Is Bitcoin Money

Bitcoin is one of several virtual currencies that have arisen in the recent decade, including Dogecoin, Peercoin, Litecoin, Ripple, and Auroracoin. Bitcoin has turned into the most successful crypto currency compared to the other virtual currencies. Bitcoin is an internet-based decentralized, unregulated currency project. Bitcoin is not a block chain in and of itself because it is transacted over a public open block chain network, rather block chain is the operating system and bitcoin is one of many apps that run on it. The concept of bitcoin is to create a new currency that is not controlled by governments. You can obtain bitcoin by buying or mining. Mining is digging for bitcoins whereas buying is done by using bitcoin exchange which may be a dangerous process due to the fact that many exchange sites are not backed up by professional corporates exposing them to a high scam. Since introduction in 2009, its market capitalization surpassed the 5 billion US dollars mark in the year 2015. The cryptocurrency technology modeled on collaborative open source principles and peer-to-peer networks that suggest a commitment to social solidarity and mutual aid. Bitcoin’s image, however, has become associated with speculators, profit-driven entrepreneurs, market-fundamentalist libertarians and technology fetishists (Yelowitz and Wilson 2015).

Economic experiments of the fundamental nature of Bitcoin have been few in recent history; Bitcoin is a deflationary currency such as gold and other precious metals with a decentralized, open source project empowering users with the ability to trade and transfer funds across borders without barriers increasing its popularity among persons in politically unstable markets. Bitcoin is also like bank money because its possible to transfer almost any amount to any place in the world. Bitcoin transactions cannot be reverted or cancelled. Harvey (2014) discusses the origins of the Blockchain technology, some of its economics, and identifies a variety of risks. (Graeber, 2014) Pointed out that money has no essence, its nature has always been a matter of political contention with cryptocurrency validating this fact. This paper will explain how Bitcoin works, the concept of Blockchain technology and how they have impacted global finance and payments.

How Bitcoin Works

Digital coins assigned to users who trade the currencies in a virtual network creating market forces of demand and supply. A unique token is generated for each user and stored in a digital wallet hosted on the user’s computer. The primary purpose of the wallet is to create keys used for transferring the coins. A transfer initiates when the owner of a token uses a private digital essential to approve the addition of the recipient key to a chain of previous transactions. The process is complete when the coin moves to the recipient’s wallet with the history of the sale recorded together with all past transfer.

A fundamental question arises, how does the system safeguards against the risk of double spending in the case of physical currency such a threat does not occur as a physical coin can only be in one place at any time. For digital currencies, they can be in several locations simultaneously. Bitcoin solution to this problem was the Block chain technology that made Bitcoin different from conventional electronic payment systems and predecessor cryptocurrencies (Barber et al., 2012). Instead of a centralized verification system suggested by traditional electronic payment systems Bitcoin uses a decentralized peer to peer network. The founder of Bitcoin Satoshi Nakamoto stated the only solution to double spending was to keep a complete and public record of all transactions in the system. (Nakamoto, 2008: 2) noted that Bitcoin needed a way for the payee to know that the previous owner did not sign any earlier transaction since the earliest sale is the one that matters, later attempts to double-spend will be irrelevant.

The concept of Block chain technology is fundamental to the success of Bitcoin as every transaction is recorded with a time stamp then joined with other sales to form a block. The block processing by the network is done using CPU power availed by users. Once the block verification completes and sealed through a process that connects it to the previous block and forms the last Blockchain. The formed Blockchain acts as a litmus test for new transactions to check for double-spending. In accounting terms, the Blockchain is a ledger and a tool used by the network to balance the system.

For a money system to be sustainable, it must have an efficient way of introducing new money into the economy. Bitcoin achieves this objective by involving its users in the process of money creation through giving incentives to users who are on the network. The initial transaction of blocks starts a new coin owned by the initiator of that chain; this is the incentive for users to provide support to the network and to initially distribute coins as the system lacks a centralized authority to issue coins. This process is referred to as mining. To regulate the number of new coins issued, Bitcoin requires miners to solve a specific a puzzle before the process is complete. The cryptographic problem solving is through a process of trial and error with the time spent is solving a problem increasing steadily over time to develop CPU power allowing the miners’ computer to carry out network tasks. In exchange for seeing out the process, the reward is a new coin.

Is Bitcoin Money

Conventional money is just tokens whether in the metal form such as gold reserves, digital form transferred electronically and traditional physical cash. Bitcoin is a complete independent transaction network which does not give single persons the control. This means that applying political pressure is hardly possible over this network. Bitcoins are used to pay for goods preferably the goods that are bought through the internet. For instance, the value of the US dollar embedded by millions of people who agree that the tokens represent value and the real economy accepts the amount prescribed. This value is upheld by the millions of people who independently use the token and those who do not will find themselves disenfranchised from the economy. The token is also backed up by the government, central bank and commercial banks. Bitcoin, on the other hand, has no political or geographical inclination and thus is not a primary unit of pricing in any jurisdiction few goods are priced using Bitcoin as the unit of account. The potential to become a currency unit exists, however, Bitcoin has not reached that threshold of money in a traditional perspective. In some economic circles, its viewed as a digital asset rather than a unit of currency. For now, Bitcoin is a digital token that can be transferred between users as it has market value and can sporadically be an exchange intermediary for goods and services.

Perceived Risks of Bitcoin

A fundamental risk posed to users of Bitcoin is the perceived value of the coin. According to (Glaser et al. 2014), digital tokens underwent a process of fetishization in which an imagined amount imbued with a small dedicated group who then sparked speculators and the media to get involved. These parties opened the tokens to the broader general public, and today we can conclude that Bitcoin perceived value is contingent upon a specific community of users who continuously affect this value as more users join the Bitcoin network. In contrast to traditional currencies the perceived value has fluctuated significantly over a short period, however, due to its decentralized model as more people get involved the cost of tokens would stabilize because the more the players, the less the influence one player has in effecting the price. The perceived risk of hacking and general cyber security threats exists in the cryptocurrency industry but as the Bitcoin users expand the security around its system has increased.

Another perceived risk is noncompliance with regulatory, accounting and tax obligations. The question that arises is how a virtual currency should interact with mainstream regulatory, legal, accounting and tax requirements in multiple jurisdictions. How should VAT be accounted for in Bitcoin transactions? How to account for Bitcoin in financial statements in the absence of specific IFRS and accounting standards? These questions can only get answers once jurisdictions categorize Bitcoin either as a currency, an asset, a digital service, a commodity or investment. Authorities are in different phases of resolving these issues.

Impact of Bitcoin on Global Finance and Payment Transfers

Bitcoin has enjoyed most of its success so far in developed economies such as the US. However, an emerging theme is whether Bitcoin can impact developing countries bring about financial inclusion on a global finance platform. Bitcoin has enabled payment transfers or low-cost remittances for users who wish to send money in small amounts globally by serving as an intermediary currency between other traditional currencies such as the US dollar and Filipino pesos (Folkinshteyn et al. 2017). Instead of using the conventional money transfer companies such as Western Union a client seeking to send money to the Philippines can transfer US dollars to Bitcoin and withdraw pesos in the Philippines. This transfer is facilitated by Rebit a star up in Philipines that provides a liquid market for both dollars to Bitcoin and Bitcoin to pesos (Ammous, 2017). This model could come in handy in failed states such as Somali where international remittances that are key to the economy has been frustrated by informal Hawala system that is under scrutiny for allegations of funding terrorist activities (Maloumby-Baka, 2015).

Traders in developing countries may experience difficulties in accessing international payment system; Bitcoin could potentially fill this gap and facilitate global commerce. Trade facilitation is a fundamental objective of any currency ((Mai, Bai, Shan, Wang & Chiang, 2015). Apart from playing an intermediary currency role Bitcoin could as go a step further and act as a decentralized financial institution. Similar to a quasi-bank where persons in countries with limited bank infrastructure with access to smartphones could install the Bitcoin wallet which resembles a quasi-bank account in which they can save and carry out transactions conveniently and safely. Bitcoin could also serve as a hedging currency for individuals in countries with volatile currencies. According to (Garrick Hileman, 2014) states such as Zimbabwe, Venezuela and Argentina are most likely to use Bitcoin as a replacement currency due to the instability of their countries’ currencies. Hileman, however, makes the assumption that Bitcoin is at a point of perceived stability which is a subject of debate to date ((Kethineni, Cao & Dodge, 2017)

Conclusion

Cryptocurrency and the blockchain technology are innovations that could have a significant impact on payment systems and financial services. The implications could change the existing economic models and methods as well as creating new financial linkages. The future of Bitcoin is promising, but some pitfalls need to be carefully navigated to secure this bright future. The success of Bitcoin in countries with inadequate technological infrastructure has to be addressed, for the Blockchain technology to consistently operate connection to power and internet is required. The technique also requires smartphones; the ordinary mobile phone cannot run the Bitcoin mobile wallet due to the size of the application and processing power regarding the data requirement. Another challenge is security concerns coined around financial crimes such money laundering and funding of terrorist activities.

The lack of an existing network of vendors and Bitcoin agent in remote locations around the globe has also hampered the growth rate of Bitcoin as compared to other financial innovation such as Mpesa in Kenya where its rapid growth was facilitated by a network of agents across the country who can offer cash readily to customers. The risk is inherent in all forms of money. However, once a new type of payment has embedded into the global economy, a level of tolerance and appetite for these risks is exhibited by economic players. Bitcoin is at the initial phase of integration with the economy, the economy is yet to give a verdict as to whether the virtual currency has gained enough users to propel it from the current state of speculative asset to a fully fledged currency. The World Bank, governments, established banking institutions are also yet to incorporate Bitcoin, and this poses a threat as it can be argued as the key players in the financial industry they have the capability of implementing detrimental monopolistic practices against Bitcoin.

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