Bitcoin: The Virtual Currency Everyone Is Talking About
Decentralization, safe-haven value, transactions without intermediaries: an overview of Bitcoin's objectives and the questions it raises.
This cryptocurrency was created in 2009 under the pseudonym Satoshi Nakamoto. The G20 considers Bitcoin a “crypto-asset.” This refers to virtual assets stored on an electronic medium that allow a community of users who accept them as payment to carry out transactions without having to use legal tender.
Bitcoin’s objectives
- Decentralization (controlled by neither the state, banks nor corporations)
- Acting as a safe-haven asset (still to be proven)
- Allowing transactions between different people without an intermediary (making it easier to send funds to certain countries where it is currently difficult)
- Carrying out anonymous transactions using blockchain technology
The challenges
Use by criminals
Previously used somewhat more as a means of exchange by criminal networks for gambling, purchasing illicit substances or for hacked databases.
Running counter to environmental efforts
According to a Bank of America report, the Bitcoin network consumes 0.4% of the world’s electricity, roughly as much as the Netherlands, and emits as much greenhouse gas as the oil burned by American Airlines.
“We are concerned about the growing use of carbon-rich fuels to mine bitcoins, especially coal, which has the worst greenhouse gas emissions of any fuel. We will not sell any bitcoins, and we will use them for transactions as soon as mining is powered by more sustainable energy”
– Elon Musk
How far should decentralization go?
If the basic idea is to decentralize the currency in use, thereby avoiding state intervention, what happens in cases of fraud or hacking? Being a platform that can be used anywhere on the planet means that the servers, and the individuals or entities operating them, can be located in countries and territories whose cooperation may be difficult to obtain, leaving the “investor” with little or no recourse.
Attacks by hackers
- On February 11, 2014, the Bitcoin network was hit by a massive attack on various exchange platforms.
- On February 24, 2014, the Mt. Gox exchange platform suffered a record loss of 744,408 Bitcoin, the equivalent of more than 250 million euros. BTC lost more than 38% of its value.
- On September 11, 2015, Mark Karpelès, head of Mt. Gox, was indicted in Japan for embezzlement. He is suspected of having misappropriated 2.3 million euros of bitcoin deposits.
- In May 2016, the Gatecoin exchange was hacked and had 250 bitcoins and 185,000 ether (another cryptocurrency) stolen.
- On August 3, 2016, the Bitfinex exchange reported the theft of 119,756 bitcoins from its trading platform ($65 million).
- On May 7, 2019, hackers stole more than 7,000 Bitcoins from the Binance Cryptocurrency Exchange, worth more than $40 million.
How can you avoid having your Bitcoins stolen?
By holding your cryptocurrencies in a “cold wallet” or holding the private keys to your wallet.
Value based on supply and demand
Based on the principle of supply and demand, Bitcoin’s supply is already known, with a maximum available. As for demand, it depends on the demand created by consumers and is currently driven above all by the news.
The more Bitcoin gives the impression of being a Wild West, the less appetite ordinary people will have for this virtual currency.
The more countries such as Algeria, China, Morocco, Russia and soon India ban the use of Bitcoin, the more demand will fall.
The more countries make the currency legal and regulated, the more beneficial the effect will be on demand, which could increase its value.
Public services
The global Covid-19 pandemic crisis will have cost the public finances of various governments dearly. How will governments recover this money? It will definitely take several years.
- Issue savings bonds
- Consumption taxes
- Increase the tax on capital gains
- Increase corporate and personal income taxes
- Encourage immigration and full employment to increase the number of taxpayers
The school system, the health care system and other public sectors are funded through income and other taxes.
If we start getting paid in Bitcoin and making our purchases with this currency, who will pay for public services?
Governments have no interest in legalizing this type of currency, and for several good reasons. Does this currency have a place in an investment portfolio as diversification, representing 0-5% of total investments? Perhaps, but one thing is certain: the investor must have nerves of steel to endure the ups and downs.
