Bitcoin: Currency of the future?

Bitcoin: Currency of the future?


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Bitcoin

Have you heard of a currency that has gone up 200,000% within a year? There is but only one currency – Bitcoin (abbreviated as BTC). The Bitcoin concept has become so popular that its features and future are even discussed at investment conferences. This has attracted many well-known investors including the Winklevoss twins of Facebook fame who believe its value can easily touch USD 40,000 from the present roughly USD 900.

Bitcoin is a digital currency and the first crypto-currency (a concept first described by Wei Dai) which is claimed to have been developed by an unknown person or group known as Satoshi Nakamoto in 2009. The market size is estimated to be USD 4 billion with around 12 billion bitcoins in circulation.

Mt.Gox USDbtc all time arith (1)

Fig: Value trend of Bitcoin on Mt. Gox (in USD)

 

The cryptographic protocol and software used in Bitcoin are open source. Bitcoins are snippets of code that use encryption to prevent counterfeiting and double-spending. It is pseudo-anonymous in the sense that its ownership is anonymous but the transactions are transparent. Complex algorithms control the supply of Bitcoins which can be generated or “mined” by running a program on a powerful computer. Bitcoins grow at a rate known to all parties in advance (it grew at a rate of 25 coins per 8 minutes on 11th April 2011). The total number of Bitcoins can’t exceed 21 million (which will be reached in around the year 2140) but their value depends purely on market forces. It is a purely virtual currency which is not backed by any security or government obligation. Its value is determined by the demand and supply forces, is traded Bitcoin exchanges like BTC China, Bitcoin 24 and Mt. Gox.

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Fig: Life of a Bubble (Expected Life of Bitcoin)

Nowadays, Bitcoin is increasingly being accepted as a mode of payment for products and services by vendors that accept Bitcoin payment such as WordPress, Reddit, OkCupid. There are even mobile apps that allow Bitcoin payment and spot trading facility. Surprisingly, many start-ups have been listed on the Global Bitcoin Stock Exchange where bonds and stocks can be traded. The ‘cryptocurrency’ wave has hit the world of financial markets and there have been a lot of speculations as to what the future unfolds. Understandably, there has been apprehension of wide spread money laundering and criminal fraud due to complete anonymity of Bitcoin transactions. Also, Bitcoins at present is highly volatile and the graph below shows the fluctuation in its value over the past two years.

Alternatives to Bitcoins

Bitcoin is one of the many virtual currencies which presently exist. Some of the other popular virtual currencies include:

  • Litecoin: It is a peer-to-peer currency enabling instant payments also based on the bitcoin protocol and its network is scheduled to produce about 84 million currency units.
  • Peercoin: It is the first cryptocurrency whose creation was inspired by bitcoin and is based upon a proof-of-work system.
  • NovaCoin
  • NameCoin
  • Protoshares
  • AnonCoin
  • MegaCoin

Though being different from Bitcoins, the following virtual currencies were popular in the past:

  • WebMoney: It is a virtual payment system which aids internet users for conducting real time transactions using WebMoney unit
  • Pecunix: It is a digital currency backed by gold
  • World of Warcraft Gold: Designed by Blizzard Entertainment, it is a virtual currency that is used by a popular online role-playing game
  • Nintendo Points: It is a virtual currency which has been established by Nintendo and it can be redeemed at Nintendo’s games/shops
  • Linden Dollars (L$): It is a virtual currency wherein digital characters can be customised
  • There have been instances where some virtual currencies have ceased to operate like:
  • Facebook Credits: It was a virtual currency that was introduced by Facebook in 2009 and ceased its operation in 2012. It allowed users to buy virtual goods in the form of applications on the Facebook platform
  • Liberty Reserve: It was a centralized currency based on Costa Rica which promoted itself as the oldest, safest and most popular payment processor. It was shut down by none other than the U.S. government due to accusations of money laundering

 

What is the future of Bitcoins, What is its status of Bitcoins in India? Please read on to Bitcoin: How it works & Why You should/should not choose it.

 

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Inflation Gone Wild-Hyperinflation!

Inflation Gone Wild-Hyperinflation!

 inflation_1811026bAs the word suggests, Hyperinflation occurs when the rate of inflation goes very high, sometimes over 5-10% per hour, and it’s almost impossible to curb the rate of inflation. In such a scenario, price level quickly increases and the value of currency keeps on decreasing. The price of goods continuously increase and the supply of money increases with it. Such a condition occurs when a country is under huge debt which it tries to pay by printing more and more currency, which eventually hits its economy very hard. It is generally associated with wars and its aftermaths, social changes in the country leading to a condition where revenue from taxes is lower than the spending of the country.

Causes of Hyperinflation

Hyperinflation occurs when government has no way of generating money in the economy, other than printing money. This rapid increase in the supply of money is not concurrently met by the growth in output of goods and their supply.

Since the inflation grows sometimes even on hourly basis, the value of currency also goes down at the same rate. If 1000 units of a currency are used to buy footwear at a particular time, same amount may not suffice for even 50% of its cost after a few hours. This leads to a situation where shopkeepers tend to hoard things because the same thing will give them a greater value in sometime. People may also tend to hoard the essentials as there is a constant fear that the same good may not be available after few hours. Thus people buy ample quantities of food or other essentials, which makes their supply in the market low and this again further leads to increase in prices

Thus it leads to a vicious circle where government prints money to spend on its people which further leads to increase in prices and in turn government has to print more money again.

Countries hit by Hyperinflation

One of the most famous examples of Hyperinflation is Weimar Germany after 1st world war. The Treaty of Versailles assigned the blame of war to Germany and it was to pay reparations to the Allies. In order to pay these reparations, Germany began mass printing of notes to buy foreign currency, which further increased the inflation rate in Germany and devalued Papiermark(German currency). Inflation peaked in Germany in November 1923 and at that time the inflation rate was 29525 %.

Hungary after World War 2 recorded worst inflation ever. The highest denomination in mid-1946 was 100, 000, 000, 000, 000, 000, 000 pengo. The rate of inflation at that time was 41.9 quintillion percent.

One of recent instances of hyperinflation occurred in Zimbabwe. Zimbabwe after its independence in 1980 began land reforms, which focused on taking land away from white farmers and giving it to black farmers. As a result, food production in Zimbabwe suffered and eventually revenue from exports of food were badly hit. Thus in order to meet its spending the government had to print more money with higher values. The inflation rate went highest in November 2008 to 7.96 billion percent and in January 2009, $100 Million banknote was issued.

Effects of Hyperinflation

The most serious concern associated with hyperinflation is that it transfers wealth from the hands of people to the government. It wipes out the savings of the people, and triggers hoarding of goods. Economy is hit badly and the investors lose trust in the country.

To end Hyperinflation, the government takes drastic measures such as cutting down its expenditure heavily or altering the currency basis. One way can be use of a foreign currency as national unit of currency. Also, the Central Bank becomes very stringent about maintaining price stability to avoid any recurrence of hyperinflation.