BITCOINS

Are they worth the hype?

Name : Siddharth Jaswal

Date : 4/08/17

Roll No. : 240 B

CIA - I
Understanding Cryptocurrency.

Cryptocurrency is a form of digital money that is designed to be secure and, in many cases,
anonymous. The most famous cryptocurrency is Bitcoin, which was found in 2008 by Satoshi
Nakamoto, the unknown inventor of the currency. The currency was introduced as A Peer
-To - Peer Electronic Cash System.
If you take away all the noise around cryptocurrencies and reduce it to a simple definition,
you find it to be just limited entries in a database no one can change without fulfilling
specific conditions.

How Do They Work?

Cryptocurrencies use decentralised technology to let users make secure payments and store
money without the need to use their name or go through a bank. They run on a distributed
public ledger called blockchain, which is a record of all transactions updated and held by
currency holders.
Blockchain: A blockchain is a public ledger of all Bitcoin transactions that have ever been
executed. It is constantly growing as completed blocks are added to it with a new set of
recordings. The blocks are added to the blockchain in a linear, chronological order. Each
node (computer connected to the Bitcoin network using a client that performs the task of
validating and relaying transactions) gets a copy of the blockchain, which gets downloaded
automatically upon joining the Bitcoin network. The blockchain has complete information
about the addresses and their balances right from the genesis block to the most recently
completed block.
Bitcoin Mining: Bitcoin is circulated and discovered through a process called mining. It is an
incredibly complex and long process. The availability of bitcoins in the network is limited to
21 million. Anyone with an internet connection, the required software and a laptop can
mine for bitcoins on the bitcoin network. However, it is not as easy as it sounds. Bitcoin
was designed in such a way that no one individual can abuse the system.
The process of mining is as follows (The Economist, 20/01/15) :
Every ten minutes or so mining computers collect a few hundred pending bitcoin transactions
(a block) and turn them into a mathematical puzzle. The first miner to find the solution
announces it to others on the network. The other miners then check whether the sender of the
funds has the right to spend the money, and whether the solution to the puzzle is correct. If
enough of them grant their approval, the block is cryptographically added to the ledger and
the miners move on to the next set of transactions (hence the term blockchain). The miner
who found the solution gets 25 bitcoins as a reward, but only after another 99 blocks have
been added to the ledger. All this gives miners an incentive to participate in the system and
validate transactions. Forcing miners to solve puzzles to add to the ledger provides
protection: to double-spend a bitcoin, digital bank-robbers would need to rewrite the
blockchain, and to do that they would have to control more than half of the networks
puzzle-solving capacity.

The transaction is known almost immediately by the whole network. But only after a specific
amount of time it gets confirmed.
Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies
are all about confirmation.
If a transaction is unconfirmed, it is pending and can be forged. When a transaction is
confirmed, it is set in stone. It is no longer forgeable, it can t be reversed, it is part of an
immutable record of historical transactions: of the so-called blockchain.
The Economics of Bitcoin.
Is Bitcoin a Currency or Commodity
There has been a lengthy debate on the classification of bitcoin, is it a currency or is it a
commodity of both. This debate has gained traction due to the peculiar behaviour of the
bitcoin in the market and the acceptance of it amongst regulators all over the world.
Bitcoin is as virtual as the credit cards and online banking networks people use every day.
Bitcoin can be used to pay online and in physical stores just like any other form of money.
Bitcoin balances are stored in a large distributed network, and they cannot be fraudulently
altered by anybody. In other words, Bitcoin users have exclusive control over their funds and
bitcoins cannot vanish just because they are virtual. Besides this bitcoin also have the same
basic characteristics as any currency used in the world, it is scarce, durable, divisible and has
a store of value.
It turns out that what a regulator believes a Bitcoin to be is important since businesses, taxes,
and lawsuits will factor in its value both now and in the future. The problem is defining a
Bitcoin is a lot like defining The Internet. The fact that no one owns units or shares of The
Internet, like you do with Bitcoins, is the basic difference. Yet there is mass confusion
amongst all regulators that have considered Bitcoin over the last couple of years. The IRS (of
the United States) treats bitcoin as property. This is done not only with bitcoin but all digital
currencies. On the other hand, the U.S Securities and Exchange commission has classified
bitcoins as security or money.

Microeconomic Contradiction.
Commodities typically follow an inverse relationship with the value of the dollar. When the
dollar strengthens against other major currencies, the prices of commodities typically drop.
When the value of the dollar weakens against other major currencies, the prices of
commodities generally move higher. Chuck Kowalski.
A steep contradiction to the principle mentioned above is that bitcoins in the year 2015
bitcoin grew around 37%, while the dollar also posted gains of 10-12%. This is peculiar trend
as during this time majority of the currencies around the world were down.
From an economic standpoint, the fluctuation of the price of bitcoins is very worrisome.
Unlike real currencies (that one can hold and touch), bitcoins are all virtual, which cannot be
held or touched. The fluctuation in price means that the new online currency is not stable.
People want a stable currency, and not one that fluctuates day by day, simply because if you
buy something for $100 bitcoins today, the same product can be work $20 bitcoins tomorrow.
Conclusion
Bitcoin is certainly not perfect, but in an intrusive and globalist society we are today it
provides a beacon for people. It is a currency or commodity (whichever way you look at it)
which has engaged people. Its greatest advantage is its ease of transaction, a relatively high
security level and proving that cryptocurrencies working on decentralized technology can
work. However, it is also plagued by a number issues, people are not ready to accept it due to
the stigma attached to it, market instability and countless legal barriers.
We should note that bitcoin was most probably created by some libertarian computer scientist
and not an economist who had found the substitute for money all the sudden. Therefore,
bitcoins greatest achievement could be that, it serves as an example for the future.

Bibliography.
1.https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-bit
coin-the-new-gold-rush-031814.pdf
2.
https://bitconnect.co/bitcoin-news/55/is-bitcoin-a-currency-or-a-commodity-us-regulators-co
nfused
3. https://news.bitcoin.com/bitcoin-defying-principle-microeconomics
4. https://www.cnbc.com/2015/12/29/bitcoin-is-one-of-2015s-biggest-winners.html
5. https://99bitcoins.com/price-chart-history/