Essay About Peer Network And Future Of Money

Bitcoins and the Future of Money
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Kyle Lindquist
Prof: Antonio Bojanic
Econ 435: Money and Banking
10/24/12
Bitcoins and the Future of Money
Traditionally, there are two types of money; commodity money and fiat money. Commodity
money is backed by a real asset, while fiat money has no intrinsic value but is backed by faith in the
currency and limiting its supply. Fiat money by definition is also state-issued money, and declared by a
government to be legal tender. In contrast, Bitcoins have no centralized issuing authority. Instead, the
peer- to-peer network regulates Bitcoins balances, transactions, and issuance according to network
software. Some have called Bitcoin a precursor to the future of money.
What is a Bitcoin?
A Bitcoin is a peer-to-peer digital currency existing since January 3, 2009. Peer-to-peer means
each computer in the network can act as a client or server for other computers in the network, allowing
access to files (in this case money) without the need of a centralized server. Bitcoins are essentially
“mined” in batches of 50 for “confirming a block” as a result of intensive calculations carried out on
computers around the world. Anyone who wants to mine the coins can download the software, but as
time goes on, the time and computation effort to mine the coins greatly increases. An average personal
computer would currently take around 2 years to confirm a block. The supply of Bitcoins is finite, with
about 10 million in circulation now. The Bitcoin supply is setup to cap at 21 million Bitcoins which are
estimated to be mined by year 2140 (assuming they last that long). Currently it is about 1 million times
more work to confirm a block now than when Bitcoins were first created. The network adjusts the
difficulty every 2016 blocks based on the time taken to find the previous 2016 blocks so that one block is
created roughly every 10 minutes.
Bitcoins are currently the worlds most widely used alternative currency, with a market cap
exceeding 110 million US dollars. They can exchanged either directly from person to person, or through
an exchange such as Bitpay, which offers more security against fraud for a transaction cost. With the
service Bitinstant, you can exchange Bitcoins for traditional currencies and vice versa. Currently, one
Bitcoin exchanges for approximately $10.00 USD.
Benefits vs. Drawbacks
There are several appealing aspects of Bitcoins. It is a great alternative to traditional money
transfers when exchanging money internationally. Moving money from country to country by an
international money transfer not only exposes parties to risk as exchange rates fluctuate but can take up
to 10 days to get from point A to B. The transfer of Bitcoins is virtually instant and eliminates transaction
cost. Perhaps the biggest draw to Bitcoins is there anonymity. They are not tied to a bank account,
difficult to trace, and can be stored inside the memory of your home computer. This has led Bitcoins to
be a widely used currency for trading illegal goods. Weapons and drugs among other things are easily
purchased online with Bitcoins.
While Bitcoins are a novel idea, they have some glaring drawbacks. The first is exchange rate
volatility. In 2011, Bitcoins reached as high as $30 USD and crashed to as low as $2 USD. There is a huge
amount of uncertainty regarding fluctuations in exchange rates. Another issue is hackers. In June 2011, a
hacker stole around $500,000 USD worth of Bitcoins. Also, because of the anonymity Bitcoins provide,
moral hazard is extremely high. It is difficult to recoup money if for instance you ship an item but the
buyer fails to transfer coins. Asymmetric information needs to be reduced if Bitcoins are to be more
widely adopted. Last, because Bitcoins have no central bank, several of the functions of the central bank
are not covered. Who clears payments with Bitcoins? Also, the central bank is a guiding force for
monetary policy and financial regulation. Bitcoins are far from regulated.
The Future of Bitcoins
I believe that Bitcoins have a strong future. They are not even four years old, yet have an
economy of $110 million USD with around 14 million