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Ben Kramer

Mr. Martin

AP English III

02 April 2018

Bitcoin: An Exploration of the Cryptocurrency Phenomenon and Its Significance

In early 2009, a mysterious and unknown man by the name of Satoshi Nakamoto

announced the launch of a new cryptocurrency: Bitcoin. He broke down his thought process as

to why this new currency option was important in an email:

“The root problem with conventional currency is all the trust that is required to make it

work. The central bank must be trusted not to debase the currency, but the history of

fiat currencies is full of breaches of that trust...With -currency based on cryptographic

proof, without die need to trust a third-party middleman, money can be secure and

transactions complete.” (Dowd and Hutchinson)

This prompted a quiet growth in the world of cryptocurrency, a name given to a form of non-

tangible currency exchanged via an online medium. Bitcoin’s growth held little relevance for

four or so years until it saw a spike in transactions and a resulting increase in value. Its value

soared from less than a dollar, to thousands. This phenomenon immediately peaked the

interest of economists and investors. Bitcoin has many notable flaws, however, including its

tendency to be used for illicit activities, its volatility, its over-speculation, and the increasing

costs associated with it. While some experts say Bitcoin is a worthwhile investment given its

previous success, this is not likely to be the case, because Bitcoin is a bubble that is on the

verge of collapse, and therefore not a worthwhile investment, along with this, the efforts that
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are put into bitcoin should be diverted and put into the blockchain technology that it operates

on.

Bitcoin clearly holds significant conversational value, as its rapid growth and inflated

value have forced it onto the scene of economics along with discussion of the stock market and

the national debt. However, in the actual world of finance, bitcoin is simply too new to compete

with the already established and nationally managed currencies that have been in place for

centuries. Given that bitcoin was only created in 2009 and the US dollar has been in play for

over two hundred years, it is not surprising that bitcoin isn’t being used to purchase coffee and

bagels every morning. It can be difficult enough for ordinary people to accept small changes,

but a complete shift in the way things are purchased on a daily basis might be too big of a bite

for the average person to chew. The struggle with such a new style of currency really starts to

show in the size of it; bitcoin holds the largest sum of the cryptocurrency market, by far, though

it simply does not compete with other payment systems. An article from Cape Times titled,

“Bitcoin Continues to Give Central Banks a Headache” lays out the numbers:

Yet even if it commands more than 80 percent of the virtual currency market, as the ECB

estimates, Bitcoin remains a minnow in the world of finance. The ECB contrasts the

69,000 daily bitcoin transactions globally with the 274 million non-cash payment

transfers each day just in the EU. (14)

This math works out to show that international bitcoin transactions make up a mere .025% of

daily cashless purchases in the EU. That is about 3 bitcoin transactions for every 10,000 other

non cash payments. Once again these are just non-cash transactions, the numbers continue to

shrink when you broaden the sample to include cash transactions, and when you broaden the
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payment transfers to a global scale. Bitcoin is a mere speck of dust compared to the US dollar,

the pound, and the euro. Bitcoins relative youth compared to other forms of currency has also

impaired its development.

This leads to another huge problem that comes along with bitcoins immaturity: bitcoin

has not reached its relatively low cap of 21 million coins, there simply is, and never will be,

enough bitcoin to supplement the dollar. Not only that, but as bitcoin climbs towards this

maximum, it loses its exclusivity, and its value relative to the US dollar. This is explained in an

article by journalists Joseph Haubrich and Ashley Orr:

Once the entire supply of 21 million bitcoins has been mined, their value (at the current

exchange rate) will be barely over 1 percent of the value of US Dollars (even assuming

no growth in US currency). So bitcoins, despite their high profile and relatively high

value, still make up only a small portion of the value of US currency. And as a fraction of

all payments in the world, it is even less.

21 million coins may seem like a large sum, however, it is all relative. There are simply way

more US dollars currently in circulation than there will ever be bitcoin. As Haubrich and Orr

later explain, “The current supply of bitcoin is nearly 13 million [coins], whereas there are 34.5

billion US currency notes in circulation; or nearly 2,700 bills for each bitcoin.” Once the

staggering amount of US dollars is taken into account, there is simply no comparison. Not to

mention, due to the way US currency works, it is more than likely that there will be more US

dollars introduced into circulation to adjust the economy. So the small number of bitcoins will

only get smaller in comparison. Even if there were nearly enough bitcoins to supplement the

dollar, the immaturity of bitcoin introduces extreme volatility in its value.

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Volatility in bitcoin value is an unavoidable consequence of the nature of how the

cryptocurrency works. Bitcoin’s value is directly influenced by supply and demand. It is only

worth what people are willing to pay for it. The issue with a supposed “currency” that

fluctuates by the values in which bitcoin fluxuates is that it is difficult for people to trust, as one

journalist stated, “‘Something that moves up and down 20% in a day doesn’t feel like a

currency, doesn’t feel like a store of value.’” (Yurcan). This is true, how could you maintain

confidence in an economy where the 10 dollar bill in your pocket fluctuated between 8 dollars

and 12 dollars? How would you make purchases in a situation like that? In an article titled, “The

Scam Called Bitcoin”, the author characterizes bitcoin as a stock rather than a currency,

“Whatever it is, though, it isn’t a currency. It’s a tech stock.” This ‘stock’ is prompting

investments rather than everyday exchanges and purchases of goods and services. People

aren’t buying bitcoin because they would like to use it as a currency, they are buying it to resell

it later for an even more inflated price than they bought it for. This is not how a currency is

supposed to function. So if bitcoin behaves like a stock, how is it faring? Not well. Bitcoin has

plummeted in value in recent months. Even though its value is not dropping at the rate in which

it originally climbed, as explained in “Is Bitcoin a Fit Coin for the Future” from the Evening

Gazette, it is not showing too much promise for the foreseeable future, “While Bitcoin’s value

may have fallen since the heady days of December last year, when one Bitcoin was ‘worth’

almost PS15,000, as I write this you can still buy or sell one for around PS4360. Not small beer.”

(56) The upside of the volatility of bitcoin is that it has created wealth for a number of people.

The success stories have spread like a wildfire. There is indeed always a slight potential for

another increase in the value of bitcoin, though experts appear doubtful. What makes this
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thought dangerous is that as prior success stories spread, more and more people get excited

and try to buy into bitcoin, however these people can be willing to take great risks for unlikely

gains.

The success of people due to bitcoin is good for those individuals, however it is

concerning for the numbers of people who see these successes and strive to achieve the same

financial gains. What makes this such a huge issue is that under-informed people may make life

changing decisions and take great risks in investing in bitcoin hoping for a major payout that

just isn’t going to happen. Again, the author of “Is Bitcoin a Fit Coin for the Future” explains this

issue and how it is concerning major banks:

They are afraid that, given that volatility, customers are willing to go into a lot of debt in

the hope of getting rich quick, hopes that look like being quickly dashed at the moment.

It has lost two thirds of its value in around a month. If you bought your Bitcoin 30 days

ago, you will not be celebrating today. (56)

It is in fact incredibly dangerous to dive head first into the cryptocurrency world with minimal

research in hopes of making millions. One could lose everything. The author of “Is Bitcoin a Fit

Coin for the Future” believes that bitcoin has made a huge mark and is not necessarily going

away, however he, “...wouldn’t remortgage the house to invest just yet.” (56). While this may

seem like only a joke or satire, there are individuals who would in fact remortgage their homes

to invest in bitcoin. People are so anxious to not miss out on the bitcoin craze, that they don’t

realize that they are getting in too late. The bubble is popping...that’s it. The very inflation

created by the investment craze is setting those investors up for failure.

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Bitcoin is becoming exceedingly less worth it for investors and users. In this instance,

this not pertaining to the actual monetary value of bitcoin, but the growing numbers of fees

and charges that are now starting to come with it. Bitcoin has previously been marketed to cut

some of the costs associated with the financial world. People who are tired of the fees and

charges that come with running an account through a bank and using ATMs regularly to

withdraw cash may see bitcoin as a cheaper alternative to such methods and to keep more of

their money. This, however, is becoming less and less the case. In an article titled “Analysis: Five

Myths about Bitcoin” from the Daily Herald, the author explains,“...bitcoin transactions, once

free, are increasingly expensive, with fees now averaging $20 and reaching as high as $400,

based on demand.” These fees sound increasingly more like the fees one would expect when

making a large withdrawal from their local ATM or when overdrawing from their account on a

vacation. So the question that remains is: is bitcoin actually cutting costs? The article, “The

Scam Called Bitcoin” tries to answer this question:

...it’s not clear how much bitcoin is really cutting cost as much as shifting them.

Specifically, it turns your transaction costs into our population costs. Now, bitcoin might

still lower costs overall, but the calculus isn’t as simple as it appears if you only add up

the benefits.

This concept is interesting, because if bitcoin was created as an alternative to fiat currency and

one of the issues it is intended to solve is the cost of managing money through more traditional

means, then how did it get to the point where the cost of managing bitcoin is the same if not

more than the cost of managing standard currency? The same reason why it is expensive to

manage money in the first place. There is a lot of behind the scenes activity that goes into
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managing bitcoin, just as there is for managing money through banks. This concept is once

again brought to light by “The Scam Called Bitcoin”. It all comes down to the way bitcoin is

introduced into the market. It is brought into existence by so called “bitcoin miners”. These

miners use powerful computers to solve difficult math problems in exchange for bitcoin. What

makes this such a costly activity is that such powerful computers are expensive and can require

a lot of energy to run. When one uses this energy, it can become increasingly expensive to cool

and maintain the computers because they have such a heavy workload. As with any industry,

the costs of the mining are trickled down to the bottom level: the bitcoin user. Ultimately, as

the fees encountered by bitcoin users grow, the constantly growing cryptocurrency market is

creating serious competition in an attempt to fix the issues inherent with bitcoin and get in on

the immense success that the cryptocurrency market has shown as a whole. These “alt-coins”

enjoy the opportunity to use bitcoin as a guinea pig and fix the flaws it has shown.

Bitcoin has inherent problems, that much is clear. It is over-speculated in value, there

aren’t enough coins, and it has links with criminal activity. These are only a few of Bitcoin’s

flaws. As these flaws increase and come to light, there is growing competition in the

cryptocurrency market as other currencies make efforts to fix the flaws that bitcoin has shown

and become the next big cryptocurrency. According to an article titled, “Bitcoin and the Future

of Digital Payments” written by William J. Luther, a bitcoin analyst:

There are more than five hundred cryptocurrencies trading today, with a combined

market capitalization of $4.89 billion. Bitcoin dominates the market by far: with a

market capitalization $4.17 billion, it holds 85.6 percent of the market.

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500 platforms makes for a lot of competition for Bitcoin. Even though bitcoin is the most

popular coin by far, it faces some disadvantages for being the first up to bat. This is a concept

that Luther continues to elaborate on. Simply put, Bitcoin’s flaws are easily identified by its

competitors, who then take these flaws into account when designing their own edition to the

world of cryptocurrencies. This means that bitcoin’s lifespan will be cut short by the

competitors that fix its flaws. For instance, “Nubits ($0.55 million market capitalization; 0.01

percent of the market) overcomes purchasing-power volatility issues experienced by bitcoin by

pegging its value to the dollar.”(Luther), and, “litecoin employs the same proof-of-work

distribution as bitcoin, but it offers a maximum circulation of 84 million coins, whereas bitcoin is

limited to 21 million.”(Luther). The volatility of bitcoin and the limit of the number of possible

bitcoins in circulation are two of the main issues with the platform. In solving both of these

issues, nubits and litecoin both prove that these, and many of bitcoins other flaws, are in fact

solvable. Why would someone invest in such an obviously flawed cryptocurrency if everyday

there are more that emerge into the market that have proven to be more than capable of

solving said flaws? A major flaw that has not yet been clearly solved, however is the almost

inherent legal issues that have been posed by Bitcoin and other cryptocurrencies. The

anonymous nature of these online currencies has made them incredibly useful to criminals for

making illegal purchases and sales.

When the topic of bitcoin is discussed, many talk of how much money some have made

off of bitcoin, and how they would potentially like to enjoy those same monetary gains. Though

another issue surrounding bitcoin may come up, this is that bitcoin and other cryptocurrencies

have a history of being used for illegal activities. As Dowd and Hutchinson have mentioned, “It
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[Bitcoin] can and does operate outside of government control: Bitcoin is a dream come true for

anarchists, criminals, and proponents of private money.” Given that bitcoin, and many other

cryptocurrencies, are anonymous, criminals have the ability to use it for the purchase of illegal

goods and services without the risk of being discovered. As William J. Luther brings to light, “It

was the only currency accepted on the Silk Road, an online marketplace whose users could buy

illegal goods and services from 2011 to 2013 (Christin 2013).” The Silk Road and other illegal

online purchasing services rely on cryptocurrencies to ensure that they can stay low profile.

There are obvious concerns with this as a currency that allows criminal activity shouldn’t be

promoted by the general public and is likely not a safe investment. Also, it is not only criminals

that are taking advantage of bitcoin’s anonymity. Bitcoin has become a popular method in

which minors can purchase drugs online without fear of their parents or the authorities finding

out. An article titled, “Teens Using Bitcoin To Buy Drugs Online”, highlights this issue. As

mentioned in the article, “...children as young as 14 are getting parcels of legal highs delivered

to their home.” Legal highs are semi-legal synthetic drugs that imitate the effects of much

harder drugs such as marijuana and cocaine. The article also explains that for young people,

purchasing these legal highs online “‘You can have drugs delivered to your door with just a few

clicks of a mouse.’”(“Teens Using Bitcoin To Buy Drugs Online”). The minors can also have the

drugs delivered anywhere they please, not only their house. The ease of purchasing these drugs

puts the aforementioned minors in great danger of addiction and overdose. Certainly these are

issues that suggest a need to solve the bitcoin legality complex. Though, there is another

concern associated with bitcoin legality. That concern is that bitcoin has a high potential for use

in money laundering.
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Money laundering is the “cleaning” of money obtained through nefarious activities such

as the sale of drugs or illegal services, and theft. Criminals that have obtained this money have a

need to send it back through the system in order to obtain “clean” cash. In an article from

Mitchell Hyman, a frequent discusser of bitcoin criminology, titled, “Bitcoin ATM: A Criminal’s

Laundromat for Cleaning Money” this concept is outlined, specifically the use of bitcoin ATMs in

money laundering. Hyman does this through a hypothetical situation:

For example, Drug Dealer Dan, who just completed a cash for drugs transaction, takes

his ‘hard earned’ cash and deposits it into a Bitcoin ATM. Once the cash is deposited,

the Bitcoin ATM exchanges the cash for Bitcoins at the going rate. With little to no

personal information required for the exchange, Drug Dealer Dan is now free to

purchase items using his Bitcoin Wallet or exchange the Bitcoins for cash at another

Bitcoin ATM. Voila! His ‘dirty’ cash has been cleaned.

As with bitcoin’s ability to facilitate the online purchasing of drugs by minors, bitcoin’s

capability of cleaning money for criminals should not be promoted. The bright side of bitcoin’s

relatively dark legal issues and capacity to allow criminals to continue to break laws is that the

blockchain technology behind bitcoin holds great value.

Bitcoin itself is not a viable currency, stock, or investment, however, the blockchain

technology that it utilizes may be quite useful. Bitcoin alone has a myriad of essential flaws that

are inherent to it, but not to the blockchain; flaws such as being used in illicit activities and

being too small in numbers to supplement the dollar. The blockchain has none of these flaws,

as it in and of itself is not a cryptocurrency, but a system that bitcoin relies on to exist. The

blockchain is an online ledger of all the transactions in bitcoin history. As expanded upon by
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“What’s the Latest in Cryptocurrency?”, it is a public record,“That includes every bitcoin that’s

ever been won, every bitcoin that’s ever been used, and every bitcoin that’s ever been

transferred.” Many experts believe that this record keeping system has many other applications

beyond that of its function pertaining to bitcoin. According to “Bitcoin Continues to Give Central

Banks a Headache”, “The Federal Reserve regards the technology as not ‘sufficiently mature’

but worthy of ‘further exploration and monitoring.’” (14). This being true, even the Federal

Reserve believes that efforts towards research and development of bitcoin and other

cryptocurrencies should be diverted to research and development of the blockchain technology

behind it. Not only should there be efforts put into research and development of blockchain

technology, but there is evidence provided by Bryan Yurcan that this research and development

is happening. According to Yurcan, Visa and a semi-owned partner of Visa called Docusign, are

working together on a proof-of-concept that utilizes the blockchain technology that sustains

bitcoin for its own recordkeeping. Yurcan also claims that NASDAQ intends on allowing its

clients to use a service titled LINQ, which also utilizes the blockchain technology for private

recordkeeping. The use of this technology by these organizations shows that bitcoin itself is not

of nearly as significant value as the system that it runs on: blockchain.

To be volatile is to be risky. Bitcoin and many other cryptocurrencies are a liability for

investors that are willing to take massive risks in order to receive the economic gains they have

witnessed others receiving. Unfortunately, it is unlikely that bitcoin will continue to grow and

produce the same financial gains that many have seen in the past, what is much more likely to

happen is actually the exact opposite: Bitcoin will collapse. This is simply due to its age,

capacity, and volatility, as well as its excessive use in dangerous criminal activity, even risking
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the lives of young people who use the so called currency to purchase drugs online. The focus

should not be on bitcoin, but on the blockchain technology that it relies on. This technology has

the ability to revolutionize the way we handle online economics, and it has already shown

plenty of promise in its use by credit card agencies and NASDAQ. The potential that blockchain

technology has to change the financial and online world has barely been tapped into, and the

focus that is currently on bitcoin, a failing system and a bubble, should be diverted to

blockchain.
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Works Cited

Haubrich, Joseph, and Ashley Orr. “Bitcoin Versus the Dollar” Economic Trends, 14 Aug. 2014,

pp. 2+. Questia Schools.

Luther, William J. “Bitcoin and the Future of Digital Payments.” Independent Review, vol. 20,

No. 3, 2016, pg. 397+. Questia Schools.

“Bitcoin Continues to Give Central Banks a Headache.” Cape Times, 5 Mar. 2015, pg. 14.

Questia Schools.

“Analysis: Five Myths about Bitcoin.” Daily Herald, 17 Dec. 2017, np. Questia Schools.

Dowd, Kevin, and Martin Hutchinson. “Bitcoin Will Bite the Dust.” The Cato Journal. vol. 35, no.

2, 2015, pp. 357+. Questia Schools

Hyman, Mitchell. “Bitcoin ATM: A Criminal’s Laundromat for Cleaning Money.” St. Thomas Law

Review, vol. 27, no. 2, 2015, pp. 287+. Questia Schools

“Is Bitcoin a Fit Coin for the Future?” Evening Gazette, 9 Feb. 2018, pg. 56. Questia Schools.

“Teens Using Bitcoin to Buy Drugs Online.” The Mirror, 30 Jan. 2016, pg.21. Questia Schools.

“The Scam Called Bitcoin.” Daily Herald, 14 Jun. 2015, np. Questia Schools.

“What’s the Latest in Cryptocurrency?” Manila Bulletin, 1 Dec. 2017, np. Questia Schools.

Yurcan, Bryan. “Bitcoin Now Kosher, Card Network Partnerships Suggest.” American Banker, 30

Oct. 2015, np. Questia Schools

---. “Is It Time for Bankers to Rethink Bitcoin?” American Banker, 1 Dec. 2017. np. Questia

Schools.