Cryptocurrency is a digital form of currency that utilizes encryption software for greater security, making it both anonymous and difficult to be counterfeit or stolen. Bitcoin was developed by Satoshi Nakamoto, whose real identity is unknown, in 2008 and refers to both the monetary units of cryptocurrency and the peer-to-peer electronic cash network through which payments can be transferred directly between two parties. These direct transfers eliminate the need for sending funds through a third party, such as banks and other financial institutions. The bitcoin network is decentralized, meaning no one person or entity owns or controls it. People can create bitcoin-based services without restrictions and without the permission of a financial institution.
Bitcoins are created and released into circulation through a process called mining. Hundreds of computers known as “miners” work to solve difficult puzzles and are rewarded with new bitcoins. Mining is also a record-keeping service whereby new transactions are verified, collected, and added to an existing group of transactions called a block. These blocks are added to the public ledger, or block chain, to ensure that there is a permanent, public record that is consistent and cannot be tampered with or removed. The value of bitcoin continues to be volatile, though its worth has grown substantially. In 2010, a single bitcoin was worth $0.003. The value has since skyrocketed to over $4,000 per share in 2017. While the possibilities of a new digital currency are enticing, there are several advantages and disadvantages to consider.
The Pros and Cons of Bitcoin
Pro: Decentralized from Governments and Banks (Greece example)
One of the main benefits of bitcoin is that it is a decentralized system of currency not bound by the restrictions of banks and reliance on the government. Not only does the use of bitcoin remove the need for intermediary involvement for transactions and purchases, but the network provides an alternative to citizens of a country in economic turmoil. For example, as Greece neared bankruptcy in 2010, Greek citizens were forced to find an alternative for their unstable national currency and banking systems. Through the use of international bitcoin ATMs, people could buy bitcoins or withdraw funds in the form of bitcoin that were transferred by a relative in another country. This allowed Greek citizens a new method for investing, retaining, and accessing their wealth in a time of economic crisis.
Pro: Quick Transactions with No Tax and Low Fees
Transactions made using bitcoin are anonymous, and there are no third parties to track or identify transactions. Therefore, sales taxes are not included in purchases made with bitcoin. Bitcoin users are also spared high fees and exchange costs for wire transfers and foreign purchases. Since there is no government involvement, travelers pay very low fees for international transactions. Transfers also occur very quickly, so users do not have the inconvenience of authorization periods.
Con: Purchasing Illegal Goods and Services
A significant drawback associated with the use of bitcoin and its lack of centralization and government regulation lies in its being used to purchase illegal goods via the dark web. Since bitcoin users are essentially untraceable, some of them have taken advantage of this anonymity for money laundering, tax evasion, and buying firearms and illicit substances. For instance, the Silk Road was a notorious black market for illegal drugs on the dark web. In 2013, the FBI shut down the site, and founder Ross Ulbricht was arrested and charged with narcotic trafficking conspiracy, computer hacking, and money laundering. The Department of Justice also seized nearly $4 million in bitcoins.
Con: The Threat of Hacking
Bitcoins are saved in virtual wallets, and although the owners are anonymous, skillful hackers have been able to access bitcoin wallets in the past. In May 2017, hackers infected 200,000 computers throughout the world with a ransomware virus called WannaCry. Cyberattack victims were instructed to make ransom payments of $300 in bitcoin, and since the initial attacks, victims have made roughly $143,000 in bitcoin payments.
The Future of Cryptocurrency
The widespread adoption of cryptocurrency as a form of payment for everyday purchases and transactions has been slow to take off. The vast majority of the public still uses its national currency, though many technology investors believe that bitcoin and other cryptocurrencies will become the global digital currency of the future. Also, corporations, banks, financial institutions, and governments throughout the world have been investigating and investing in networks similar to bitcoin and cryptocurrency’s potential to be the future of real-world financial transactions.
Understanding world economies and financial institutions is essential for business professionals. Cryptocurrencies present a new possibility to change the way financial transactions are made, and business professionals need to be well versed in this technology, as it has the potential to influence global commerce and investment strategies. Not only should they grasp the possibilities, but they also need to be aware of the dangers and downsides of this new volatile market.
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