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Bitcoin- Challenging the Financial System

Posted in Finance Articles, Total Reads: 3089 , Published on January 06, 2018

Bitcoin is the most speculative and most riskier investment. Nobody knows where it comes from, who created it and definitely where it is going? But still people are drawn towards it from every corner of the world. Bitcoins have exposed the system in new ways. According to statista.com, ransomware attacks have increased 167 times the previous year. Computer attacks were prevalent during the older times also when internet first came into picture, with government finally adjusting themselves to the cut-throat technology and even end up making laws to provide cyber security.

Now glimpses of Government versus cryptocurrency war are also seen through various instances like China banning ICO to major American investment banks like JP Morgan Chase and Co calling it an economic fraud. Bitcoin just like Adam Smith’s theory is a free market with no intervention from a third party, but during the time of major economic bubble burst like the great depression, we have seen the theory failing in major ways. So, the question here arises is, can the Adam Smith theory fail in case of Cryptocurrency Bitcoin too? And if yes, who will intervene and in what way?

Image: pixabay

Bitcoin is the biggest Cryptocurrency by market capitalization. It has a major ability of providing long term benefits. People who invested in bitcoins decades ago, are themselves shocked to see the surge in its value, making them richer day by day.

Negative publicity is also a publicity. No matter how much is said against it, it is still much more in demand, and its demand is greater than its supply. To devalue Bitcoin, its supply should increase more than the demand. The driving force behind every cryptocurrency is a technology called blockchain, where a new type of software runs across multiple computers at the same time and all these computers run the same program and this program serves to create a transactional record called block. Surprising whosoever created bitcoin knew this. Altogether you can only mint 21Million bitcoin and currently there are 12,446,725 bitcoins in circulation with increasing number of demand. To cater to this, there is another thing called Bitcoin cash that has come up. The good thing is everybody who owns a bitcoin is eligible for bitcoin cash which is created by splitting blockchain. Again, there is no security or surety as to how much a blockchain can be split?

There is also a possibility that a new cryptocurrency can come into circulation which is easier to mine and allows faster transaction. Keeping aside the source, as long as these things are working out, Bitcoin seems to be going well, until one decides to taper with the minting process. But here is what you didn’t notice. Blockchain is not owned by anybody, it decentralizes information across multiple personal computer and distribute it too. Similar to Unix, it is open source. Due to its millions and millions of users, it is different for any one person to hack it, tamper it or even take down the network. Many people who run the system use their own personal computers to hold bundles of records submitted by others. Each block has a time stamp and are linked or connected to each other in a chronological order. You can view it, add to it but you cannot change it. There are no middlemen in bitcoin. Validation of the transaction is also done by many users. So, users are the in charge? Well it seems like it. Users are the in charge and since they have the authority, they are the interveners themselves. Blockchain is a database technology which helps verify the ownership of this digital cash and that only one person is claiming it at a time.

Another thing to notice here is the importance of technology, how technology have changed its course over time and now it has the power to change the world. Cryptocurrencies ride high on new and complex technologies, but a cryptocurrency with superior technology will always be demanded more in the market, ultimately leading to decline of older cryptocurrencies. This shows the volatility of the market and money. In a split of a second, the currency in your bitcoin wallet will value near to nothing. Bitcoin is an asset which is easy to liquidate and whose price is rising high, almost quadrupling in six months, which provides huge ROA.

The adoption of bitcoin across the world by people or companies is not much and certainly governments of many countries try to ignore it. But there is no denying the fact that huge amount of investment in made on these bitcoins, and if the bubble burst, no one will know what to do. As today’s youth , I hope we all will live long enough to see its future. Seems like Adam Smith’s theory can finally work without any Keynes coming into picture.

This article has been authored by Aishwarya Kochar from SIBM Bengaluru

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