Friday, May 8, 2015

Gold For Nerds

Bitcoin logo (Wikmedia)

“It’s gold for nerds.” This is a quote by American writer, comedian, and (former) television host Stephen Colbert. No, he is not referring to the Samsung Galaxy s6 or even the new Apple iWatch. Mr. Colbert is talking about the Bitcoin. What is the Bitcoin? I’ll tell you. The Bitcoin is an encrypted, computer-based currency whose network is independent of a central bank. It is better known as a “cryptocurrency.” When it was first developed, the Bitcoin was considered to be a breakthrough in computer science and cryptography. It was the first currency that was able to transfer data anonymously and safely. Once a Bitcoin had been sent, only the intended recipient could receive the money. Bitcoins could be bought and sold by anyone, and its popularity was growing rapidly. Things have changed a lot since the Bitcoin first started up, however. Lately, the Bitcoin has been having major troubles dealing with hacking. Additionally, its market value has been fluctuating rather wildly, rising and dropping in the most unpredictable manner. Can Bitcoins be policed in a manner that promotes their legal usage and stabilizes the currency, but prohibits their usage for criminal activity? I believe the answer to this is no. The economic risks and legal issues of the Bitcoin outweigh its benefits; therefore, the Bitcoin ought to be removed from circulation as a viable currency.

Contention 1: The Bitcoin can be easily used for illegal activity.


Let me introduce Ross Ulbricht to you. Ross is the creator of a group called the Dread Pirate Roberts. This group created the first major drug-selling website: the Silk Road. Ross and the Dread Pirate Roberts are just common criminals who have used the technology around them to make themselves virtually untraceable. How? First of all, they used a tool called Tor. Tor is a technology that allows a website to be created with anonymous servers. In layman terms, Tor helps you make and access sites that are part of the infamous “Dark Web,” a large part of the internet that is completely untraceable. Second, the Dread Pirate Roberts used the Bitcoin for all transactions within the site. Because Bitcoins are also generally untraceable, all buyers and sellers using the Silk Road remained anonymous. After several years, the FBI finally caught the Dread Pirate Roberts and located their servers in Iceland. They also discovered a large stash of Bitcoins on Ulbricht’s computer. There is one very important thing about this story. The FBI only caught Ulbricht because of an identity error he made when the Silk Road was just starting up. If Ulbricht had not made this error, the FBI would still be searching hopelessly for the group responsible for the Silk Road. As stated in the Economist, “Installing backdoors into encryption on popular chat apps, as Britain’s prime minister David Cameron would like to do, would not have caught Mr. Ulbricht, and they will not catch any of the entrepreneurs who have copied and improved his design since. As a result, dark web marketplaces will continue to thrive for as long as it is possible to post vacuum-sealed drugs without their getting intercepted.” The Bitcoin has opened the doors to a countless number of problems starting with its ability to aid criminals in the creation of illegal marketplaces. For this reason, the Bitcoin ought to be removed from circulation.

Contention 2: Contrary to its claims, the Bitcoin is vulnerable to cyberattacks.


In truth, the Bitcoin is not as secure as its creators and promoters claim it is. One of the main reasons why the Bitcoin was originally considered as such a bright prospect for the future of currency was because people thought it could never be stolen. This was proven completely false after half a billion dollars worth of Bitcoins were stolen from Mt. Gox, a company based in Tokyo. As stated by Michael Casey and Paul Vigna in their book Bitcoin and the Digital Currency Revolution, “[Bitcoin] wallets have proven vulnerable to cyberattack and pillaging, including the wallets of big exchanges such as Tokyo’s Mt. Gox and Slovenia’s Bitstamp. Even though the core program that runs Bitcoin has resisted six years of hacking attempts, the successful attacks on associated businesses have created the impression that Bitcoin isn’t a safe way to store money. Until these perceptions are overcome or Bitcoin is replaced by a superior digital currency, the public will remain suspicious of the concept, and regulators will be tempted to quash it.” As a result, market price of the Bitcoin has dropped from $675 in June 2014 to $228 in April 2015. This is a major blow to the Bitcoin and is simply another reason why it is not a viable currency.

Out of all of the arguments brought up by supporters of the Bitcoin, there is one that stands out. The Bitcoin has very little or no transaction fees. Having zero transaction fees on all of your charges can be quite an attractive option. Nowadays, this is especially nice because credit card companies are constantly adding their own surcharge to every one of your transactions. According to the Wall Street Journal, the Bitcoin’s absent or significantly lowered transaction fees could save the United States government trillions of dollars. The second major opposing argument is that the Bitcoin has potential to connect the entire world to the modern economic system. Currently, there are many third-world countries that are unable to develop due to their severely unstable economy. Bitcoins can be bought or sold by anyone in the world; therefore, people from developing countries simply require a computing device to become connected to the global economy. As stated by Marc Andreessen of the New York Times, “Many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.” These are the main reasons why others believe the Bitcoin has great potential and ought to remain as a currency.


Extreme fluctuation of Bitcoin market value can be seen in the graph above (Blockchain)

I disagree with the opposing arguments for several reasons. Though I cannot disprove the fact that the Bitcoin has very low transaction fees, I can show that this benefit is meaningless. First of all, the market price of the Bitcoin fluctuates wildly. As aptly put by the Wall Street Journal, “Who wants the cost of their groceries to vary by 10% from week to week?” This trend can be seen in the graph shown above. Second, there are very few people that use the Bitcoin. Some have even declared the currency to be dead. Billionaire Warren Buffett’s advice in relation to the Bitcoin was strongly voiced: “Stay away.” A simple analysis of these two points show that the Bitcoin has not been attracting many people lately. Low transaction fees have not been able to change this, rendering it immaterial. The second opposing point was that the Bitcoin could connect the world to the modern economic system. As I have shown previously, if the Bitcoin is not being commonly used, there is no economy that the world can be connected to. In addition, the Bitcoin is supposed to help developing countries stabilize their economy. As seen previously, the Bitcoin is perhaps one of the most inconsistent currencies there are. For these reasons, I disagree with the opposing arguments.

The Bitcoin is not a viable currency for several reasons. As I have shown, the Bitcoin has and can be easily used for illegal activity. The biggest example of this was in the case of the Dread Pirate Roberts and their Bitcoin-based, drug-selling website. The second reason is that the Bitcoin is vulnerable to cyberattacks. This was seen in the scandal involving the Tokyo company Mt. Gox when 500 million dollars worth of Bitcoins were stolen. Third, the market value of the Bitcoin fluctuates too much. Everyday shopping would become more of a gamble than an errand. Finally, there are few people in the world that use or accept the Bitcoin. All of these reasons stated show that the Bitcoin has very little potential. In conclusion, the Bitcoin ought to be removed from circulation, for it will not be a viable currency.

Bibliography

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Conclusion, updated 28 May 2015


The economic risks and legal issues of the Bitcoin outweigh its benefits; therefore, Bitcoins ought to be changed so that they contribute to positive digital citizenship in the online world. During the time that my blog was published, I received many thought-provoking comments. The first comment was from Jonathan Pelster. In his comment, Jonathan stated that Bitcoins could be used as an international currency. When I first started this blog, I thought that everything about the Bitcoin was absolutely horrible. Later on, I read Tommy’s comment, which talked about how Bitcoins could help with lots of things, such as transferring funds to start a business. Both Jonathan’s and Tommy’s comments have helped clarify my thinking by showing me that even though the Bitcoin might be ineffective, it opens up many possibilities for future innovations. The next two comments came from Ms. Gerla and Coley. In the former comment, Ms. Gerla talked about the extreme fluctuation in market value of the Bitcoin. After reading the comment, I really wanted to find an article that explained why this fluctuation occurs. While looking for this, I found the following article about Why the Bitcoin’s Value is So Volatile. The latter comment by Coley asked me why the Bitcoin was so relevant. After answering this question, my opinion changed. I now believe that the Bitcoin should not be removed from circulation, but should be shown to young scientists around the world to spark new ideas and innovations. I will leave with one final opinion. This one is about my entire blogging process that has led up to today. I really enjoyed the blogging, because it is a great way to not only put information out there, but receive constructive responses. Honestly, comments are huge. They can completely change your mind, like they did for me.

9 comments:

  1. Hello Kattikas, I really like the points you make about Bitcoin and I personally believe that there are ups and downs to the use of Bitcoin. I've personally never used Bitcoin but I've heard a lot about it and its definetely an interesting topic. I find the governments opinion on it very interesting because its amazing how someone managed to make an online currency. The ups to Bitcoin is that it is an international currency in a way that it works anywhere in the world. Obiviously, like you said it can and has been used for a lot of illegal activities especially including the Silk Road. Also, I agree with you that Bitcoin cannot be used as a viable currency because of its fluctuation in value. There is a link at the end of the comment which may help you to furthur your research. I really like this article and hope that you expand this later on. Keep up the good work Kattikas.

    http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea

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  2. Kattikes, I'm so glad you chose to pursue this topic, as it is one big mystery to me. (This article helped me understand the blockchain a little better, too.) You have broken down some fairly complicated economics into terms we can all understand, and you make a very clear case for why Bitcoin cannot (or will not) become a viable currency. In current news, financial experts agree with you that stability in its value is necessary if it is to succeed. Martin Tillier at NASDAQ says Bitcoin needs to " achieve some degree of mainstream acceptance" if it's going to be successful, and for most people, that means it has to find a stable value. He seems to think that's possible. I guess we'll have to wait and see!

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  3. Hello Kattikes, I liked how through you're point on bit coins illegal use and I agree with it. I personally believe that bit-coins benefits are do not come close to their detrimental effects and their uses for criminal enterprises. But Bit coin could also help people if used correctly. Such as being able to easily transfer funs to someone seeking to start a business. But the untraceable factor allows it to be so easy used for illegal things that it may never be a truly good thing. Great article Kattikes very well written.

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  4. Hi Kattikes, I really enjoyed your article about bit coins. Coming from a person who has never used this online currency before, this really opened my eyes about what Online currencies are all about. In my opinion though I don't see the true value of the Bit coin compared to regular cash. I found an interesting article that I believe proves my point. What I want to ask you is why are Bit coins relevant at all and how do you think people can make them more popular? Thank you again for bringing up such a great topic! -Coley

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  5. Hi Kattikes, I really enjoyed reading your article about bit coins. I am so exited to read to article and leave a comment on it. Because I read a lot of articles and videos about bit coin. I agree with you about the bit coins are very easy to be used for illegal activities. Because it is a kind of money which is used on Internet. The stability is very bad on bit coin. The bit coins are made by discovering from computers. They have to open a computer with a long work time to find bit coins. It also is a Internet money. So the bad group can use it to do some illegal activities. I also found an essay about the stability of Bit coins. It argued about the stability of Bit coins' price. I think it can help your essay. I also hope you can enjoy the article. You did a nice job.
    http://www.coindesk.com/can-bitcoins-price-ever-stable/

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  6. Hello, Pelster. Thank you for your comment. That was a solid article you the referenced to at the end of your post. I really like how the updated version organizes content into specific headers for the convenience of the viewer. I understand your claim that the Bitcoin can be used as an international currency, but I believe that your following statement is much more important. You said that the Bitcoin will not be a viable currency, because its value fluctuates too much. After much research, I think this fact outweighs the possible benefit of the international currency idea; thus, I believe the Bitcoin will not be a viable currency. For information on why the Bitcoin's market value fluctuates so much, take a look at this article. Thanks for the support!

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  7. Hi Ms. Gerla. Thanks a lot for the comment. I am pleased to see my article is actually helping people understand basics of the Bitcoin. I completely agree with Martin Tillier's words that you have quoted. I honestly believe that the Bitcoin is a fascinating and very original idea, but we can all see that it cannot be an effective currency if its value is not be stable. It's as simple as that. The following article provides a graph that beautifully illustrates this extreme fluctuation. Take a look, and thanks again for the comment!

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  8. Hello, Tommy. I really appreciate the comment. For the most part, I see that you agree with me, but I just wanted to touch on the startup business idea. I think this could be a great possibility for the Bitcoin. Honestly, the Bitcoin has so much potential to be used for good. But, like you said, there are always going to be those guys out there who take advantage of anonymity and use it for illegal activities. This is one of the two main problems of the Bitcoin. The second is that the Bitcoin's price fluctuates to much. Take a look at this article about whether Bitcoins are the Criminal's Best Friend. Once again, thanks for the comment. Cheers!

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  9. Hi Coley. Thank you for the comment. I'll start off by answering your question. Bitcoins are relevant, because they have potential. Here's an example. Say you are in the check out line at the Trader Joe's. You go up to pay for you potatoes, but instead of taking out your wallet, you pull out your phone. All you have to do is confirm a transaction and you've paid for your potatoes. Trader Joe's is happy, because they don't have to pay any fees for your transaction. You are happy, because no one can steal your money, and organized crime is unhappy. On to the second part of your question. I believe that if the Bitcoin company could stabilize their currency and minimize crime involving their currency, most logical people would switch to the Bitcoin simply because of convenience. This article on Bitcoin's True Revolutionary Potential may show you other reasons why the Bitcoin is relevant. Thanks!

    ReplyDelete

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