Bitcoin: temporary bubble or a currency revolution?

Business correspondent explains the Bitcoin phenomenon

Bitcoin is one of the biggest cryptocurrencies on the market, beside Ethereum, Ripple, Litecoin, and many others. So what is cryptocurrency? How can a person actually obtain it? Why do they call cryptocurrencies bubbles?

Despite having the similar ‘currency’ in its name, cryptocurrencies possess many different elements. Normally, money is obtained, supervised, borrowed and transferred through government and central banks. We only prefer to send our money to legitimate banks, which work under the government’s regulations. Cryptocurrency users do not necessarily need the government regulation to ensure their money is being saved; they ‘trust’ each other through a network called ‘blockchain’.

So what is block-chain? Normally, we keep separate records of transactions. When you write your friend a cheque, you balance your own chequebook and your friend does the same when they deposit it. But they might forget to update their balance. Your cheque value might go over the the amount your friend can offer. But until the bank realises this flaw, you have already taken the money and left your friend knowing nothing. With a block-chain, instead of two separate chequebooks with two financial records, you and your friend will share the same record of transactions. This share record is private, decentralised and neither of you controls it.

In order to simplify the concern, since it is as popular as ever, we will focus on the giant cryptocurrency – bitcoin. Bitcoin is limited. There are a finite number of them: 21m. Every four years, the number of bitcoin released will be half of the previous cycle, as will the reward to miners for mining new blocks. Mining is one of the ways for us to obtain bitcoin. The other two are buying on an exchange and accepting them for goods and services. For example, I buy a house from my friend with bitcoin. Rather than the bank verifying my transaction and my money itself, the miners – other participants in the bitcoin network will do the bank’s job. Transactions are not verified individually but rather are gathered into “block- chain”. Miners will run software and attempt to open this block-chain. Every miner that is able to run this software and verify the transactions will be rewarded 25 bitcoins which have been newly generated. Furthermore, the 25-bitcoin reward is released every 10 minutes randomly as well.

The price of bitcoin’s all time high was nearly $20 000 on 17 December 2017. But is bitcoin also a bubble like the Dutch Golden Age’s Tulipmania, or the housing crisis in 2007? Robert Shiller, the Nobel prize-winning economist, expressed his opinion on The Guardian in February 2018 that bitcoin would become an experiment rather than a “permanent part of the financial world”. Nouriel Roubini, professorof economics at New York University, claimed that bitcoin was “the mother of all bubbles”. Retrospectively, he was right. The price of bitcoin has reduced massively since its peak. It is still a contentious debate whether the mania towards cryptocurrencies has ended, but the government and the banks’ action on cryptocurrency has proved more powerful than our will.

While China has been one of the biggest mining fields of bitcoin, the Chinese central bank has announced it is to block all platforms related to cryptocurrency trading and the issuance of initial coin offerings (ICOs) including domestic and foreign platforms. Major banks such as Lloyds-TSB announced that it would stop people buying cryptocurrencies using credit cards. Major US banks such as J.P Morgan, Chase and Bank of America implemented the same policy at the beginning of February. India and Bangladesh have banned Bitcoin as a payment tool. The Bank of England Governor Mark Carney announced in his speech this Friday that Bitcoin should be regulated, not only to crack down on illegal activities but also “to hold the crypto-asset ecosystem to the same standards as the rest of the financial system”.

If cryptocurrency must be aligned to the rest of the financial system, the decentralised nature of cryptocurrency – the most attractive feature to crypto investors – will be threatened. Whether bitcoin’s price is fragile or not, the actions of those banks and countries, especially after the mortgage crisis, will certainly worry investors and drive down its price.

However, environmentalists might offer certain weight for the government’s side. Bitcoin uses roughly 32 terawatts of energy every year, enough to power about three million US households, according to the Bitcoin Energy Consumption Index. Furthermore, there are lots of mining fields in China, which incorporates a lot of the energy being exploited inefficiently. Even if there are improvements to the operation of bitcoin through more environmentally friendly methods, such as Vienna-based Hydrominer, these improvements are not widely known within the cryptocurrency network, especially in rural China.

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