the Chinese government should participate in the virtual currency market, and Baidu, Chinese searching website similar to Google,  announced that it will allow using Bitcoin for payment.


Even though Bitcoin is gaining reputation as a currency, there are still some obstacles and worries about using Bitcoin, such as a hacking threat, other similar digital currencies, radical price surging and falling, monopoly, and the basic question which asks fundamentally whether Bitcoin can become a real currency. For better information, The Post interviewed the co-founder of Korbit (Korean Bitcoin Exchange) and director of Business and Operations, Louis J. Kim.


Kim says that Bitcoin is a promising currency and that it can handle the problems by itself. Firstly, he pointed out that even though hacking news about Bitcoin exists, it does not mean that hackers succeeded in hacking Bitcoin networks. They are just targeting the Bitcoin users’ computer or transaction sites, which are also common in online banking today; therefore, it is not only Bitcoin’s weakness.


About the other similar forms of virtual currency, he says that historically it is very rare that “me too” products overcame the original. (“me too” product is the product which copied or made similar with original product.) In fact, these serve as priming to spread the original more. He added since Bitcoin is an experimental currency that those “me too” currencies will be helpful to improve Bitcoin, and this phenomena implies that Bitcoin is settled quite successfully.


On the monopolistic perspective, he mentioned the example of the stock market. In the stock market, it is really hard for one person or group to buy all stocks because stock price is changed depending on the demand for stocks. Likewise, he thinks that not only is it difficult to gain a monopoly over Bitcoin, but that there is little reward for doing so. This is because the one big reason Bitcoin has value is that people accept it as currency. If one person acquires a monopoly, Bitcoin will lose its value, because people will not desire to use it anymore. If a certain individual or party controls all Bitcoin, it will lose its value, and this is the reason why Bitcoin users spent Bitcoin even the value was low. It can work more properly when it is spread.


But he reveals his worries about the recent increasing price. Because increasing value causes worry of speculation.Currency usually has three roles; a medium of exchange, store of value and unit of account, but recent price changing is so fast that Bitcoin has had trouble acting as its unit of account well. However, he also mentioned that he believes exchanging with actual money like dollars, will cover some degree of its role.
At the end of the interview, he says that it is not worthwhile at all discussing whether Bitcoin is currency or not, because many people are already using Bitcoin and the market exists. He thinks Bitcoin will motivate financial innovation and is promising that will be used more than now.


Money has developed as time pass, from exchanging essential products for living such as salt and crops to luxurious and scarce materials like gold and silver. Then money made it possible to escape  from this format, moving from gold to paper, which guarantees a certain amount of gold, and finally to just paper bills which are issued by governments based on credit. Now, it is also trying to escape from this issuer, and seeks more freedom than the past. How much can humans develop and invent new concepts of currency? In a rapidly changing society, can virtual money replace paper bills? And what is going to come next? Bitcoin may be able to  show some possible answers for the future.

 

Kim Du-hyeon  kimduhyeon51@dongguk.edu

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