07/09/2017 Economy, GS Paper 3 0 comment

Bitcoin- All you need to know | Bloomberg

What is Bitcoin?

  • It is an attempt by a firm, using blockchain technology, to create a set of shares in a trading entity that had an initial set value and fixed number (much like the face value and number of shares offered in an initial public offering), in the hope that these shares would become the medium of exchange through which people trade goods and services.
  • Since the number of shares is fixed, demand for them goes up over a period of time as more and more people use the shares to settle their transactions; so, the bet is that each bitcoin’s value goes up stratospherically since there will never ever be any more bitcoins issued.

It is legal?

Yes, as the Government has not yet regulated it in both India and China.

Could bitcoin be the next gold?

The idea has become particularly popular as the value invested in bitcoin and other cryptocurrencies has marched upward over the past year. Even after this week’s selloff, prompted by China declaring initial coin offerings illegal, the value of all cryptocurrencies in circulation is around $155 billion.

Digital Revolution –

The value of all bitcoins in circulation is moving close to the value of gold held by Exchange Traded Funds (ETFs).

Doubts on viability of Bitcoin –

There are two main reasons to doubt bitcoin’s viability as an investment.

  • One is an engineering issue: Its creaky infrastructure is likely to be a turn-off for all but the hobbyist users.
  • Another is more philosophical: Digital currencies have no fundamental value, so have no place in a portfolio.

Value of digital currency as compared to Gold –

  • It’s a fair question, but one that could equally be levelled at gold. Since Richard Nixon ended the fixed $35 an ounce convertibility of gold in 1971, its value has risen at times (the 1970s, the 2000s) and fallen at others.
  • The best argument to justify investing in gold these days is not that it’s an eternal “store of value” but that its very weirdness makes it special: According to modern portfolio theory, you should buy gold not for its superior investment returns, but because it doesn’t correlate much to other asset classes such as stocks, bonds and commodities.

Advantages of Bitcoins-

  • Freedom in Payment.
  • Allowing users to be in control of their transactions help keep Bitcoin safe for the network.
  • With the block chain, all finalised transactions are available for everyone to see, however personal information is hidden.
  • Bitcoin protocol cannot be manipulated by any person, organisation, or government. This is due to Bitcoin being cryptographically secure.
  • Currently there are either no fees, or very low fees within Bitcoin payments.
  • Due to the fact that Bitcoin transactions cannot be reversed, do not carry with them personal information, and are secure, merchants are protected from potential losses that might occur from fraud.

Conclusion –

Digital currencies may be as vulgar as the original barbarous relic, but neither is going away any time soon. If that makes investors in both look less like seers and more like problem gamblers betting on where a fly will land — well, welcome to financial markets.