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Bitcoin: Economic Friend or Foe?

When you really think about it, a dollar is only really worth the cost of the paper needed to print it. American currency used to be backed by gold, and since gold was a universally desirable and tangible commodity, it had actual value in global markets. But in 1971, President Nixon canceled this direct convertibility of US dollars to gold as a part of a larger series of economic initiatives known as the “Nixon Shock.” Since then, currencies have pretty much been free floating, and all that is backing up our dollars is our trust in our government. In theory, anyone can usher in a new form of currency, and if a large enough population decides to trust that this new currency has value, it becomes valuable.

This is the concept behind Bitcoin. In 2009 an anonymous individual working under the pseudonym Satoshi Nakamato created a new online currency known as “bitcoins.” This currency is completely unregulated, meaning there are no banks that monitor the movement of this money, and you don’t need to give any form of identification when using them online. There are no fees whatsoever, making the currency desirable for both small businesses and for people looking to make international purchases. You can buy bitcoins using virtually any currency on various bitcoin exchange sites. Bitcoins can also be transferred from person to person using mobile apps or through the internet. The bitcoins you acquire are stored onto a “virtual wallet” on your computer, which serves as your personal virtual bank account. The only difference is that your bitcoins won’t be insured by anyone; they are solely your responsibility as an individual.

So, why is there so much fuss over these bitcoins lately? There are a two major things that are concerning about this new online currency to governments. First and foremost is the anonymity of the bitcoin. The only way of identifying who is purchasing bitcoins is by a “virtual wallet ID.” There are no names, which is why bitcoins have become a very popular means to purchasing drugs, or other illegal materials and services. The former “Silk Road” site that the FBI took down a few months ago was a popular destination where bitcoins were used, but a Silk Road 2.0 already exists with specific instructions for access that is keeping the bitcoin usage for this site alive and well.  In addition, various fake ID sites accept bitcoins to prevent their business from being shut down by any government. If people can’t trace where purchases are being made, then there is no way any authority can dismantle such an operation.

Another major concern is the lack of control over this currency. Bitcoins are generated through a complex process known as “mining.” This is when a computer or group of computers run bitcoin software. The software creates new bitcoins which are accounted for in the virtual public record, known as “block chains.” Pretty much anyone can download and install the bitcoin software. According to Consumerist.com, new block chains are created every 10 minutes, and the final bitcoin will be created in 2040, bringing the final circulation to just under 21 million. Additionally, as of this March, one bitcoin equals around USD $693. It is extremely hard to regulate bitcoins in general, as there is no one specific place where they are generated. The inflation of bitcoins has also been shifting dramatically as of late, and are becoming increasingly more sought-after as a legitimate currency.

The type of activity that bitcoins allow for internet users could be a huge threat to both international security and for the regulation of the global market. There are no taxes associated with bitcoins, and nobody backing them besides the users themselves. This all makes for a very unstable market where pretty much anything goes. Are there positives to bitcoins? Of course there are; many people find transferring money much easier and more secure than through other means, because there is no middle man that could possibly tamper with the money transaction. But others are arguing that bitcoins could dramatically alter the current global free market. Is it possible for commerce to be liberal? The bitcoin could make it so. Only time will tell if this modern electronic currency will become detrimental or beneficial to our digital-age society.

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