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Technological advancements are moving so rapidly that sometimes it is hard to keep up. Both the hardware and software are continuously changing. There has been a recent advancement that has the potential to radically change the financial world-Bitcoin. Bitcoin is to the financial world what the internet was to the communications industry. Bitcoin is designed to replace the current financial payment network system that existed since before the internet. Bitcoin bypasses the current convoluted process of money transfer, it facilitates the direct movement of funds from one person to another without the need for a middle man (financial intuitions). It allows the redirection of power from the hands of a few to the masses. It is completely decentralized and it is this distributive consensuses property of bitcoin that makes it so revolutionary.

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Bitcoin was designed to be like precious metal which means it requires a lot of resources to obtain them. It is pretty much akin to gold in that there is a limited supply. There can only be 21 million bitcoins in circulation. There are essentially two ways to get bitcoins. You can go the one of the many bitcoin exchanges and buy bitcoins or you can mine them. If you wanted to buy bitcoins, Coinbase seems to be the most trustworthy place to do so. The current value of a bitcoin is $275.41 CAD, plus or minus 1.5%-2% volatility. Bitcoin’s volatility depends on factors such as, its ability to store value and the current media reports on Bitcoin. If you decide to mine for bitcoins, you would need a powerful CPU/GPU to run the algorithms. Mining is the term used for adding transactions to the public ledger. Using special software, if you can solve a complex algorithm you are rewarded with bitcoins. This will be added to the ledger and is verified by the hashcash proof of work function. This is what makes it secure and tamper proof. Mining is not an easy or quick process. You compete with everyone else who is also mining. There are clusters of people who are mining for bitcoins. It can be pretty expensive when you have your computer running twenty four seven. There are reports of $80,000 electric bill of some miners. Give that bitcoin highest value was $1242 it is easy to understand the appeal of mining for them.

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Bitcoin as mentioned before is completely decentralized. No one owns or controls bitcoin. It is an open source code available to all. Also Bitcoin provides complete anonymity to its users. These are two of the most appealing features of Bitcoin. They just so happen to be the two most controversial features. In its pure form Bitcoin cuts out the middle man (financial intuitions) and allows the direct movement of funds from one anonymous person to another without fees, regulatory concerns or taxes. This is in contrast to the current financial paradigm where most countries have a governing financial authority. These authorities are in charge of setting monetary policy and they are both powerful and influential. However, they are not accountable. It is common that these officials are not elected, so if we don’t like what they are doing, we can’t vote them out. Bitcoin eliminates this problem. The main appeal of Bitcoin is that there is no central governing authority. In so doing, it allows individuals rather than institutions to have control of the money supply. That’s the good part. The bad part is that because there no governing authority, it means there is recourse or insurance if it hacked. When it’s gone, it’s gone. There is no one to go after or complain to or try to get some type of compensation. The second feature of anonymity, is welcomed by the consumer. It does not require your personal information and you can create as many identities as you wish. This means there is no way to track anyone’s activities using bitcoin. This is great because it protects the average consumer from identity theft. Unfortunately, it is also a great feature for those engaged in the black market. Case in point is Silk Road. Silk Road was an online black market that used bitcoin for their transactions. They were shut down by the Federal Bureau of Investigations (FBI) in 2013.

 

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Since its inception, we have seen many variations of this innovative technology. It is not only being adopted, but also its constantly evolving. Ripple is an example of one form of its evolution. It uses the bitcoin innovation to replace how bank transfers are currently being executed. It has somewhat of a hybrid of old and new systems. How this will eventually play out I can’t say. What I can say, is that Bitcoin seems to be just the seed of a greater possibility. The fact that the creator of Bitcoin still remains a mystery does concern me somewhat, but holding that constant, we cannot deny that the possibilities of this technology are far reaching. The ability to allow people real self-governance over the movement of their assets is powerful. It is disruptive to the current financial paradigm and has far reaching implications.
Bitcoin is in its infancy. It’s only six years old. Its current status is still in flux. Today, the legality of bitcoin varies from country to country. In the US, for instance, bitcoin was approved as a convertible decentralized virtual currency in 2013. In March of 2014 the Internal Revenue Service (IRS) issued tax guidance for bitcoin business. If you reside in the state of New York you have to get a BitLicense to be able to conduct business using virtual currency. This is in contrast to Iceland, which has prohibited the use of bitcoin because it is not in accordance with their Foreign exchange act. As for the European Union (EU), they have advised their banks not to deal with virtual currency until there is a regular framework in place.

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It seems that the whole purpose of bitcoin was to circumvent regulations, fees and taxes and allow direct movement of value from one person to another. The current trajectory seems that regulators are slapping on a very similar framework for regulating bitcoin as currently exists for fiat money. So while no one entity controls bitcoin there is budding regulation for controlling the ability to use bitcoin which defeats the purpose for which it was originally created. As rightly noted by Peter Rose of MoneyGram, “Obviously the frictionless is the value that Bitcoin brings, and obviously there’s supposed to be a low cost structure. But increasingly as you start to scale the business and really look at remittances on a global basis, all of the things that Bitcoin stands for will get complicated, because the structure of having to ‘know your customer’ and to be able to live under the regulations that governments are forcing you to live by, starts to diminish the benefits that Bitcoin does. The frictionless becomes more frictioned

The question to be asked is would these regulations impede the evolution of bitcoin? If left on its own, what can this cryptocurrency morph into and what impact will it have on the financial system and more importantly what impact it will have on us?

Dr. M

http://www.thekidonomicsseries.com/

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