Summary of Bitcoin and Beyond The Possibilities and Pitfalls of Virtual Currencies - Article Example

As an online currency, Bitcoin serves as a mode of currency in a digital format that can be used by anyone online to receive and make payments for goods and services bought online. It works and can be used just like a regular currency. Anyone can start using bitcoin. The process of using bitcoins begins with having an online wallet that can be downloaded online for free. Just like the physical wallet which can be kept anywhere in the house, the digital wallet can be stored as a file on hard drives, USBs and even smartphones and users can also have several digital wallets similar to having multiple bank accounts. The transaction involving bitcoin online however is different from the traditional mode of payment. The system has volunteers called miners who check the transaction using bitcoin and decide whether to approve or decline it. If approved, it is then recorded to a blockchain which is a ledger that contains the history of such wallet.

The Vice President and economist with the St. Louis Fed David Andolfatto explained that bitcoin is a good investment by citing its stability compared to traditional currency. As an example, he cited the trend of the purchasing power of each currency to 100: the yen, the euro, the U.S. dollar, and the Zimbabwean dollar. The currencies were extremely volatile compared to bitcoin underscoring the stability of the currency.

The theory of nominal exchange rate indeterminacy was cited to help explain why bitcoin is a good investment. It was cited that there is no single economic theory that dictates the relative price of two intrinsically two objects such as bitcoin and currency. The value assigned to currencies, therefore, is relative.
Bitcoin is secure compared to regular currencies because the presence of a digital wallet in someone else’s computer will allow the transaction history of such a digital wallet to be viewed and therefore, could be linked and traced to its users which could help authorities to catch illicit activities using bitcoin.

The article however cited some challenges involving the use of bitcoin and that is the issue of regulation. Regulating bitcoin could be a challenge because it does not have a central authority. It is because it is an open-source network that made bitcoin physically impossible to regulate.

I. Evaluation of the article
The subject discussed in the article may be a little intimidating because it attempts to explain the economics behind bitcoin. It is however written in a reader-friendly manner that made the article digestible to its readers albeit the topic is heavy. It simplified the explanation of the dynamics of bitcoin which made the read engaging and very interesting. Read More