Hello again, readers!
The term passes by so quickly. We’re already on the penultimate issue of The Iron Warrior this term! Many thanks to everyone who contributed articles to this issue. I’d like to recommend in particular Amer Abu-Khajil’s article on the pros and cons of graduate studies on page 3, and Cameron Soltys’s article on the increasing irrelevance of graphics and return to gameplay in indie games, on page 8. I would especially like to thank Edward Blake and Wade Wilson, who were feeling adventurous in this issue’s TopZ (with a Z), doing a rather rebellious article that messes with our column spacing and includes (gasp!) QR Codes. Our last issue will be published on November 27, and includes the triannual Tin Soldier, the issue that everyone loves!
There’s been a topic that’s been making the rounds in the last several months both on the internet and on the fringes of financial circles. That topic is the bitcoin. The bitcoin currency was originally created in 2009 as a digital currency that did not rely on trust. Historically, all forms of currency and money relied on trust. For example a paper bill is physically worth less than a cent, it only holds value because we trust that it holds value. The markets tell us that this bill is worth this much at this time, relative to other currencies. Before, it used to be other sources that currency relied on for value. For example under the gold standard, money was defined to be worth a certain amount in gold. In ancient and medieval China, a bill was worth what it was worth because the government said so and would enforce it. The key underlying thing concept here is that people trusted that money was worth a certain amount, and that’s what gave it that value.
The bitcoin tried to change that. Bitcoins are created through using computers as “miners”. Thus anyone can technically “mint” bitcoins, provided they outfit their computers for the task. This would usually lead to rampant inflation as everyone would try to create the currency. However, this is not the case as the currency has predefined limits and the creation of bitcoins will slow until it hits a rate of production of virtually zero. Thus there would only be a limited amount of bitcoins in existence at any one time.
When the bitcoin first came into existence, within months people had discovered a flaw in its design that allowed people to print infinite amounts of the currency. Yeah, not a great start to an infant currency. However, it recovered from this rocky start and rose to the level of a fringe alternative currency used by conspiracy theorists and paranoid tin-foil hat wearers everywhere. Eventually, in 2011, some mainstream organizations such as Wikileaks (if such could be called a mainstream organization) began to accept bitcoin donations. In 2011, the bitcoin hit its first major spike, jumping from 30 cents to about $32, but fell back down to $2.
As knowledge of the bitcoin became more prevalent, its uniqueness caused some to consider the implications of a new “cryptocurrency,” so named due its reliance on cryptography rather than trust for value. Eventually, bitcoins became public knowledge in early 2013, and these days it is used mainly by speculators as a commodity rather than a true currency. However, it is accepted by several prominent vendors such as Reddit and WordPress.
The bitcoin’s price has fluctuated wildly since its introduction having reached lows of 30 cents, but at the same time has experienced spikes of over $400 for short periods of time. However, since 2013, the price of the bitcoin has risen steadily and today is worth around $325. Is this the true price of the bitcoin, or is it simply the result of speculators driving the price up? Is there even truly a difference?
The bitcoin is different from traditional currencies in several ways. I already mentioned that it is an attempt to not be based on trust, but another important note is that the bitcoin is purely a digital currency. There are no physical bitcoins out there (yet) and the majority of trading is done online. The bitcoin is certainly not the first digital currency, but it is arguably one of the more prominent ones at the moment. The bitcoin is also independent of any central authority, there is no Federal Reserve or National Bank regulating the value and amount of bitcoins in the world. Instead it self regulates . As stated earlier, the amount of bitcoins in the world tends toward an upper limit, doing this by making each successive bitcoin exponentially harder to make than the last. As production is linked to processing power, there will eventually come a point where it is near impossible to make a new bitcoin under current processing power limits. That limit is currently estimated at around 21 million.
Crucial to the bitcoin is a decentralized encoded public transaction log. A key issue with digital currencies is called double-spending. As digital currencies are digital and not physical, a user can copy the currency he spends, and he would spend one and keep the other, thus spending free money. This being such an obvious problem, all major digital currencies have ways to stop this. For the bitcoin, this is its public transaction log, known as the bitcoin protocol. It keeps track of all Bitcoin transactions made in the world, and thus ensures a bitcoin cannot be copied and spent multiple times. It is also crucial to the bitcoin’s self regulation, as it keeps track of the number of created bitcoins, enabling the bitcoin to decide how much it takes to make the next ones.
So, all things considered,, the bitcoin is a rather fascinating currency with clever planning. Solutions seem to have been found for the major problems that usually plague digital currencies, like double-spending, hyper-inflation and self-regulation. However, the real question most people are asking is, is the bitcoin a viable currency? From all the things we have learned, it seems like, yes, it could be viable. However, there are still problems with it, as there are problems with any currency.
First of all, the bitcoin is not widely accepted yet. This is a problem inherent to all newfound currencies. It is hard to use something as money when the majority of places you’d want to buy things would not accept it. Traditional currencies that had the backing of countries avoided this problem, as it would be automatically accepted in every business within the nation. I cannot think of an instance where this problem has been solved yet by a nontraditional currency.
One thing preventing the bitcoin from reaching public acceptance is that it’s primary usage before hitting the mainstream was as a currency on internet black markets using anonymity networks and darknets. The most notable black market that used bitcoins was Silk Road which was shut down on last month by the FBI. From this raid the FBI came into possession of 144 000 bitcoins valued at $28 million. Such large quantities of trading indicates that it is clearly favoured by the shadier side of the internet for deals, and such stigma could be hard to shake off if the bitcoin were to try to become a legitimate currency.
Another thing that might prevent widespread adoption by countries is that the countries themselves cannot regulate it. All traditional currencies tend to be linked to and regulated by at least one country. The USA uses the US dollar, China uses the RMB or Yuan, the European Union uses the Euro, etc. If a country has control over its own currency, it can regulate its value using things like interest rates and minting. Thus it can try to slow inflation during prosperous years, and try to kickstart the economy during recessions. Allowing the bitcoin to be used as currency would mean that governments would lose this control over their currencies, and the imposes a certain amount of risk.
Overall, the bitcoin is probably the digital currency closest to seeing widespread use. However, there is still a ways to go before such a thing can happen. Is it wise to invest in the bitcoin right now? Perhaps, but be aware that as it is currently most used by speculators, it is prone to sudden spikes and falls, and is hard to predict. It is possible that you may have already missed your chance. I’d wait and see.
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