The Bitcoin has thrust its way into the financial limelight
of late and as our first decentralised digital currency it is still shrouded in
mystery; the specifics of how it operates, protected by the impregnable walls
of vernacular. Even its creator’s real name and whereabouts is unknown- the
creator released a paper under the alias Satoshi Nakamoto, in 2009, when the
currency launched, although many have begun speculating that this was created
by a team of computer scientists and experimental economists. When the European
Central Bank (ECB) were discussing Bitcoin and other virtual currencies in
their ‘Virtual Currencies Schemes’ report[i], they identified three
types of virtual currency (See Fig. 1). The first type identified was any
currency that is created and traded purely in the virtual world that cannot be
bought or sold, legitimately, using real world currencies- and example of this
could be the trading of ‘gold coins’ in an online game where it is impossible
purchase them with real money. The second type of currency is by far the most
common and can be seen in many more online games wherein players are encouraged
to use their own money to buy virtual currency that can be traded in-game, but
not in the real world- an example of this could be ‘Microsoft Points’ which can
be used to purchase add-ons in the ‘Xbox-Live’ community. The final is where
Bitcoin comes into its own- this is where the currency can be traded and
converted between the real economy and the virtual one. This is where the
subtle menace of Bitcoin lies- if the value of ‘Microsoft Points’ plummeted, a
select few firms may have slight changes in revenue flow, but if Bitcoin falls,
a great deal will change.
Bitcoins are
divisible down to eight decimal places, it is possible to be very exacting in
how large or small transactions could be- this does make for Bitcoin being an
excellent medium of exchange (when its value is stable that is). The
Bitcoin operates, as has been mentioned before, in a decentralised, deregulated
manner- the creation of Bitcoins works through individuals ‘mining’ for them
using their own computers to legitimize
transfers of ‘coins’, and thus create more in the process as they awarded with
50 Bitcoins per transaction. The transaction times for Bitcoins entirely depend
upon the processing power of the machines making the calculations. The average
transactions time is estimated at about 30 minutes which somewhat detracts from
Bitcoin’s ability to act as a superior medium of exchange compared to common
currencies. This ‘mining’ is the equivalent of the printing of money- the more
people mining, the lower the value of the Bitcoin, as the money supply is
greater. Mining requires the download of specific software; the coding of which
has been compared to Dante in the
original Italian due to its complexity, furthering the mystique surrounding the
Bitcoin. The number of coins that can be mined is capped at 21 million through
the number of Bitcoins awarded, per transaction, to ‘miners’ decreasing
geometrically- halving every fourth year (Fig.
2).
Fig. 1
Fig. 2
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