May 2014
Cryptocurrencies exploded into 2014 with a bang as the value of a single Bitcoin; the most popular cryptocurrency’s value exceeded $1,200/coin. The sudden popularity of the once unknown crypto sparked the creation of more than 50 additional Cryptocurrencies dubbed altcoins. For a moment it seemed as if the cryptocurrency revolution that digital currency advocates have prophesized for the last decade was finally here. But that moment was short lived as world economic powers began to shift their sights to regulating the currency and even outright banning it in some countries. This paper will seek to examine the positive and negative effects digital currencies could have on the world’s economy from the perspective of the free market and governments around the world.
Bitcoin is a peer-to-peer payment system, which was introduced in 2009 as open source software by Satoshi Nakamoto. Satoshi who operated under a pseudonym was only identified as recently as March 2014. This peer-to-peer payment protocol is not to be confused with the cryptocurrency, which bears the same name and happens to operate using the Bitcoin protocol. In fact, each and every digital currency is based on the same original open source Bitcoin protocol. This system was design to be fault tolerant and to not need any central bank; it is a completely decentralized network totally reliant on the masses of people that utilize the network. Satoshi believed that the Internet needed a completely non-reversible transaction method that would not suffer from a lack of trust and increased transaction fees. The result of that was the development of the payment system based on cryptographic proof instead of trust known as Bitcoin.
Bitcoins (the currency) and thus each and every altcoin that has since been created based on the original protocol operate in a few very specific, secure, reliable, and predictable ways. The first is the handling of transactions. Bitcoin’s public ledger is essentially a list of all transactions that have ever taken place with the use of Bitcoin from around the world. Owners of coins transfer their coins by digitally signing a hash of the previous transaction. In order to make sure that coins aren’t spent twice from the buyer, the public ledger only acknowledges the earliest transaction, all later attempts are ignored. In order to determine when the coin was transferred the Bitcoin protocol network uses a timestamp server to prove that the data existed at the time of the transaction. The next step that helps Bitcoin to implement a distributed timestamp server is to use a proof-of-work system. Proof-of-work can be described as each CPU having only one vote when making majority decisions. Computers that mine for coins are known as nodes, and help participate in verifying transactions and blocks across the entire network.; it is these nodes that make up the voting to verify hashes found and transactions. Each computer having one vote helps to prevent large groups from taking control of the network and falsifying the ledger. This kind of stability, security, and decentralization is why Cryptocurrencies based on the Bitcoin protocol and protocols derived from it are forecasted as economic disruptors.
Around the time that Bitcoin reached it’s peak many people shrugged it off as a bubble, in that the value of the currency was artificially inflated due to consumer interests in using the currency as an investment opportunity and not it’s intended purpose as a currency. While Bitcoin suffered from this bloating and public scrutiny many of the popular altcoins such as Litecoin, Peercoin, and even the Internet tipping Dogecoin succeeded in attracting broad arrays of people interested in using the currencies in the right way. The spread of Cryptocurrencies have already had dramatic effects on certain markets and the economy as a whole since gaining global popularity. An example of one such market that has been dramatically affected is that of graphics cards. In order to mine for altcoins that operate with the scrypt algorithm graphics cards such as those produced by Nvidia and AMD must be used. The rush to purchase top of the line graphics cards has drastically inflated the prices for these cards as the manufacturers struggle to meet the growing demand. Nvidia and AMD have also found themselves in steeper competition as they battle to produce gpu miners with the best speed, temperature, and lowest possible energy demand. In an article released by Forbes Jason Evangelho discusses Nvidia’s latest GPU and their attempt to de-throne AMD as the number one provider to cryptocurrency miners.
“This all leads to a conclusion that’s far from crazy: When Nvidia’s high-end Maxwell cards drop later this year (possibly by late March), they’re going to meet or surpass the hashrates currently possible from AMD, consume less power, and do so while staying cooler and quieter.”
The disruption in the production and pricing of graphics cards is just the beginning of the economic changes Cryptocurrencies have caused. Governments around the globe have been forced to take a serious look at the implications digital currencies can have on our society and how if at all they can be regulated. After the take down of the digital black market Silk Road, the U.S. Senate held a committee hearing which was titled: “Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies”. The purpose of the hearing was to determine the impact and legality of Cryptocurrencies. In the months that followed this meeting U.S. federal offices began to make decisions as to how digital currencies would be treated. The IRS determined that Bitcoin would be viewed as a form of property rather than as a currency, which subjects any Bitcoin transaction to a capital gains tax. Furthermore it was decided that mining activity could be taxed as income. Federal regulations changes such as these have resulted in some companies ceasing all their U.S. operations. Many proponents of digital currencies don’t believe that there should be any regulation or intervention by governments. Despite the imposed regulations the U.S. is still very open to the mining, usage, and trading of digital currencies unlike some countries who have restricted or even banned them.
It is important to ensure that we do not begin to regulate digital currencies too much as they are undoubtedly contributing to our economy and stimulating innovation. There are more than 300 new cryptocurrency related startups worldwide that have been created within the last five years. Large established firms such as Overstock.com, Virgin Galactic, PayPal, EBay, WordPress, and even TESLA have all begun to accept virtual currencies in one form or another. Cryptocurrencies have started to integrate themselves into systems that have existed long before their creation and that is a sure sign of resilience. With new exchanges, marketplaces, ATMs, and employee payment systems being created to work with digital currencies it is safe to say that they are here to stay.
Shortly after the New Year digital currencies began to experience a sharp decline and critics claimed that the “Bitcoin Bubble” had finally burst. Now a few months have the sharp decline the value of the currencies have begun to stabilize again and the future has never looked brighter. The political atmosphere surrounding Cryptocurrencies worldwide must be watched closely to ensure that governments are not acting from a place of self-interests. If governments begin imposing even further obscene regulations on these digital currencies to protect their control over markets then the public will need to respond accordingly. The use of digital currencies to facilitate illegal transactions online is a talking point political opponents of digital currencies continuously bring up however, just because some small portion of digital currency owners use their coins for illegal activities does not mean the entire system should be stopped. If that were the case no monetary system in the world would be legal. Digital currencies and their inherent decentralization represent a loss of control for governments and that it was It is my opinion that they are going to attempt to decrease the popularity of online currencies.
In conclusion Cryptocurrencies represent a change in economics that the modern world has yet to see. The ability for everyone to have complete and absolute control over his or her estate and finances without reporting to some central bank or authority is profound. That each and every transaction of either coins or even property can be audited by anyone anywhere makes the network much more transparent and trustworthy than our current systems. I do not believe that the “cryptocurrency revolution” is here just yet, however I do believe that it’s coming. Of all the technologies and methodologies being invented in the 21st century there is nothing that stands to disrupt our economic system in the way that Cryptocurrencies can.