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Red Flag For Bitcoin

Is this the end for Bitcoin? Have we finally seen a weakness in the new potential “monetary” system? Just today Mt. Gox, the biggest and best-known Bitcoin exchange, was expected to file for Chapter 11 bankruptcy. There have been reports of extreme theft concerns when dealing with the viability of the electronic currency.  Bitcoin prices have fallen below $500 a piece for the first time since November, when prices were as high as $1,200.

So much for all the hype Bitcoin has gone through. I personally thought Bitcoin would see solid growth over the next couple of months leading into the summer and possible reach $1,400. But another side of me also believed that Bitcoin would have its’ dark days. However, I did not (along with many others) expect this to happen so soon. It is estimated that Mt. Gox lost 744,000 Bitcoins, or about 6 percent of the pseudo currency that’s in circulation worldwide. With this whole concept of complete electronic currency, we were bound to run into some type of hackers that would eventually create this downfall.

“With Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5-10 years, and cause governments to react swiftly and harshly.” Two-Bit Idiot blog mentioned who also first broke the story.

The unfortunate truth is that this is a serious hinder in the entire Bitcoin concept. But what I am really curious about, is whether or not this is problem that will eventually bring back the commotion, or is it the end of Bitcoin? Many people of the older generations take Bitcoin as some silly currency. They do not understand the full value that it would have especially with our technology driven world. Because of their mindset and with what has happened with Bitcoin, over the next couple of days, weeks, and months, we should expect a tremendous amount of criticism trying to finally take down the whole idea. But why should we do that? Why can’t we learn through our mistakes through these early ages of electronic currency? I could almost guarantee there were flaws when the American dollar first took off. There were flaws, theft, and many other problems with our currency then, and there are still problems today! Although this day in age everyone expects everything to be perfect when it deals with our currency or a new potential one such as Bitcoin. But overall, there will be steps made to ensure Bitcoin does not have a total collapse.

“The wider Bitcoin industry is seeking to both distance itself from Mt. Gox and offer reassurance about the virtual currency’s future. The chief executives of six major Bitcoin exchanges and other businesses pledged in a joint statement to coordinate efforts to assure customers of the security of their funds,” The Wall Street Journal addressed.

Looking at it from a ‘big-picture’ perspective, I do not believe the end of Bitcoin is in sight. Although our world might always have its’ thieves, whether it’s with Bitcoin currency or with each country’s current currency, our world is also just at the beginning ages of our day in technology. Our generation has the intelligent minds to continue to strengthen the Bitcoin system. Although I do believe this is a tremendous fault in the system, Bitcoin will resurrect to gain strength again even in the next couple of months.

Bitcoin’s New Role

Talking about Bitcoin is always interesting whether you are an academic, watcher, speculator, the regulator, central banker, or just ordinary folks.

Many suspects a chance Bitcoin will replace conventional money in the economy. I think no central bank will allow it to take such position since money plays a important tool for a central bank to manage the economy through its monetary independent role. Regarding this issue I think it is unlikely that Bitcoin will replace ordinary money, dollar, yen, euro, and the like. At most, the popularity of such electronic money will help the government and the central bank in case when it comes to implement electronic money regime as intensively promoted by Professor Miles Kimball, people have already been familiar with such electronic money.

Nevertheless, Bitcoin can still play important niche role. Since its evolvement five years ago, Bitcoin has been turning into central debate all over the world. Inspired by an article in Wall Street Journal, I list at least three features make Bitcoin deserves such important position on debate state.

First, it is virtually anonymous, identity of parties involved are encrypted and thus, unknown. It becomes the concern of the regulator in every single country since the anonymity could ease illicit transaction to go and it could be used to perform any money-laundering activities without being able to track. A series of arrests prove that this anonymity raise much of government concern. Peter J. Henning, a professor at Wayne State University Law School in New York Time titled More Bitcoin Regulation is Inevitable wrote:

“The days of anonymous transactions in Bitcoin and operating an exchange with no outside interference are over. As virtual currencies develop, firms devoted to aiding trading, and perhaps even their users, will encounter greater government regulation, along with the costs that come with compliance.”

On one side, this regulated-to-be certainly will eliminate or reduce the supremacy of anonymity of Bitcoin. Perhaps, at the end of the day, this anonymous feature will turn out to be like bank secrecy, the bank’s promise to keep financial affairs and dealings of the customer confidential. This is the rule of the game. If Bitcoin want to be widely accepted and does not want to be continuously viewed with suspicious, it has to follow the rule.

Second, it is relatively safe and secure, as stated by an article In the New York Times:

“First, Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world …. a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

In spite of recent attacks, Advancement in its technology thus far and continuing improvements to go along with its popularity will make this issue not a big deal anymore later.

Third, Bitcoin cuts out the middle man, such as banks, clearing houses, and other financial intermediaries.  It promises free or low transaction cost all over the globe. With more merchants accepted it, its future as a free method of exchange will be promising.

I think the last feature is the biggest privilege of Bitcoin, after abandoning the first feature of anonymity as a prerequisite for it to thrive and lasting smoothly. In this area, for sure there is Paypal as a competitor, but its more anonymous feature and no need for a bank account, debit cart or credit card will make Bitcoin superior over Paypal. In this regard, Bitcoin will become a hope for people to send money internationally with low or free cost just like comparing sending a mail through international postal service and sending it over email, the benefit is clear. For banking sector or money delivery businesses like Western Union, it could be a serious threat just like other businesses that eventually turn to be obsolete when they fail to adapt.

Revealing real world examples of Bitcoin use

Professor Miles Kimball said “Bitcoin is not future money, but it is the electronic dollar” on his blog post inside Slate, how governments can and should beat Bitcoin at its own game. I agreed with Professor saying that it is unlikely to happen that U.S government will abandon the power of printing money out of nothing, and there are plenty of more reasons. One of the biggest reasons is that it is very difficult to keep value of money constant over time and why our government should handle the use of electronic money even in small scale. Today’s blog I will give you just few examples to illustrate my points and examples are collected from in real life situation in Japan. These examples will show how those examples are linked to its difficulty of keeping money value constant. Inside of WSJ, Mt. Gox Shows Bitoin’s Growing Pains, wrote a report a few situation which Mt.Gox has dealt in this month. Mt.Gox is the world dominant platform for exchanging Bitcoin. The company is now facing questions like “Where is our money?”

Several issues occurred:

First, with Bitcoin, money transaction happens inside of cyber space, so the company faced with security issues, yet dealt very poorly. For example, a Hacker attacked main serve of the company and stole information. Mt.Gox made an apology by saying “however, please understand that we are NOT the developers of Bitcoin” Looking at one example, I can claim that if strong institution like a government does not handle electronic money, you may lose all of your bitcoin and hear an apology like above.

Second, value of money fluctuates greatly.

 Mt. Gox became the world’s biggest bitcoin exchange by volume, with more than 80% of bitcoin trades, according to Bitcoinity.org, a service that tracks rates on various exchanges. During that time, the price of a single bitcoin rose from 92 cents to a peak of more than $1,147 last December,

This is another very straight forward example why government should handle electronic money and will fail under control of private institutions. Value of money will not stay in same and this will cause further civil disaster.

Third people keep questioning the company if the company has everyone’s bitcoin and cash, this damage the credibility of bitcoin as a money exchange if people are worried about the safety of their money all the time. If this continues, Bitcoin will lose its function as a medium of exchange.

In the contrast, there are people of early adaptors and entrepreneur of bitcoin who still favors even after the turmoil proved by Mt. Gox. Their simple reasons are one, easy to use; and second, paying no taxes. It is true that use of bitcoin can make easy transactions and can be cheap because there are no transaction costs added by banks or credit card companies. It is also true that government of Japan has not finished their full analysis on Bitcoin and has no way to collect taxes on bitcoin transaction. However, it is not perfectly true if people account the risk of their money disappearing to nowhere by a hacker attack, delays being made whenever transactions overflows, and most importantly, great fluctuation in money value.

“This is much safer and more convenient than credit cards,” he said. “I believe people will get addicted to it once they start using it.” 

So let save a comment like this for the next time.

Using Bitcoin

The Wall Street Journal introduced a story of a personal tech columnist, Geoffrey Fowler, who spent a week using Bitcoin Currency. Considering current criminal charges of Bitcoin for money laundering, it’s interesting that he felt that using Bitcoin is not so anonymous or shadowy. Financial regulators are cautious about anonymity of this eletronic money transaction. But, when Geoffrey tried to buy Bitcoin, he should actually provide quite substantial amount of personal information including bank accounts. He also seems to be quite impressed by the fact that it is not that difficult to use Bitcoin. Except online shopping malls, there are now 3,000 places where we can use Bitcoin. Geoffrey bought cupcakes and sushi by using Bitcoin.

There surely seems to be some progress in Bitcoin usage among people. But these progresses are still very slow, and many people think that there is no practical advantage to use Bitcoin over paper money or credit cards. If electrical money such as Bitcoin is surely a solution for many economic fluctuations as we now study in ECON 411, what can be the best way to induce people use more Bitoin and less paper money?

First of all, in regard to criminal charges of money laundering and vulnerability of hacker attacks for Bitcoin, I do not think that these are the problems only for Bitcoin. These are the common problems, which current electronic financial system faces altogether. Criminal organizations do the money laundering in current paper money system. And also, many financial companies sometimes have unwelcome visits from hackers. So, I think if people criticize use of Bitcoin for these charges, it does not seem so fair to me. As other financial companies try to improve technology and procedure to reduce those problems, companies utilizing Bitcoin should also try to mitigate these problem through technological improvements. These improvements of technological vulnerability will lead to reduce unfair charge forelectronic money.

I also think of financial incentive for using eletronic money. As Geoffrey introduced, companies can reduce credit card fee using Bitcoin, and then provide consumers with a small financial incentives by using those reduced card fee. But, I think that fundamental way to induce widespread of electronic money comes from political process. We need strong political consensus, and leadership of government and central banks to adopt new electrical money. As we learned from ECON 411 class, after government introduce government sanctioned electronic money, government and central bank can apply various measures to reduce use of paper money, and increase use of electronic money. So, the most difficult part is to get strong consensus among people and politicians. Considering prevalent skepticism about Bitcoin, I think that, for such a political consensus to be realized, we may need to experience several more severe financial crisis under lower zero bound limitation. Let’s see how things going on.

Fisher equation and the paradox of bitcoin

There is no lack of comments about the significance of Bitcoin. Some treat Bitcoin as an apparent speculative fad, while others argue that Bitcoin could become as revolutionary to monetary system as email is to information system. Being bombarded by all kinds of assertive ideas and well-structured arguments, I think it is crucial to have one’s own stance on this issue. According to what I have learned about currency, bitcoin is losing its function as a transaction media and evolving into a speculative tool. If a currency is not transferable and become an speculative tool, sooner or later the use of this currency will die out.  Once the bubble burst, this super nova will step down from the stage of history .

Over the past three years, bitcoin’s price skyrocketed from a few cents in 2011 to a high of more than $1,100 in December 2013. As a electronic currency, bitcoin does not really need to posses any intrinsic value to be exchangeable. But the surge of price from a few cents to more than a thousands is evidence that people are not using bitcoin as a means to facilitate exchange. Rather, this surge of price could only be explained by speculative activity.

To illustrate my point using fisher equation, now imagine we are all citizen in a nation that use bitcoin as official currency, and the only goods being exchanged in the economy is U.S. dollar.Recall how the face value of a certain type of currency is determined. By fisher equation, we have:  M*V=P*Q

where:

M is the total bitcoin supply in the virtual nation

V is the number of times per year each bitcoin is spent (velocity of money),

P is the average price of all the good (i.e. U.S dollar) sold during the year, denoted in bitcoin, of course

Q is the quantity of goods (U.S. dollar) sold during the year.

supposed that we fixed M (this is realistic since the anonymous creator of the currency capped the number of total possible Bitcoins at 21 million). How will the price of our dollar change in response to change in  Q and V ?

Suppose now we have more dollar in the economy (or more dollar poured into the economy by some magical power, you could also see this as more people buying bitcoin using dollar from outside of the economy), then the quantity of dollar (Q) increased overtime. Holding other variables fixed, to make the equation balanced, we now have a smaller P.

Now suppose people preferred to hold the bitcoin in reserve than to frequently trade it for dollar, we now have smaller V.  We can see this as analogy to people in this virtual economy becoming less and less inclined to consume goods (dollar) that they “produced”. As V decreases, to make the equation balanced, we now have even more smaller P.

This is exactly what we see in reality. More and more people buy the fixed amount of bitcoin and hold it on reserve, waiting for appreciation of bitcoin rather than using it as a transaction media.  Therefore,  we see the price of dollar denoted in bitcoin become smaller and smaller, or put it another way, the price of bitcoin denoted in dollar become larger and larger.

This illustration is to support my argument that bitcoin is not used as a supplements to facilitate transaction, as it is originally intended for, but rather as an speculative assets.

The most important reason bitcoin become popular is because people believe it will replace traditional currency due to its merit of reducing transaction cost. But it is paradoxical to see that the bitcoin, while being valued for its merit of facilitating transaction, is gradually stepping out of circulation and ended up in investment portfolio. This paradox helps me explain my stance on bitcoin nature, a splendid castle-in-the-air that will gone with change sign of economy weather.

 

Bitcoin Could Hamper a Transition to Electronic Money

In class this week, Professor Kimball has been sharing the rationale for adopting electronic money. The argument is straight forward – monetary policy is currently limited in the extent to which it can stimulate spending by the zero lower bound. Paper money can be withdrawn from a bank and collect zero interest, so if the Fed cannot lower interest rates below this level, hence the zero lower bound. The key note here, however, is that real interest rates are what is important to positive inflation is a workaround to the zero lower bound. As the Professor described, most developed economy central banks have set a constant inflation target at around two percent to give them more room to maneuver near the zero lower bound. As Professor Kimball outlined in his blog post “The Paperless Economy”, abolishing paper money (or at least significantly penalizing holding it) in favor of electronic money could solve the zero lower bound problem by allowing negative interest rates. From a theoretical standpoint, I agree completely with Professor Kimball’s argument. There are, however, a great deal of structural impediments to adopting such a monetary system, which will make it difficult for developed nations to converting to electronic money in the near-term future.

I believe the biggest obstacle to electronic money would be public perception of such a monetary regime. Paper currency is an easy form of money to understand. Even electronic payments are currently denominated in dollars and usually paid with a credit card or payment service. Transitioning to a completely new currency that is entirely electronic, for the purpose of easier manipulation by the central bank could be met with extreme opposition.

The best current example of electronic money is bitcoin. As Professor Kimball himself mentions as the subtitle to his blog post linked above, “Governments can and should beat bitcoin at its own game.” bitcoin has created an immensely successful cyrptocurrency, which has established legitimacy and value outside of formal government control. This is essentially the polar opposite to what Professor Kimball advocates, as bitcoin exists outside the government’s control, while electronic money would have to be easily controlled by the central bank. A problem could arise in the switch to electronic money, when individuals who are distrustful of government opt to swap their paper cash for bitcoins or other cryptocurrencies instead of government backed electronic money. Demand for these non-government controlled currencies could skyrocket and while the supply of bitcoins is eventually limited, a work around or substitutes will surely be devised if the switch to electronic money is imminent. In the next century, cryptocurrencies may very well be what gold was in the last. Individuals have flocked to gold when governments used aggressive expansionary policy as it was seen as a hedge against inflation. Bitcoins may serve the same purpose in the future for investors who do not wish to be exposed to negative interest rates.

While the existence of bitcoin may fundamentally hinder the adoption of electronic money, current issues in the bitcoin system and regulatory scrutiny could mean that the threat of cryptocurrencies is minimal. As the Wall Street Journal reports on their Money Beat Blog, just earlier today Mt. Gox, the leading bitcoin exchange, halted service and the price of the currency dropped nearly $200 to $600. Governments around the world, including Russia and China limited the legal status of bitcoin as a currency in their countries, which also an issue for more widespread adoption. Overall, while bitcoin may present a real obstacle for governments to over come in terms of introducing electronic money, bitcoin itself must first overcome the obstacles that currently prevent it from fully competing with government backed currency.

Trouble For Bitcoin?

In one of my first blogs I argued that Bitcoin was unfeasible as a form of transaction due to the high level of volatility in the price of Bitcoin. I also stated as one of my key points that central banks had the ability to create further volatility by making similar announcements as China made in December that would effectively ban the use of Bitcoin in their nation.

This week my prediction was correct as Russia added its name to the list of central banks outlawing the use of Bitcoin in their country. According to Russian law, the Russian Ruble is the only official currency and using any “money substitutes” is illegal. Furthermore, Russian officials stated Bitcoin’s ability to “be used to launder money and finance terrorism” as a reason for outlawing its existence. (Russia to Crack Down on Virtual Currencies) Bitcoin’s recent price drop was not only due to the news coming out of Russia but also a result of technical errors that may have many question the ability of Bitcoin from a technical standpoint.

On Friday, the largest Bitcoin exchange called Mt. Gox, “blamed a long unresolved technical issue for its decision to abruptly halt customer withdrawals last week.” Officials admitted that there was a “bug” in the software of Bitcoin that allowed recipients of Bitcoin to alter the receipt of their wallet so that they could claim that they did not receive their Bitcoins despite already having them in their wallet. This glitch, allowed Bitcoin scammers to withdraw twice as many Bitcoins in their wallet than they paid for. As a result of Mt. Gox’s halt, the price of Bitcoin fell from $703.57 to under $550 over the weekend. (Exchange Halts Bitcoin Withdrawals: Price Drops)

Officials from Mt. Gox have sited the increased level of transactions as a reason contributing to the technical glitches. These troubles site potential issues for Bitcoin in the long term. In my opinion, there are two ways to look at this situation – 1.) Under current conditions the software infrastructure of Bitcoin is unable to support the increased level of transactions or 2.) The high level of transactions are proof that we are currently in the midst of a Bitcoin sell-off. If the issue with Bitcoin is only a software issue, then the problem will likely be temporary and can be solved with coding. But the bigger issue for Bitcoin could be an even bigger sell-off due to an increase in investor fear. This massive sell-off could be triggered by the increased scrutiny in the US, with the Department of Homeland Security recently seizing a subsidiary of Mt. Gox, and increased foreign scrutiny from Russia and China, as well as other countries. A quick look on online blogs, such as Reddit, will show too that speculators are leaving the Bitcoin market as transactions with exchanges have become more difficult and expensive. For these stated reasons, I would not be surprised if we see an even bigger Bitcoin sell-off in 2014.

(revised) Bitcoin Security

The idea of a virtual currency has been gaining traction recently due to concerns over sovereign currencies.  The popularity of Bitcoin and its rapid rise in value from $12 to over $1000 demonstrates the optimism that is accompanying virtual currencies.  The growth of Bitcoin though comes with potential issues, one of them being theft.

Since the inception of the currency, more than 35 major Bitcoin scams and thefts have occurred worldwide, including the heist of 38,527 Bitcoins from online-exchange Bitcoinica LLC in May 2012, according to BitcoinTalk.org. (http://www.bloomberg.com/news/2014-02-07/bitcoin-rally-spawns-startups-offering-theft-protection-tech.html).

People have been hesitant to support Bitcoins due to its unpredictability and risk.  Just this week, a large Japanese Bitcoin exchange called Mt. Gox, was forced to halt due to a “technical malfunction”.  To further exacerbate the uncertainty over bitcoin, the Russian Government released a statement saying that “bitcoin and other digital currencies are illegal under current law”.  The announcement from Russia and the closure of Mt. Gox caused a drop in the value of bitcoins by 8%.

While there are pessimists out there, opportunists have viewed the arrival of Bitcoins as a new market.  Start ups have begun to emerge offering different forms of theft protection.  The explosion of bitcoin start ups have lead to investors to create a Bitcoin incubator in California.  The incubator has received 45 applications and 40% of those applications have focused on security.  These security issues that Bitcoin face have brought about new opportunities.  While Bitcoin may not succeed, it has actually benefited the economy through creating new jobs and a whole bunch of new start ups.  Some of these start ups have actually focused on creating a tangible asset.  A start up in Tennessee is selling fireproof metal pieces that protect bitcoin users private passwords.  Another start up called Titan Mint actually goes ahead and creates physical coins that have security codes to encrypted online accounts.

When I thought about bitcoins, I looked at them as a digital currency and that was it.  Now, I’m beginning to realize that the creation of bitcoins has created a new market for digital theft protection.  I believe that bitcoins will help bring about some new innovations around cyber security.  Bitcoins are creating new start ups all around the world and helping create new, technical innovations.  Unfortunately, I don’t see bitcoin becoming a real, significant player until governments make a ruling on it.  Apple recently removed a bitcoin app from its app store due to governments like China and India are uncertain over its legal status.  Until the uncertainty and risk associated with bitcoins is resolved, I don’t believe bitcoin will succeed as a new form of currency, but it will create new innovations that will help the tech sector in the long run.

A recent Wall Street Journal article brings up the possible that bitcoin could lay the foundation for the creation of a digital dollar.  As I’ve mentioned in the past, I believe this is the most likely scenario since no government is willing to give up sovereignty to an unknown, unregulated, unsanctioned currency.  Canada is experimenting with its own electronic currency, MintChip.  Proponents of bitcoin though are call MintChip a failure.  MintChip doesn’t created a free market currency and creating an alternative, nonpolitical monetary unit.  The game changer though will be the creation of a digital dollar.  Looking at it from a foreign policy standpoint, and an economic standpoint, the US dollar has the most demand out of any other currency.  What is going to happen to countries like Russia, China and Argentina when their citizens can buy US dollars within seconds.  The easy access of US dollars could see it become an even more dominant currency.  It would become more difficult for countries to use capital controls or restrict capital inflows and outflows.  Open markets would lead to a more efficient global economy with less trade restrictions and capital restrictions.  Countries would no longer be able to manipulate their currencies and interest rates.  This could protect against future problems like Europe’s sovereign debt crisis, which was caused by Spain, Greece, Italy and Portugal inefficient bond ratings.  Besides the obvious benefits of negative interest rates, there could be political benefits that may entice the US to look into an electronic dollar.

Inflation Scare in Argentina

This past week Argentina’s currency experienced its largest devaluation since 2002. This substantial devaluation has a caused a rise in inflation and uncertainty to grow within the economy. Argentina’s currency devaluation is not only a result of US tapering and weak numbers from China, but also long-term domestic policies that have created a large distrust in the Argentinian government.

According to the Wall Street journal many economists believe that the inflation is a result of “heavy state intervention, price controls and corporate nationalization that have underpinned their policy making for more than a decade.” (WSJ – Inflation Fuels Crisis in Two Latin Nations) To further the distrust in the central government, the state released inflation index for 2013 was reported at 10.9%, while an independent figure measured by an independent group of economists came in at 27%. (WSJ – Dispute Leads to Revise Index) As a result many local businesses are struggling to price their products and are being forced to close shop. One local coffin maker in Argentina said, “I have to tell customers that I can give you a coffin today, but you’ll have to pay for it later, at who-knows-what-price.” This confusion in pricing has resulted in decreased consumer spending and investments in Argentina. Bank of America Merrill Lynch recently forecasted that the decrease in investments and spending as a result of higher interest rates and inflation will lead to a 3% contraction in GDP this year. (WSJ – Inflation Fuels Crisis in Two Latin Nations)

Argentina has reacted to the inflation scare by issuing strict warning to business owners to not increase prices. The government warned that fines would be placed on businesses that continued to raise prices. If Argentina continues to mandate pricing, they may be able to temporarily curb inflation but businesses that rely on imports will be unable to sell products for profit. This will inevitably lead to further economic contractions.

As government discontent and uprising continues, one alternative plan for Argentinean citizens would be the adoption of Bitcoin or another cryptocurrency for payment. This would free businesses from the political constraints and corruptness of the central government and would provide them with better pricing transparency. Even though cryptocurrencies are known for being volatile, a large scale adoption from a country like Argentina could give the chosen cryptocurrency stability. Regardless, the high level of inflation currently present in Argentina is just as volatile, if not more volatile, as those of the cyrpotcurrencies. For small business owners that are at the mercy of pricing ceilings cryptocurrencies could be the only solution for these business owners. As inflation continues to rise and reach levels believed to be unstable by economists (about 50%), inflation will likely rise exponentially. When this occurs watch for Argentina to move towards cryptocurrencies.

Possible Beginning of the End of the Bitcoin Era?

Last week, Charles Shrem, a large Bitcoin tycoon, was put under house arrest. He was charged with money laundering among other various crimes. He is allegedly connected with a drug scheme that involved Bitcoin as the method of payment. This currency has been booming in recent times, but the decision of Shrem’s trial could have an impact on the future of Bitcoins. Shrem is the founder of a website that was widely used in the exchange of the online currency. According to the Wall Street Journal, Shrem is optimistic about Bitcoin’s future despite his arrest.

To add to the woes of the Bitcoin culture, Apple has been taking down all of the applications on its App Store that allow users to buy and sell Bitcoins. The most recent application to be taken down is called BlockChain. A New York Times Article mentions that the chief executive, Nicolas Cary, of the application describes Apple’s actions as “building a walled garden to interfere with innovation”. (Cary)

Interestingly enough, Bitcoins have inspired the concepts of electronic currencies. Professor Miles Kimball of the University of Michigan wrote his first article for Slate about ending the use of paper currency. He argues that Bitcoin is a great display of electronic money, but it is dubious that governments will give up their control over currency. By adopting an electronic currency, the government would be able to eliminate the zero lower-bound. Professor Kimball has been an advocate of this for a while now.

Bitcoins are a novelty within themselves. Online currency seems to be futuristic. Electronic transactions are easier and faster. The downside is that Bitcoins can be used for illegal transactions. This is because they are unregulated, therefore they are not being traced by a governing entity. It is not illegal to own Bitcoins because there are ways to purchase many legal items and services with them. The government cannot arrest someone for exchanging their dollars for Bitcoins. It would be impossible to prove that a person bought Bitcoins with the intent to be a part of an illegal transaction.

The United States adopting an electronic currency has its ups and downs. Transactions can be made more quickly. We see this with the use of credit and debit cards. A swipe and a signature are enough to make a payment. Another positive to electronic money is that the government can trace money even more than it can now. Money used for illegal transactions is almost always done in paper form because it cannot be tracked. Electronic money would allow the government to know what every dollar, every day, goes towards, thus curbing illegal activity. Professor Kimball is also an advocate of negative interest rates, which are only possible with electronic money. This is where I believe that the downside lies. With negative interest rates, people will be losing money every day unless they spend it. There would be no incentive to save. Furthermore, there would be no incentive to lend money. Creditors would cease to exist if they were to be paid back less money than they loaned.