Bitcoin, the first decentralized cryptocurrency, has experienced an unsteady period of leaps and falls in valuation amid heightened fears of a global trade war.
Bitcoin was created anonymously in 2009, not tied to any political system or government. This means that it is not vulnerable to possible failings of government-issued currency such as inflation.
“Cryptocurrencies are generally available wherever people have access to the Internet,” said cryptographer Burton Kaliski Jr. “Because it’s a different kind of financial transaction than a check or credit card or a stock or bond, it’s not well-integrated into applications, so some special customization may be needed to use it. But once that customization is in place, it’s just as easy to use as any other financial transaction.”
Since no bank, government or other authority controls of Bitcoin, the integrity of transactions and the value of the asset is ensured by the asset holders themselves. Each Bitcoin transaction is recorded using a blockchain — this information acts like a ledger which is encoded on the bitcoin itself. With this sort of tracking device, people are unable to spend the same Bitcoin more than once since everyone else on the peer-to-peer network knows that it has already been spent.
“The most recent block in the chain provides a way to authenticate everything that’s happened in the past, including all ‘coins’ ever created, and all transfers of value from one asset holder to another,” Kaliski said. “The most fascinating part about Bitcoin is that the new block in the chain is created essentially at random, by one lucky ‘miner’ who happens to get the right combination of cryptographic results first.”
“The most fascinating part about Bitcoin is that the new block in the chain is created essentially at random, by one lucky ‘miner’ who happens to get the right combination of cryptographic results first”
Advantages of Bitcoin include avoiding large transaction fees and sending money to other countries without high wire transfer fees.
“Cryptocurrencies could help small businesses who want to send and receive payments without as much overhead for transaction fees,” Kaliski said.
Another motive for investing in the asset itself includes investors who noticed the potential for Bitcoin’s net worth early on.
“Investors who bought early and held on potentially made a lot of money, at least on paper, depending on when they sold,” Kaliski said, “as more investors became interested in cryptocurrencies and the price consequently grew.”
After Bitcoin reached its peak on Dec. 11, 2017, with a value of over $19,000, it fell back to under $8,000 on Feb. 5, according to CoinDesk.
“One reason [for the sudden market drop] may be increased actions by governments to regulate cryptocurrencies, which may make them less attractive to some investors than they were before,” Kaliski said. “Another is that the price drop itself erodes investor confidence — the more it falls, the more cautious people are about getting in, just as the more it rose previously, the more enthusiastic they were about buying.”
According to Bitcoin Magazine, the United States currently has no cryptocurrency regulations in place. The Securities and Exchange Commision has warned investors of the risks involved with investing in cryptocurrencies, along with hinting at the need for greater cryptocurrency regulation.
The Financial Consumer Agency in Canada, on the other hand, does not consider cryptocurrencies to be legal tender, nor an official medium of payment recognized by law that can be used to extinguish a public or private debt.
In an article written by Bitcoin Magazine, Stephen Poloz, the head of the Central Bank of Canada, is quoted on his interpretation of Bitcoin as a cryptocurrency.
“I object to the term cryptocurrencies because they are crypto, but they aren’t currencies … they aren’t assets for the most part,” Poloz said. “There is no intrinsic value for something like Bitcoin so it’s not really an asset one can analyze. It’s just essentially speculative or gambling.”
“Cryptocurrencies are so new that there’s very little experience about how to predict where the prices will go,” Kaliski said, “and this may keep major investors on the sidelines, thus limiting the growth in demand for the assets.”
Senior David Wu invested in Bitcoin during the beginning of the school year in 2017.
“It’s definitely a fun investment particularly for me because I like a little bit of a gamble,” Wu said, “but at some point one has to figure out when to sell.”
“[The] problem with buying Bitcoin [is that] there’s so much hype around it that people just hold [onto it] and think that they’re gonna be able to go out and buy a Lamborghini,” Wu said. “Most investors blind themselves [to] reality … and listen only to the shills that tell them that Bitcoin will rise to $100,000.”
