1. Introduction

Bitcoin is accepted broadly as a peer-to-peer payment system and digital currency, often referred to as the first decentralized digital currency. It was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. It does not require an intermediary, and transactions can be executed without the need for a credit card or a central bank. These can be executed with a minimal fee and are solely for the purpose of buying goods or services. Users are able to obtain bitcoins by mining and exchanging other forms of currency or services or goods. Bitcoin is known to have a capped supply, and the currency’s last fraction is predicted to be mined in the year 2140. The capped supply is focused on diminishing the value of money over time due to inflation by imposing scarcity to the coins. In today’s economy, currencies have several different forms and uses. One currency may serve a myriad of functions, such as the USD in the United States. It acts as a medium of exchange, as a unit of account, and as a store of value for consumers. Other currencies are very specific in their use. For example, the old Italian Lira was a unit of account and a medium of exchange for the people of Italy, and the German Marks during the 1920s Weimar Republic served as a store of value due to hyperinflation but also as a medium of exchange in reparation payments. Bitcoin was designed to be a global digital currency and to be extremely efficient in its functionality. This can be seen as an answer to the inefficiency of multiple currency forms and their specific but differing uses. It has the ability to act as a universal form of currency, as a unit of account, and a store of value through price verification and a lack of fluctuation in an upward direction of the value of bitcoins needed to obtain specific goods or services over time.

1.1. Definition of Bitcoin

Cryptocurrency is a type of digital or virtual money that has no need of being issued by a government and uses encryption techniques to handle the generation of units of currency. It has always functioned separately from centralized banking systems and usually uses a technology called blockchain as its record-keeping platform. The decentralized control of every cryptocurrency works through a blockchain, which is a database that functions as a distributed ledger. A network is made up of a chain of nodes (computers that connect to the network) that each execute a small amount of work to complete a transaction. Every transaction is a file that includes the sending and receiving addresses and the amount of coins involved. Transactions will need to be confirmed by a certain number of nodes and only then is the transaction deemed to be complete and the receiver may spend his newly received coins. Rumor, later disproved, has it that bitcoin was invented by a person purporting to be a Japanese man named Satoshi Nakamoto. He announced bitcoin in 2008 as “a peer-to-peer electronic cash system.” This is an extremely fitting description of what Bitcoin is and is a good place to start to discuss what Bitcoin actually is and how it functions. With regards to the technical definition of Bitcoin, as per Wikipedia, it is an implementation of a network that uses the same name for the units of currency and the data transferred and also it is arguably the first global currency. This is fitting because it is still the most dominant cryptocurrency and data is readily transmittable given that it is electronic.

1.2. Importance of Bitcoin in the Financial World

Bitcoin is one of the most groundbreaking ideas to emerge from the realm of finance in a long time. This digital currency holds several advantages over traditional fiat currencies. This paper will address the various ways in which Bitcoin is truly unique and its potential to change the world. Understandably, in its current infancy, the world is slowly coming to terms with the incredible significance of Bitcoin. Bitcoin is unlike traditional currencies in many ways. One of its most defining features is its inherent inflation resistance. While almost all currencies suffer from a decreasing value over time and at the whim of certain economic conditions, BTC has a predictable and limited issuance that makes it immune to inflation. This feature alone may greatly impact the future of international and domestic economics. It is difficult to say whether deflation or inflation has a more positive effect on an economy depending on the state of it, but knowing the global economy has a currency that isn’t subject to unexpected change in value is reassuring. An inflationary currency usually discourages saving as it loses value over time, while the exact opposite is true for deflationary currencies. Bitcoin could potentially shift societies from a spend to survive mentality towards a more frugal savings culture.

2. Recent News and Trends

Bitcoin was created by an unknown person or a group of people under the name Satoshi Nakamoto. It was released as open-source software in 2009. The bitcoins were created as a reward for a process known as mining, which is recorded and kept through computer hardware. Bitcoin can now be used to purchase things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally. You can use it for your purchases and it’s been widely accepted around the world, but just a few countries have banned it, which makes Bitcoin free from the rates of a country’s currency. According to the current price chart, it’s very clear that Bitcoin’s price is so volatile. When bitcoin rises too high, it’s predicted it will drop and rise again. This volatility is a market for traders to get a large profit through Bitcoin. Volatility is related to the news and events. If the news is positive, the price can rise, and when otherwise, the price could fall. This will be a trader’s chance who understands the pattern of price movement because Bitcoin’s price movement is so regular. High volatility is very good for a trader who likes the swings in price. But this can be very bad for Bitcoin as a digital currency. Then price rising and falling may have a bad impact on the users, both from the consumer’s side or merchants. Bitcoin price stability is the most desired gift for Bitcoin users. Because merchants will not suffer losses and consumers will avoid the possibility of losing purchasing power. But there is a positive impact for service providers to facilitate with hedging Bitcoin. Hedging on bitcoin will minimize the potential loss by locking the money in the exact price, then it will convert the amount of bitcoin being the safeguard into dollars. Because even with its impact on Bitcoin users, price volatility is the best chance for a trader to get a profit from Bitcoin.

2.1. Bitcoin Price Volatility

Bitcoin is known for its rapid and frequent price movements. According to a study by CoinDesk, the USD/BTC exchange rate rose from 5.413 to 985 between April 1, 2012 and January 5, 2017. The cause of such price movements is clear: all the money in the Bitcoin market is a tiny fraction of the money in other global financial markets, and this makes price movements very volatile. Price volatility can be a good thing, but at the same time, it can be detrimental to an investment. Volatility can affect prices anywhere from being a mere 1-2% to being up to 20% on a bad day. This is because if someone buys Bitcoin and the price drops 20%, they will be reluctant to buy more Bitcoin in the future or use it as a payment method when the price continues to drop. If Bitcoin’s price can stabilize for a while, this can be avoided. However, at the moment, the price of Bitcoin can see huge price spikes or declines in just one day. This is an example of a large price spike on Silk Road 2.0, assumed to be connected to the fact that law enforcement shut down the site briefly. This price rise is the most significant long-term change in the price of Bitcoin. After changes to the code, the price of Bitcoin could increase with some prediction. If the prediction is fulfilled, the changes may be good, but at the same time, if the prediction fails, it can be detrimental to the price.

2.2. Adoption by Major Companies

Recent news of Bitcoin’s future increase in legitimacy has direct ties with its changing image, from a money linked to illegal and shady business practices to a respectable investment and open payment network. The first significant example of this is the Nasdaq opening an exchange to trade in Bitcoin. Following their SMARTS Market Surveillance technology being implemented to monitor for manipulative activities, it’s clear that they will aim to provide a well-regulated and stable environment for their customers to buy Bitcoin. CEO Fred Grede said, “Given the increased demand from consumers and enterprises in an ever-evolving industry, the time is right for us to expand our offering,” and in charging 0.35% to 0.5% in trading fees, this could potentially earn Nasdaq a tidy profit given Bitcoin’s trading volume of $740 million in the last 24 hours. With lower fees than traditional exchanges and with Nasdaq’s reputable image, it is likely they will enjoy a great deal of success from this venture. The most newsworthy instance of a major company investing in Bitcoin is MicroStrategy’s recent purchase of approximately 70,784 Bitcoins for $1.135 billion at an average price of $16,035 per Bitcoin. This came about as part of their capital allocation strategy to store value using alternative assets and it’s no secret that CEO Michael Saylor is a big fan of the cryptocurrency, given that they have also just recently announced the completion of their university free Bitcoin course for non-technical and technical. With Bitcoin’s price now approaching $34k at the time of writing, this can be seen as a risky move given that the value of BTC has not been stable as of late, however, Saylor is confident that the move will prove to be very profitable for MicroStrategy in the long run. This mass purchase of Bitcoin has set a precedent for other major companies to do the same, potentially causing a snowball effect where there is slow but gradual accumulation of BTC by large corporations due to a fear of missing out and given that it is no secret that Saylor will stand to profit from consulting these companies to do the same.

2.3. Regulatory Updates

China’s regulatory climate for Bitcoin is rapidly shifting. A little over a month ago, the People’s Bank of China and other regulators told third-party payment processors to stop doing business with Bitcoin exchanges, and the exchanges to shut down their Chinese renminbi (CNY) trading platforms. At that time, the exchanges said that their direct interaction with the government had been minimal. But on April 15, they got a notice from the central bank summoning them to a meeting. The bank presented them with a document reiterating its March guidance and making it clear that it applied to all banks and payment processors that might potentially do business with Bitcoin exchanges, and not just to ones it had talked to before. The situation is now fully clarified and very severe. The “Big Three” Chinese exchanges—BTCC, Huobi, and OKCoin—recently issued identical statements that said in part: “Today we were verbally informed by China’s central bank that banks and payment institutions in the country will no longer be allowed to deal with digital currencies – great, now China will have less piracy and more fraud. At this point in time, we were strongly recommended to stop acting as an exchange platform, but at the same time focusing on registering digital currency as a new emerging industry so that it may get through to legal status to prevent any financial fraud and fundraising economic crimes.”

3. Impact on the Global Economy

Bitcoin’s total supply is capped at 21 million coins and is expected to have a halving event every four years. This will cause the supply issuance of Bitcoin to decrease, and it is expected to become scarce and more valuable over time. The value of a currency is determined by how much value it can store and transfer. If Bitcoin is to be used as a long-term store of value, this could have a stabilizing effect on its price. Bitcoin is less volatile than its earlier years, but the rapidly increasing price and interest surrounding Bitcoin still attract the more speculative investors. The speculative nature of Bitcoin particularly attracts investors in times of economic instability. The high reliability of Bitcoin as a long-term store of value could potentially see people convert a portion of their savings to Bitcoin. The vast number of users storing value in Bitcoin could, in turn, have a significant impact on the global economy. It could cause a decrease in spending and aggregate demand due to the fact that people would rather hold on to their Bitcoin and spend depreciating fiat currency. While this may seem discouraging to an economy, it will cause lending to become more effective as an indirect result. An increase in lending efficiency will have the effect of lowering the real rate of interest in the economy. This gives a potential positive effect on economic growth. The lowered interest rate will discourage the more risk-averse savers as they are receiving less return for their money. Instead, it will encourage spending and investment, thus stimulating the economy. This is a significant shift from the global economy’s current state, in which the more recent trend of low interest rates and QE have done little to stimulate growth.

3.1. Bitcoin as a Store of Value

The contentious issue of whether Bitcoin has any intrinsic value has been a prominent one for its advocates. One prominent apologist, Timothy Peterson, claims that Bitcoin will have value in the future relative to the value of gold in terms of energy output. The idea is that as a hedge against all other forms of wealth, people will store their value in Bitcoin the same way they have done with gold in recent history. Gold has value because it has properties and characteristics that make it useful in an endpoint. The same goes for any other asset that can be considered a “store of value.” Bitcoin has a set lifetime of 21 million coins, it is easily transferable and divisible, it is highly durable, it is consistent (one bitcoin will always be equal to one bitcoin), and it is verifiable. According to Peterson’s model, Bitcoin has already largely achieved its value as a store of value against other fiat currencies and will only stay at these relative prices or increase in comparison to other currencies. This is quite a bold claim considering Bitcoin’s price history, yet these price fluctuations could be argued to be price discoveries as it moves towards its steady state value when the world’s wealth is stored in Bitcoin.

3.2. Potential Disruption to Traditional Banking Systems

The idea of Bitcoin poses a significant threat to the traditional way of managing financial transactions. There are a number of reasons why it will have an effect. The first, and most obvious, is the ability to send bitcoins at a fraction of the cost that it takes to send traditional money. Currently, consumers have come to expect relatively high fees for international transfers, and this is an area where Bitcoin shines. It is still unclear what sort of transaction fees will exist for Bitcoin as it becomes more mainstream, however the current model is to have very low to nil fees. This is made possible by miners who are rewarded in new bitcoins for processing transactions. With traditional money, there is a human who gets a percentage of the action, and it is highly likely that the efficiency and ease of access to the global market Bitcoin offers will force a change in the way money is transferred around the world. The second reason is the potential ease of use in loans and credit. It is no secret that most of the world is in debt. This is due to the fact that money lenders make it too easy to get money, and consumers often do not understand the implications of high-interest loans, credit cards and in some cases, outright inflation of the currency being lent. An unstable economy can lead to the latter, and while inflation is used as a form of hidden taxation to cover the currently delinquent debts of various nations, it has dire effects on those who save their money. High-risk borrowers will often excessively spend the money they have borrowed, and in an unstable job market where unemployment rates are raised by technology-driven increases in efficiency, the lack of new jobs can force a borrower to spend money that no longer exists. This is often the case with inflation of fiat currencies. High-risk borrowing is significantly less of an issue in a deflationary environment. This is because the sole act of holding bitcoins (or any currency with a deflationary economic model) results in an increase in real value of that currency. This is in stark contrast to money with interest, in which not only the loan, but also the interest, will have to be paid back with money that is likely to be worth less. With the ability to peg loans to specific real-value amounts and automatic wage reduction for inflation indexed jobs, Bitcoin truly offers a more stable economic climate for those who lend and those who borrow. This will not be without downside for some consumers who are unable to get loans in a low-risk environment, however it will be a change from the current culture where nearly anyone can procure credit.

3.3. Opportunities for Financial Inclusion

For the 2 billion people in the world without a bank account, Bitcoin may be the only access to financial services. It has been said that Bitcoin users “have their bank in their pockets.” Anyone with an internet connection can receive, store, and send bitcoins, conceptually enabling global economic inclusion. This is reinforced by the ability to access Bitcoin through feature phones, which are widespread in emerging markets and far cheaper than smartphones. With further development, there could be an easier way for the unbanked to protect their assets and eventually gain access to credit.

Bitcoin’s potential to provide greater financial inclusion is enormous; this could change the way aid is given, especially in remittances. When migrants send money back to their families in developing countries, they are often charged high fees of up to 10%. This will vastly improve the lives of workers abroad by allowing them to send money back to their families without having to carry it with them and opening up new streams of commerce for small businesses in the developing world. This is particularly significant in Southeast Asia, with Indonesia and the Philippines being the main targets for these new services.

3.4. Environmental Concerns

The energy consumption required for mining has always been an important factor. The added value provided by Bitcoin is considered too marginal to justify this level of energy consumption. A frequently cited estimate is that the Bitcoin network consumes as much energy as a country like Ireland (Kroll et al., 2019). As the network is designed to produce a block approximately every 10 minutes, the energy consumption has been gradually increasing as the computing power of miners increases. The primary reason for the increasing energy consumption is the increasing block difficulty; in other words, it is becoming more costly to produce each unit of hash rate. This is an intentional feature of the network designed to limit the rate at which new bitcoins can be produced, mimicking the extraction of gold or any other precious metal. While the increasing block difficulty ensures that energy will always be expended at a similar rate, the increasing market price of Bitcoin means that overall energy consumption will continue to increase. The environmental impact of this energy consumption scales with the source of energy being used. Bitcoin mining is immensely more effective in regions where there is cheap electricity, and the cheapest electricity is often the least sustainable. Now consider that much of the Bitcoin mining is happening in China, where the majority of electricity comes from coal. This has led some to suggest that the entire proof-of-work system is fundamentally flawed and that a system of this kind should never be implemented again.

Mustapha Ghezlane