My views on Bitcoins

Bitcoins have become a hotspot for some investors and tech companies that the price for Bitcoins shots high and a Bitcoin relevant company, Blockchain (provides digital currency wallet services), has received $40m in venture capital funding. I think that the major reasons for the growing popularity in Bitcoins are the increasing trading between individuals (including individual groups, parties) across countries, exchange rate risk, and increasing number of online business activities. Moreover, when the price increases and Bitcoins become more popular, more investment and attention are drawn into this sector and this further increases the price and the popularity of Bitcoins. Of course, there are some people disliking Bitcoins that Mark Cuban calls Bitcoins a bubble and plans to invest in another digital coin; the idea of digital coins is very popular at the moment.

I think that the most important characteristics are its decentralisation, artificial scarcity, design for ownership. Before discussing these characteristics more specifically, we have to assume that Bitcoins are a commonly accepted currency; this is important because without this assumption, there is no point for us to discuss the use of Bitcoins in our life. Firstly, its decentralisation means that no government or organisation has control of it, so the Bitcoin monetary system is relatively fixed and this reduces the uncertainties in the future. Secondly, the monetary system is designed based on artificial scarcity that there would only ever be 21 million Bitcoins in total. This means that Bitcoins theoretically should always appreciate against currencies backed by governments. This is because the supply of Bitcoins is in decline over time and meanwhile the supply of other currencies is relatively stable or increasing over time. Moreover, if we believe the world economy is always on an increasing trend, the Bitcoin system will always be in a deflation as the total amount of Bitcoins is fixed but the available products that can be consumed increase; moreover, most economies have inflation over time, this implies their currencies are devaluing. Therefore, the price of Bitcoins should always increase. Thirdly, its design for ownership is very special, each individual has a unique private signature. I question the privacy of using Bitcoins. Of course, such private signature does not require a government ID; however, when people use Bitcoins more commonly and frequently, each individual is more likely to have one specific address rather than multiple addresses for convenience. Although the owners are not explicitly identified, their Bitcoins addresses become their new IDs. In addition, it is possible for individuals to conduct many strategies to increase privacy, but in order to be more convenience, there will always be a sacrifice of privacy.

In my opinion, Bitcoins have several challenges. Firstly, the advantage of low or no transaction costs can be vanishing when Bitcoins are used more and more often. It does not have transaction costs because the transaction does not have an intermediary. However, when Bitcoins are used more often, a financial market will definitely occur in the Bitcoin world that people have the need for saving and borrowing. When people open their Bitcoin bank accounts for saving and borrowing, the intermediary will appear and the transaction costs will be not different from the costs in other monetary systems. Secondly, it is possible for everyone to invent a new digital currency as long as the new system has all necessary characteristics for being a currency. Mark Cuban plans to invest in another digital currency and some other investors may do the same; therefore, it is important for Bitcoins to expand its influence ahead of any other digital currency to win the majority of the digital currency market. Thirdly, Bitcoins’ another major challenge is from governments’ regulations. Governments are more likely to oppose the idea of Bitcoins, as when Bitcoins become influential enough, governments will lose control of monetary policies. In addition, governments and other regulators are highly likely to impose regulations to break the privacy of Bitcoins in order to fight against crimes like money laundry. 

Overall, I think that Bitcoins have a bright future, but its time has not come yet.