Bitcoin Trading Issues - Essay Example

Bitcoins of the Written: written: Business communication, BBA, 1st year Table of Contents Introduction 2 Characteristics of bitcoin trading 4 Advantages 5 Inconvenience 7 Bank Alternative 9 News about bitcoins 10 Future 10 Personal feedback 11 Works Cited 12 Introduction Bitcoins refer to digital currency that individuals use for personal or business transactions. It is based on the technology of cryptography. It is a product of modern technology and advancement making online transactions much simpler. It uses online network for creation of funds as well as for their transfer. Using the wallet software, people can send or receive bitcoins. This system can be used without hassle on a computer, mobile or any electronic devices that can support web technology. Individuals purchase bitcoins through payment by online transactions from bitcoin exchanges. These bitcoins serve as money for all types of payments and receipts on the web. Individuals can maintain their own bitcoin wallet, where these bitcoins are debited or credited. Since this is a peer-to-peer currency, it does not require any central authority to issue currency or track transactions (The Economic Times, 2014). The concept of bitcoins was first published in a newspaper in 2008. However, it was only in 2009 that the first online wallet software for transacting bitcoins was released. It was called Bitcoin-Qt. Nonetheless, this software initially was poorly developed and many of its features were exploited to create more and more bitcoins. Later on, a team of core developers and experts of software were employed to monitor, develop and enhance the bitcoin way of transacting. Since then, use of bitcoins has rapidly increased. Also, there have been considerable fluctuations in the price of bitcoins. The price of bitcoins had reached its peak in 2013, during the Cypriot financial crisis. From the initial days of inception, the bitcoin system has suffered plenty of glitches with respect to technology and software system that it was based on. This was largely due to lack of proper governance and management of the software. The system was found to crash multiple times. So, individuals were not really eager to use it as a system of online money. Bitcoins were largely used in online gaming versions, where individuals on winning points were credited with bitcoins. Hence, only youngsters and teenagers were found to take interest in this system. Soon as greater regulations were incorporated in this sector, bitcoin exchanges were regulated whereby they were required to submit reports of bitcoin transfers. Gradually, more and more business firms and non-profit groups started to accept this form of exchange. Currently, BTC China, which is a Chinese bitcoin exchange, is the largest bitcoin exchange in the world by virtue of trade volume. Nevertheless, paying virtual currency for real goods was considered unacceptable in China because of which the value of bitcoin currency had considerably dropped. Many financial services companies were prohibited from using this medium of exchange, as questions were raised regarding its authenticity. In the US, however, bitcoin exchanges had to follow the rules governing any other money services institutions. They were required to submit reports so as to prevent money laundering. Although efforts have been taken worldwide, this system is still not considered as a safe or fraud free means of trading. This facilitates several illegal transactions such as, purchase of drugs and other items that are subject to punishment and penalty in the real money system. The Silk Road is an example to this; whereby this online illegal online market had used bitcoins as a mode of exchange to obtain illegal items. The regulations regarding the bitcoin exchange were not able to prevent it. Millions of bitcoins were stolen and unaccounted for due to inadequate software system and verification. Mt. Gox, a bitcoin trade exchange, had withdrawn its bitcoin trading services early in the year 2014 due to unregulated activities (BitcoinWebHostings, n.d.). Characteristics of bitcoin trading Bitcoin wallets- Once an individual has installed a bitcoin wallet on their system such as, computers or mobile phones, it generates a bitcoin address. This is the address that one needs to share with others so as to receive or make payments as bitcoins. This installation is simple and can be promptly downloaded by following a step-by-step guide. Blockchains - These can be considered as transaction logs for bitcoins. Every bitcoin transaction gets recorded in the blockchain digitally. The blockchain records every single transaction along with details such as, wallet from which the amount is relieved. This also keeps track of the ownership of every single bitcoin in circulation as well as of the total balance of bitcoins available in the wallet by auto updating. Private keys- Every transaction uses a private key with which transactions are signed as a proof that bitcoins have been transferred from its owner. Such a system prevents manipulation of transactions and provides greater security. Mining- Through this process, every transaction gets confirmed after being checked for authenticity. For this, a team of miners constantly verify every transaction and blockchain so as to make sure that all details are correct and updated. They guarantee security and safety of every transaction. For providing such services, miners are paid with a certain amount of fees from the merchants. Pricing- Bitcoin values fluctuate on the basis of demand and supply. Since there is no centralized value for bitcoins, it is highly subjected to the level of usage. Unlike other currencies whose values are subject to rates of inflation, bitcoins get influenced only by its acceptability and usage by the owners. Buying and selling- The easiest way to obtain bitcoins is by purchasing them for cash in person. Through buy and sell bids, the online exchanges offer bitcoins too. The exchange or purchase is normally done on the basis of market price of bitcoins. However, the buyers and sellers often agree upon a certain price as per which the bitcoins are bought or sold. Software- The bitcoin wallet software, also known as the bitcoin client, facilitates transactions that are made online. This software follows a protocol that ensures transactions as valid (Holden, 2013). Advantages Fast transactions- The main advantage of using bitcoins is that this facilitates transfer of money or its value in a fast and easy manner. Physical exchange of money gets completely avoided. In this case, individuals do not need to contact each other in person to conduct business. Although this feature is also provided through online money transfer using bank debit or credit cards, bitcoin system is considered even faster as individuals do not need to consider any banking system as an intermediary. Money gets automatically debited or credited during transactions, when bitcoins are exchanged. Additionally, in case of using cards for online transactions, it takes about more than five hours for the money to get debited or credited in the bank account. Yet, in case of bitcoins, the amounts get easily debited or credited within ten to fifteen minutes. Lesser transaction fee- Bitcoins are highly preferred in comparison to cards such as, visa and Mastercard, as they charge certain amount of money as transaction fee. The fee is generally two to three percent of the transaction cost. This gets totally avoided in the case of bitcoins as lesser or no fees are charged for transactions. Transparency- Without revealing identities of the parties, bitcoin network can be well-scanned through by buyers and sellers involved in trading through bitcoins. This assures a greater level of satisfaction. Banking systems not involved- For using traditional system of paying through cards, individuals or parties in the transaction need to have a bank account. This gets not required in the case of bitcoins. Individuals can transact without involving the bank or bank account. All that is required is a bitcoin wallet. Online transactions- The bitcoin system is highly preferred in online transactions as this is free of hassles. Conversion of money- The bitcoins are purchased by paying certain amount of cash. This in turn converts the value of money in terms of bitcoins. No upper limit- In case of cards, there is an upper limit to their usage on the same day. This is absent in case of bitcoins. There are no upper limits. They can be used up to any limit as long as bitcoin balance is available in one’s wallet. Easier method- To pay and receive money through online transactions is comparatively an easier method as this involves little or no hassle. With a few clicks of buttons, money gets easily transacted. Facilitates trading and investing- Many individuals can benefit by investing money in bitcoins. Individuals can buy them when the relative prices of bitcoins are low and then sell them at higher prices. So, similar to trading of foreign exchange or bonds, bitcoins too can provide flexibility of purchase and sales and take advantage of change in prices. Alternative to national currency- Bitcoins can be used as a universal currency. It does not involve the need of conversions while transacting business overseas. These bitcoins are normally purchased on the basis of US dollars, thereby establishing a uniform value of exchange (Gray, 2014). Inconvenience Price volatility- Bitcoins are highly volatile as their value depends upon the users. With more trading on basis of bitcoins, their value is found to rise. Similarly, with lesser usage, their value lowers. Hence, many believe that bitcoins cannot be trusted as a valid medium of exchange. For instance, an individual may end up paying higher or lower for a particular commodity through this system as the correct value of bitcoins are not known definitely and also keeps on changing. This is the reason why many business concerns do not employ this system for transaction in business. Lack of liquidity- In order to convert bitcoins into liquid cash, an individual needs to sell them at a bitcoin exchange. This may not be feasible all the time. Black market- since bitcoin system have less regulations and paves way for privacy, it is a highly preferred for criminal activities. Black market dealers can easily purchase illegal goods bitcoins. Bitcoins have increased the market for drugs in the Silk Road which was a huge eye opener for US. There are also black markets existing to steal bitcoins by manipulating data available online. Hacking- Nowadays all types of online activities are prone to hacking. Especially that involves low security. Although bitcoin software guarantees that through private keys, the transactions are secure, but it has been seen that millions have been stolen from bitcoin wallets through hacking. On the other hand card system of payments more secure and cannot be hacked. Money laundering- Bitcoin system paves way to convert unaccounted money into legal money. Although many claim that since bitcoin system offers full transparency, money laundering cannot really happen in its context, but in reality it has been seen that many traders have used bitcoin system to effectively conduct money laundering. Illegal mining- Transacting on the basis of bitcoins involve careful scrutiny by miners. They use specialized software for this purpose. It has often been noticed that the system for mining gets hacked and unauthorized mining is conducted. This also paves way for the creation of unauthorized bitcoins. Ransomware- Through bitcoin trading, hackers can trace the computer system through which the transaction was conducted. Following that, they can hack the computer system and demand ransom for decrypting the same. Such incidents have been recorded worldwide (Guttman, 2013). Bank Alternative On analyzing the growing usage of bitcoins, it is a matter to consider whether bitcoin system would be able to replace banking activities. This, however, would not really be an advantageous scenario as it would entail a lot of illegal activities. Hence, bitcoins have posed to be a growing nightmare for banking systems and financial regulators worldwide. If bitcoin system gets regulated and are made totally secure from hacking in any manner, then it might serve as a potential competitor of banking system. In traditional banking system, there is enough hassle in respect to providing complete details before every transaction and currency system is highly subject to inflation. Bitcoin system is free of inflation as well as comparatively more user-friendly as the amount of information required to be provided is limited. Bitcoin system is also less dependent on intermediaries, unlike traditional payment options (Gigaom, 2013). Due to its simplicity and easy use, bitcoin system is taking over considerable markets. If more monetary power gets transferred to this system, then it may bring about downfall of traditional banking activities. For this reason, many government authorities have restricted the use of bitcoins as an alternative to real cash. A country’s business and trading activities should not be supported by a virtual money system created by bitcoins and other digital currencies. It is also not possible to involve bitcoins in capital markets as this lacks liquidity and are highly volatile (The guardian, 2013). News about bitcoins The latest information that is making headlines on the issue of bitcoins revolves around its inventor, Satoshi Nakamoto. He claims that it was not him that created or invented the concept of bitcoins. The magazine that recognized Nakamoto as inventor of bitcoins has, however, stood by their story (Yahoo News, 2014). Another story surrounding the bitcoins world is fall of one of its largest trading platforms, Mt. Gox. This has led to a potential fall in prices of bitcoins. Yet, many individuals claim that fall of Mt. Gox will have a positive impact as this will be able to end illegal trade of goods (TNW, 2014). Apart from this, a growing trend in theft of bitcoins is seen. Future Bitcoins seem like a monetary system for the future world of business. Although it lacks many characteristics such as, safety, disclosure of identity, greater supervision of fund and fund allocation; with adequate changes and greater control, this system can still be used effectively in future. It is also possible that traditional banking systems start providing bitcoins and facilitate trade. The bitcoins sector has tremendous potential to grow with enhancement of online technology and rapid use of the web (Hill, 2014). Personal feedback Replacing real cash with bitcoins is not a good option, but with better regulations and lesser volatility, bitcoins can be used for purchasing and selling articles online. Certain steps need to be undertaken to make sure that this system does not spread too widely so as to overshadow the exchange of real money. At least this growth must not occur unless regulations governing bitcoins are changed. Also, it is important to consider that bitcoins serve as virtual money. Hence, by increasing its usage, there would be a greater interference of the virtual in the real world. If measures are taken to lower its volatility and make it closer to real money, then bitcoins can be used as a potential medium of exchange with low threat. A lot of people are unaware of this concept of bitcoins. So, if there is greater awareness and online traders are encouraged to use bitcoins, then this would result in reduced volatility (Hill, 2014). Works Cited BitcoinWebHostings, (n.d.). History of Bitcoin. Retrieved from http://historyofbitcoin.org/. Gigaom, (2013). Bitcoins will prosper until governments or banks decide to crush it overnight. Retrieved from http://gigaom.com/2013/07/13/bitcoin-will-prosper-until-governments-or-banks-decide-to-crush-it-overnight. Gray, D. (2014). Bitcoin: A Dummies Guide to Virtual Currency. Delaware: Speedy Publishing LLC. Guttman, B. (2013). The Bitcoin Bible. Norderstedt: Books on Demand. Hill, K. (2014). Secret Money: Living on Bitcoin in the real world. New York: Forbes Media. Holden, N. (2013). Bitcoin Essentials. New York: Fizik Publishing. The Economic Times. (2014). Bitcoins a revolution: Some must-know myths & facts about the virtual currency. Retrieved from http://articles.economictimes.indiatimes.com/2014-03-16/news/48265612_1_bitcoins-virtual-currency-satoshi-nakamoto. The guardian. (2013). Why bitcoins scares banks and governments. Retrieved from http://www.theguardian.com/technology/2013/apr/07/bitcoin-scares-banks-governments. TNW. (2014). Mt. Gox’s fall is good news for Bitcoin, says Blockchain, as it buys trading platform RTBTC. Retrieved from http://thenextweb.com/insider/2014/03/04/mt-goxs-fall-good-news-bitcoin-says-blockchain-buys-trading-platform-rtbtc/#!Aof9p. Yahoo News. (2014). Nakamoto hires lawyers in Newsweek bitcoin fight. Retrieved from http://news.yahoo.com/nakamoto-hires-lawyer-newsweek-bitcoin-fight-172016289--finance.html. Read More