BY SABRINA EDWARDS ’20
Today’s internet and financial news outlets are awash with speculation and perspectives on bitcoin, the world’s most prominent cryptocurrency. But what is bitcoin and why do college students and recent college graduates care? Though it seems like technology and financial experts’ ultimate expensive toy, cryptocurrencies like bitcoin carry huge implications for the future of money and the roles of formal financial institutions in online commerce.
What differentiates cryptocurrencies from traditional forms of currency is that most monetary systems are verified or insured by governments or by precious metals (like the gold standard). Cryptocurrencies, on the other hand, have software encryption as their base and as their indication of value.
Bitcoin is one of these cryptocurrencies and was one of the first to become mainstream. According to CoinDesk, bitcoin is the name for both the actual, individual pieces of code that function as currency and the network that holds and counts all of these individual “tokens.” This system is a network that allows people and groups to pay each other using the “tokens” without financial intermediaries.
Bitcoin was introduced in 2008 as a medium of exchange independent from central authority and has since developed into a different standard for modern monetary systems. This independence is what makes it so attractive to many who are suspicious or distrustful of banks and central governments having access to their finances and their financial histories. It also represents an ideal of democratically owned and sourced digital currency, as the ledger containing all of the anonymous exchanges — the blockchain — is maintained by bitcoin community volunteers rather than a central authority. This is also part of how bitcoin can be so easily transferred internationally, as it is not regulated by any particular government.
Another unique aspect of bitcoin is that it is limited in supply. While traditional currencies are printed or produced by governments as a monetary policy mechanism, bitcoin has a finite number of “tokens” that are produced at a constantly diminishing rate. Bitcoin release will cap at 21 million, according to CNN. The release of bitcoin is a complex process, and servers “line up” to gain access to new bitcoin in a process called bitcoin mining.
Because bitcoin has no physical form, it can be divided into smaller and smaller pieces at no cost to a central governing body. The smallest unit of bitcoin is called a satoshi — named after the pseudonym of the creator of bitcoin, Satoshi Nakamoto — and it is the equivalent of one hundredth of a cent, or 0.00000001 of a bitcoin, according to CoinDesk. This makes it useful for more exact and more minute electronic transactions.
Bitcoin is far from the only cryptocurrency; it just happens to be one of the most prolific and the one with some of the largest returns since its development. Other cryptocurrencies include: Litecoin, which is very similar to bitcoin but has a faster transaction rate; Ethereum, which is second to bitcoin in market capitalization; Zcash, which is a more private and more secure bitcoin; and many others, including new currencies constantly being developed.
While bitcoin appears to be generally positive with specific and localized impacts, there are larger-scale implications resulting from the anonymity and decentralized nature of cryptocurrencies.
The relative anonymity and universality of bitcoin makes it an ideal candidate for use by terrorist organizations and drug dealers. As reported by the BBC, Bill Gates said recently in a Reddit question and answer session that, “crypto-currencies are used for buying fentanyl and other drugs so it is a rare technology that has caused deaths in a fairly direct way. I think the speculative wave around ICOs [initial coin offerings] and crypto-currencies is super risky for those who go long.” His comments were met with criticism especially as he has previously been an advocate for cryptocurrencies, and his foundation, the Bill and Melinda Gates Foundation, has been investing heavily in development of blockchain technology for entrepreneurs in Kenya.
In addition to concerns about the ethics of bitcoin, there are also environmental concerns. According to CNN, the computing needs for bitcoin mining and for bitcoin maintenance are colossal — every year, bitcoin networks and mining take up 32 terawatts, which is the power usage equivalent of three million American homes over the same period of time. For comparison, CNN states that Visa online transactions use, on average, the same amount of power as 50,000 American homes.
For people considering bitcoin not as a measure of exchange but rather as an investment option, there are other risks to consider. “Because [bitcoin is] not created centrally, it can’t be fixed centrally,” said Maya Gore ’20. “No one can control it anymore. Once it’s been infiltrated, it has to die. It’s not like it could recover, so if you invest a lot in bitcoin and someone hacks it, it’s dead.” This concern with the security and volatility of bitcoin is a consistent one with many investors, leading financial analysts to be skeptical of the long-term investment potential of bitcoin.
While the jury’s still out on the actual long-term impact of bitcoin, what is certain is that the rise of cryptocurrencies and their implications for the international monetary system are too prolific to expect them to go away.