In the current era, physical banking is gradually losing the hype that it initially had and this can be attributed to the advancement in technology. Digital banking has taken over and it is possible today for people to transact business using their bank accounts remotely. However, all these are subject to regulations which users are obliged to comply with. Thus to a great extent, there are regulations to instil sanity in banking. In this issue of money and banking, the concept of bitcoin, as a new currency came up in 2009 to bring a great extent of revolution in the banking sector and transacting business online (Yellin, Aratari and Pagliery, 2018). Its unregulated nature poses the question of: how reliable will the bitcoin as a currency be in future?
Bitcoin as a New Currency
The emergence of bitcoin according to Yellin, Aratari and Pagliery (2018) can be traced back to unknown individual alias Satoshi Nakamoto in 2009. It is now considered to be world’s first decentralized currency and is accepted in many countries around the world. According to Franck, (2018) the currency has a big potential of becoming the new global currency because of the fact that it is not tied to any central bank or country. However, the fluctuation of its value still casts some doubts on its sustainability. For instance, as reported by Al Jazeera News (2018) the value of one bitcoin in 2010 was less than $0.10 but by 2017 the value of the currency had fluctuated to around $18,000.
Governments have no ties or control over the currency and this makes transactions with it to be typically tax-free in addition to being inexpensive. Using the currency also easy to transfer around the world as the processes involved are few. Based on the fact that banks are unable to utilize an individual’s saved bitcoins for the purpose of investment, it is not likely to be affected by challenges faced by banks. For instance, government-related economic depressions will have no impact on the value of bitcoins. The technology that has been used in the currency has been successful in doing away with intermediaries bridging the transactional trust gap. Based on these reason among others the, currency has increasingly become popular and its value as well has exponentially skyrocketed.
Owning Bitcoin
Contrary to the other currencies the bitcoin is stored in ‘digital wallet’ which can be on the computer of the user or in the cloud, through the use of cloud technology. The wallet is known to be like a virtual bank account through which the users can receive or send the bitcoins and transact other businesses like paying for goods. However, these digital wallets are not insured posing potential financial risks. The working of the currency is based on blockchain for its validation and it is dependent on the growing community of institutions and people online. This criterion can be likened to the concept of peer-to-peer (P2P) networks which are independent in their operations.
The Dangers revolving around Bitcoin Currency
As a decentralized currency, there is an increasing number of people who use the currency basing their reasons on the cha and uncontrolled aspect of the currency. However, there is a lot to be desired revolving around the use of the currency especially when it comes to big investments. According to Al Jazeera News (2018) the co-founder of the website, bitcoin.com sounded a warning stating that the currency “is the riskiest investment that one can make.” Some of the risks involved in bitcoin investment are given by many researchers some of which are the following:
In the first place, the bitcoin as a cryptocurrency has the characteristic of being volatile which means that its price can significantly change even within a single day, unlike other currencies which takes time before they reach the lowest level (Al Jazeera News 2018). In the event that such happens, it will mean that the investor will lose their capital invested in bitcoin. Such an event had been witnessed in December 2017 and January 2018 when its value fell by 26% and 10% respectively.
Secondly, there is the risk of hacking of the bitcoin accounts and wallets which lead to the investors risking the loss of their investments. A good example is with a South Korean cryptocurrency exchange opted to file for bankruptcy upon being hacked over $70 million worth of bitcoins (Al Jazeera News 2018). This aspect is implying that the security of the currency is questionable.
Thirdly, based on the fact that bitcoin cryptocurrency uses an early stage of technology, there is a high likelihood that it will undergo significant changes in the future. Thus there are possibilities that there will emerge other technologies that supersede the current making them obsolete (Al Jazeera News 2018). When this happens, the value of bitcoin will drastically be affected and the investors will risk losing their investments.
Thanawala " Nathan, (2018) give the fourth reason tied with investing bitcoin as it can be said that it is neither a commodity nor a currency based on its property. The reason for this is that cryptocurrencies do not fulfil the requirements for being commodities or currencies because of the discrepancies surrounding their origin. In this regard, they cannot be backed up by any tangible asset but only on sheer demand. This implies that when the demand falls, then its value will fall as well drastically.
The fact that bitcoin is not being controlled by any government, it has been said that it is prone to illegal activities because they cannot be traced to an individual (Franck, 2018). In this regard, criminals can take advantage of the anonymity of the currency usage and carry out illegal businesses. It, therefore, means that as long as it exists, the level of criminal activities will increase because criminals have a platform to operate away from the watchful eyes of authorities. Its unregulated space also implies that in the case of fraud, the users have nowhere to go to for a refund. This is unlike the conventional currencies where, for instance, users can get compensated by banks in case of faulty in their credit cards.
Conclusion
The hype about bitcoin is real and the cryptocurrency is taking over investors who are increasingly using the currency to invest in substitution of the conventional currencies. However, as seen in the above discussion, there is a great concern for the sustainability and reliability of the currency in the long term. So far the risks that are surrounding the currency are many indicating that its failure will be a real loss to investors across the world who have a lot of fortune invested in the currency. For the purpose of reliability and sustainability, the bitcoin currency has to be under some regulations t gain the trust of those who doubt it otherwise it will remain a risky and bad currency.
References
Al Jazeera News. (2018). Bitcoin: Know the risks before you buy. Retrieved from https://www.aljazeera.com/news/2017/12/bitcoin-buy-171219100738438.html
Franck, T. (2018). Massachusetts regulator lists 7 dangers with bitcoin, calls it potentially ‘worthless’. Retrieved from https://www.cnbc.com/2017/12/13/massachusetts-regulator-lists-7-dangers-with-bitcoin.html
Thanawala, H., " Nathan, N. (2018). 7 reasons why you should not invest in bitcoins, cryptocurrencies. Retrieved from https://economictimes.indiatimes.com/wealth/invest/7-reasons-why-you-should-not-invest-in-bitcoins-cryptocurrencies/articleshow/60891341.cms
Yellin, T., Aratari, D., " Pagliery, J. (2018). What is Bitcoin? - CNNMoney. Retrieved from http://money.cnn.com/infographic/technology/what-is-bitcoin/
