Kingston University London
International Study Centre
Topic: Discuss the advantages and disadvantages of Bitcoin. What will be the impact of this cryptocurrency be as a currency in the future?
Module: AES (XS6005_F_ACYR_20)
Tutor: Naomi Abraham
Word count: 2409
Over the last decades, technology has constantly improved allowing new opportunities in multiple areas. For example, the internet allowed people to communicate and increased bank productivity by allowing customers to access online banking.
Cryptocurrency is a form of digital currency allowing people to make payments online without the intervention of other institutions. The cryptocurrency that will be discussed is Bitcoin. This cryptocurrency was created in 2008 and was firstly utilized in 2009. It was created by a person with an unknown identity, the given pseudonym is Satoshi Nakamoto (Frankenfield, 2021). The initial purpose of the currency was to create a transformative financial system that didn’t require a third party. The main characteristic of Bitcoin is that there is no external intervention as transactions are directly made peer-to peer.
The bitcoin can be considered as a speculative asset because of the versatility of its value. However, it is also considered as a currency as some goods and services can be acquired with Bitcoin. For example, it is possible to by a car such as Tesla with Bitcoin (BBC, 2021). Therefore, cryptocurrency is a growing alternative mode of payment for multiple goods and services, but it remains relatively limited when it comes to the global adoption of this alternative as a currency as it is outside the governance of traditional modes of payment (Segendorf, 2014). Since the creation of currency in 2009, the value of the currency has significantly increased. For example, the value of a Bitcoin was less than 200$ in 2013 while it was more than 50.000$ in April 2021 (Statista, 2021). The essay will present that Bitcoins has several advantages such as the fact that the system used is decentralized, it provides anonymity, and it can not be counterfeited. However, multiple drawbacks can be underlined, for instance, users are still exposed to fraudulent activities, the value of the cryptocurrency is volatile, and it facilitates illegal transactions. This essay will highlight that even though Bitcoin can be beneficial to make payments, it cannot be considered as a currency that will be widely adopted in the near future.
One of the main advantages of bitcoin is that it is not controlled by conventional institutions making payments easier. It is a decentralized currency which is not regulated by the traditional financial institution such as bank or government (Kubàt, 2015). Without intermediate included, people keep their cryptocurrency on digital wallet and can make transactions with very low fees percentages that are assimilated as donations more than fees. Sometimes no fees are applicated, unlike other financial institution (Kaşkaloğlu, 2014). The decentralization gives some advantages that are valued by users as it avoids the control of a single institution because the currency is self-regulated by miners (Bohme, Christin, Edelman and Moore, 2015). Every transaction is listed on the blockchain by miners who make sure of the authenticity of transactions. This system is transparent as it gives the opportunity to any users to see every transaction that was made through the Blockchain; hence it is possible to assess if a payment is validated prior providing a service (Bohme et al., 2015). Moreover, by being a decentralized currency, Bitcoin do not depend on countries monetary policies. Hence, it may be an alternative for peer-to-peer transactions around the world with lower fees than traditional bank (Ahmad, Kumar, Shrivastava and Bouhlel, 2018). According to DeVries (2016), Cryptocurrencies have an advantage compared to traditional modes of payment because of the ability to make fast peer-to-peer transactions due to this decentralization. It is widely beneficial for international businesses especially in case a transaction needs to be done in an emergency. Therefore, the decentralization allows users to have convenient advantages to make payment.
Moreover, Bitcoin is reputed to be a secure currency because of the specificities of the system used to control its uses which is a major positive aspect. The actual financial system usually faces fraudulent activity such as counterfeited fiat currency. According to Zaghloul, Li, Mutka and Ren (2020), Bitcoin cannot be duplicate as each transaction is strictly controlled by miners and listed on the blockchain. The currency is generated electronically with complex electronic code; therefore, each operation is considered unique. People may be tempted to make more than one operation with the same coin. However, double spending cannot be allowed as miners will notify that multiple transactions was attempted and wouldn’t validate the operation (Zaghloul et al., 2020). The blockchain is constantly kept up to date and verified by miners therefore it is not possible that users have their fraudulent transaction validated. Hence, the mode of functioning of the system provides a security of the currency.
Nowadays, there is a growing concern when it comes to fraudulent activities such as identity theft or financial fraud. Therefore, another advantage of bitcoin is that an emphasis is put on user’s security. According to Bohme et al. (2015), early adopters of the currency were attracted to the possibility to make transactions anonymously. As a digital currency, Bitcoin is also exposed to cybercriminals therefore, transactions can be made anonymously as people have options to use pseudonyms instead of using their real identities (Khalilov and Levi, 2018). Even though the system is transparent because every transaction is listed on the blockchain and can be publicly seen, it is still appealing as only pseudonyms of the addresses used to make the transaction will appear. By avoiding using real name, people cannot be easily identified by criminals with bad intentions. It may be required to prove identity in order to receive a service, however it is not publicly available. The anonymity provided by this cryptocurrency increase the level of confidence that people may have to use it as an online mode of payment which is a strong benefit for the sustainability of a cryptocurrency.
Even though Bitcoin put emphasis on user’s security, the system still has flaws and users can be exposed to fraudulent activities. In order to make transactions, because of the decentralization of the system, users rely on digital wallet. However, these wallets do not directly keep the coins as it gives access to a secure system that requires a private key to prove the ownership (Zaghloul et al., 2020). Every user has a public address which is used to receive or send payment and a private key that allows people to have access to their currency or withdraw a payment that has been received (Frankenfield, 2020). The private key is made with complex mathematical algorithm which make it significantly difficult to hack. Moreover, the private key is personal and prevent to use any coins if lost. A plethora of wallets are available on the market, however some of them may be more vulnerable than other as they allow to store private keys online (Zaghloul et al.,2020). The different types of wallets are Desktop, Mobile, Web and Hardware. For example, web wallets store these private keys online that makes them vulnerable as wallet can be exposed to hackers. If a private key is stolen, the accessibility to the Bitcoin available is easier, therefore, they can be taken away from the original owner. Hence, it is crucial that users have an appropriate wallet and an efficient private key storage as it may be subject to fraud.
The cryptocurrency market is highly volatile according to Aggarwal, Patel,Varshney and Oostman (2019), which can be detrimental for users. The Bitcoin initially works as a speculative asset which means that the value of a coin depends on the supply and the demand on the marketplace. Bitcoin has an unpredictable value that can lead to reluctance amongst potential investors or users (DeVries, 2016). Hence, as long as people trust the currency and are willing to invest in it, the value will continue to increase but the currency can also dramatically decrease if people lose trust in the currency. For example, the recent investment of $1,5 billion of Tesla company in the cryptocurrency had a significant impact on the value of the currency that increase over 25% before falling back slightly (BBC, 2021). Such investment on the cryptocurrency sends a positive signal to investors who may also be tempted to invest. Hence the value of the currency is related to people trust. Moreover, according to Reiff (2020), bitcoin value may fluctuate because of external event. For instance, in 2014 the revelation of an attack of the OpenSSL vulnerabilities which is commonly used to generate private keys has resulted in a decrease of 10% of the value of the currency. These example shows that Bitcoin may have a high value, but the opposite can rapidly occur depending on several factors. Events occurring in the financial market or decision taken by the government can significantly influence Bitcoin prices (Zhu, Dickinson and Li, 2017). According to Corbet, Lucey, Peat and Vigne (2018) Bitcoin is limited as a currency because it doesn’t meet the requirement of fixed unit of account due value fluctuations. Therefore, the constant unpredictability of the Bitcoin value makes some people believe that it is more an asset than a currency, despite the possibility to make real life transaction. The volatility of the currency limits its adoption as a mode of payment.
Although most users appropriately take advantage of the anonymity provided by Bitcoin, a drawback can be underlined as some users make an abusive use of this functionality by having illegal activities on the Darknet. Criminals could be attracted by the darknet as it allows to make research anonymously. However, the anonymity provided by the access on the Dark web gives a place to criminals willing to conduct illegal activities. According to Kethineni, Cao and Dodge (2018); the darknet is appealing for criminal firstly because it gives the opportunity to alter their identity and Bitcoin is an attractive mode of payment as it increases the discretion they need in order to make illegal transactions. For example, a case study conducted by Kethineni et al. (2018) shows that 7 out of 12 criminal cases was related to the use of Silk road which was an illegal platform on the darknet that allows people to pursue illegal activities. On this website, the only mode of payment authorized was Bitcoin because of the anonymity provided. Since, the website has been closed by the Federal Bureau of Investigation (FBI) in 2014 because it was illegal. However, multiple websites on the dark web still pursue illegal activities by benefiting the anonymity provided by Bitcoin. Hence, the currency facilitates illegal transactions.
The idea of Bitcoin largely accepted as an official currency does not seem possible. Firstly, the decentralization preventing official institutions to control it as a currency makes it controversial. Kethineni et al. (2018) argued that some countries such as China and Japan do not allow financial institutions to trade bitcoin, but it is permitted amongst the population. However, countries such as Bangladesh, Bolivia and Ecuador prohibit the use of the currency in some cases. For example, in Ecuador, people are allowed to trade Bitcoin however it is not allowed to use it as a currency to have access to goods or services. Moreover, some country such as Germany do not classify it as a currency but as an asset (Kethineni et al., 2018). Hence, at the international level, this cryptocurrency operates in an unclear, cloudy area. Furthermore, there is a growing concern about the system used to maintain the functioning of the cryptocurrency as it is based on powerful computing machines. To provide the effectiveness of the functioning of the currency, miners simultaneously try to solve complex mathematical operations in order to validate transactions. However, only one miner can finally solve it therefore the rest of the energy used by the other miners trying to solve the same operation end up wasted (Zaghloul et al., 2020). Hence, some people believe that in the present day where environmental issues are constantly raised, the method used is not eco-friendly. The absence of legal control also reduces the possibility of general acceptance amongst population around the world as it appears complicated to define which utilization of the Bitcoin can be legal (DeVries, 2016). According to DeVries (2016), The confusion generated by the currency is not only due to the absence of clear legal frame but also to the volatility of the value. Businesses and private users can be reluctant because of the fluctuations of the value. Therefore, a general acceptation of bitcoin as a currency may be difficult in the future.
To sum up, even though bitcoin can be beneficial to make payments, the adoption of this cryptocurrency as a currency largely accepted in the future seems limited. The decentralization of this currency may be attractive for some people as it allows to make transactions easily and anonymously which is valuable because of the constant growing of the invasion of the privacy nowadays. However, this advantages also have a limit as it facilitates illegal transactions on the darknet for criminals. Moreover, the hard work carried by the miners assures an overall good security to the system but the guarantee of a total safety of people asset cannot be given because of the vulnerability of digital wallets. Furthermore, the bitcoin can be a good alternative to dollar for example as the value tend to decrease over the year while the bitcoin value continuously increases. However, it may be highly risky because of the unpredictability of the value which can easily fluctuate due to events that can make people lose their trust in the currency. Many people are still hesitant when it comes to adopting this currency which is considered as an asset more than a currency by some experts. In addition, techniques used to make the bitcoin system work is also an issue because it is not aligned with the sustainable way of living promoted by many people nowadays. Some people also prefer having the assurance provided by conventional institutions such as banks. Therefore, the prospect of the global adoption of this currency in the future seems restricted at this stage unless governments and international institutions take several steps in order to regulate its uses and give a clearer insight of the Bitcoin.
List of references:
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