To be or Not to be

Just over a week ago, the world's biggest (once-dominant) bit coin exchange-Mt Gox collapsed while half a billion dollars of customers cryptocurrency are supposed stolen by some anonymous hackers on the internet. Afterwards, Mark Karpeles, Mt Gox's chief executive, declared that 'There was some weakness in the system, and the Bitcoins have disappeared. I apologise for causing trouble.'-the bit coins ecosystem has passed away. (The economist, 2014)

In my past posts, I tend to use some objective points to discuss whether bit coins can be a successfully financial system or they just a bubble in the future. In my first two posts, I shown some backgrounds about what is bit coins; when bit coins came in front of us; particularly how it works. Subsequently, in order to find some key agreements, I figured out the characteristics of bit coins. Based on these, it seems that there will be a revolution for our current financial system. In general, in terms of dual character, what I said is we should not be too excited and the potential problems always along with a emerging thing. I tried to explore the depth and widened my horizon, as a result, I read some literature so that I complained with myself referring to Gresham's Law.

So far, as the first paragraph I shown above, the latest news has let me down. With glancing some agreements on the internet (also from some of my friends), I wonder if the bit coins are total a evil. Like all the spectators are rational, I would like to say sarcasm is the lowest form of wit. 

Bit coin is neither a angel nor a evil, we should have patience and let the bit coins do its work. To be honest, before I wrote this blog, I want to completely give a so-called 'reasonable point' on my topic. However, absolutely, I tried not to be such restricted that I should have said that bit coins is a undoubted evil and it dose seem to be a bubble. For human beings or for our financial system, in the course of advancement, every little changes may tend to be a brilliant idea; every try may make sense. 

To borrow Shakespeare's words, to be or not to be, it is a question. Let the market make its own decisions.The only thing we should do is that we need be patient and wait for the timing when bit coins would again possess rosy face.

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The critical thinking of the future of Bit coins-Based on the Gresham's Law

From the graph above, In April 2013, it shows bit coin-the digital currency spiked at $266 before plunging to $ 105 in wild ride conceivably  related to Euro crisis.(the guardian, 2013) Zoe, a editor from international business times, announced bit coins were flourished during Cyprus’ banking crisis due to worried European investor purchase of the entire currency in the face of the woe (story here). During past time, most individuals were perpetually overconfident of the future of bit coins. In my view, as I said before, such enthusiasm perhaps be premature (for more details, please see my last post).

In order to explain my point in a clear way, I would like to introduce the Gresham's law to see this problem for my readers. The applicable condition of Gresham's law is based on the gold standard. Comparing with gold, in essence, bit coins has the similar phenomenon which we can indicate that they have  the convergence nothing but one is digital(string of long database code) the other is 'real' currency. As I have described the decentralization one of the four features before, bit coins are not subject to the central bank. Also the supply of bit coins will stand still in the short run, if the price continue to soar, when you are possessing a great deal of bit coins, you will not sell them at all. Instead, you prefer hoarding these money which can lead to a reduction of liquidity. In perspective of Gresham's law, bit coins will be driven out of the financial market as a good money. Unless these digital currency being 'bad', individuals would spend them.  When such situation occurs, bit coins start to stop circulating. In reality, as a none fiat money, there is no face value of bit coins. Otherwise there is no intrinsic value based on the materials. The value appears when the voluntary exchange exists for bit coins.

In words, even we are confident that there cannot be a inflation. Once bit coins become a good money, that perhaps submit to a deflationary spiral that causes individuals or industries to abandon bit coins. Under this case, it is probably to lead a financial panic because there will be a everlasting downturn about the previous value of bit coins. Thus, a foreseeable crisis will burst.   

Reference: 

Philipp Güring & Ian Grigg, 2011. Bitcoin & Gresham's Law - the economic inevitability of Collapse. (link here)

David Mint, 2012. Bitcoins: What they are and how to use them. (link here)
Grinberg R. Bitcoin: an innovative alternative digital currency[J]. 2012. (link here)

Such enthusiasm may be premature

After analysing the features of bit coins, to some extent, bit coins seem to be conducive to the existing financial system. Yet some of its underlying negative impacts cannot be overlooked. 

We should be advised that these potentially particular money(bit coins) lacks authoritative backing and central control (Bryans, 2014). When bit coins go mainstream, obviously, states have little power in controlling bit coins. It seems that the status of centre bank would be a significant decline in the financial markets as well. Even the money supply of bit coins will be a stable level at 21 million in the future (for more details, please see my last post). Before the 'exactly' anticipated amount of currency circulation being reached, somewhere we need to be aware that its growing circulation area is adjusted by a system of specific algorithms basing on computers(Satoshi Nakamoto,2008). On the other hand it is influenced by network operations and the profit-maximising principle. In that cases, it is impossible to imagine what negative effects is going to exert on our current financial system, Besides the real demand of money supply fails to be accurately reflected in the operation of the market due to bit coins being a destabilising factor.

After all, in such an ‘anarchical world’, this issuing mode will be bound to adversely effect on the mechanism of currency issuing system and the control policies of central banks. At the same time, economic efficiency which is obtained in the course of issuing currency by central bank will also be hit because of the prevalence of bit coins. It means, namely, either the traditional seigniorage income can be compelled to reduce or the structure of the monetary base will be damaged(Walter,2012).

In conclusion, once bit coins are popularised around us, there is an issue that regulating the circulation of bit coins will be the first challenge for financial system as a whole.

Reference: 
Bryans D. Bitcoin and Money Laundering: Mining for an Effective Solution[J]. Indiana Law Journal, 2014, 89(1): 13. (link here)
Satoshi Nakamoto 2008. Bitcoin: A Peer-to-Peer Electronic Cash System (link here)

Walter Ochynski 2012. Account free possession and transfer of electronic money(link here)

A gigantic revolution is coming!

Compared with the money we already use. The unique characteristics of bit coins determine its particular role in current money markets. Bit coins are e-money. Unlike the distinction between other material currencies in different types, there is no currency exchange costs incurring in the process. Also bit coins are nearly world-ready currency, which is fully implemented due to the operation on the Internet without intervention by the States or the Governments. It is said that it brought great convenience into the international transaction. 

More importantly, another advantage of trading by e-money is environmentally friendly. Creating (print or coin) material money will result in resource depletion, but bit coins are not. We do not have to worry about problems of resource-exhausted, such as gold will run out, or lacking of paper in the future. 

Otherwise, bit coins are restricted of the algorithm, and the total amount of these would tend to be a stable level that the number of bit coins will not arbitrarily increase, furthermore current prices hikes would not lead to increase the supply of bit coins. In general, individuals will never realise how much money will be created by a central bank in days to come. Even the central banks themselves can not explore it as monetary policy depends on economic variables which usually change rapidly. However, mining bit coins is predictable. In terms of high certainty how many bit coins will be mined over a specified time therefore the growth rate of the Bit coin monetary amount is predictable. As we can see on the following chart, the total amount of bit coins will be remain at 21 million by nearly 2040 and the growth rate will fall down dramatically in the near future. 

Source from : ( https://en.bitcoin.it/wiki/Controlled_supply ; calculating by myself)

From the above analysis, possibly it is shown that the presence and circulation of bit coins will lead to a gigantic revolution in traditional money market.

reference:

Maria A. Arias and Yongseok Shin. 'There are two sides to every coin-even to the Bitcoin, a virtual currency' Regional economist, October 2013 (link here)

Mihaela Iavorschi. 'The Bitcoin project and the free market' CES working papers – volume V, issue 4, 2009 (link here)

The Characteristics of Bit coins

In my past posts, I have discussed some brief concepts of bit coins. However if we are going to explore some further details, the characteristics of bit coins should be paid more attention to.I would like to take four parts into account:

1.Decentralization

Fundamentally, there is no central bank so that  bit coins are decentralized as a distributed currency, for instance, the whole activities are populated with transactions from customers(or I can call them users). The decentralization of bit coins provides a comparative safety and freedom environment.

2.Circulating around the world

In reality, customers are able to manage bit coins in any computer if the network connection is normal. Hence,any user can mine(why I say 'mine' here? If you are interested in this topic, please see paper here), buy and sell bit coins wherever they live. The main point is to find a expedient way to his or her supervision of the bit coins production.

3.The exclusive right

For manipulating bit coins, as users, the only way they can do is to use your private 'key' which means anyone else could not take the bit coins unless users offer them the vital 'key'. In a sense, it can not be wrong: the exclusivity undoubtedly guarantees that right.

4.Low transaction cost

Some traditional transactions measures, to some extent, is much expensive than that of bit coins.This is illustrated in table below, which exhibits statistics about the cost per execution (in €) in the main European stock exchanges and the cost per execution (in BTC) in main bit coins market.  

cost per execution	mean	transfer the unit into $
Total cost in €	5.31	7.26
total  cost in BTC	0.0000001% BTC	0.000058

(Source from: Network collections, calculating by myself )

From this table, it is clear to find that the cost per execution in BTC is much lower than that in Euro. Moreover, in bit coins' market, traders can transact with each other in a convenient way that they just need find the IP on the internet. Implicitly, individuals trade in bit coins' market is cheap and 'affordable'.

As far as I am concerned, the four main characteristics of bit coins seem lead its trading to a bright future. 

Reference:
Wallace B. The rise and fall of Bitcoin[J]. Wired Magazine.[Online]. Available, 2011
Kristin Samuelson. The Ins and Outs of Bitcoin  Nov 13th，2011 Chicago Tribune Business column(link here) 

What and why?

Referring to my first post, after the financial crisis in 2008, many people start to question the system of  central bank. Individuals was looking forward to finding a new monetary system which would protect them from suffering from other potential financial crises.

On November 1st in 2008, a person calling himself Statoshi Nakamoto (It might be a nickname.) published a paper in a secret cryptography review group. However, during the historical condition, this paper suggests a new idea on electronic money. At the same time bit coins are coming. In general, bit coins system is getting rid of the restriction of 'third parties'. Subscribers only use software to 'explore money' and make a deal with others in direct way.(see more details here).

In 2008, for instance, the U.S government pump money on wall street and Detroit Automobile company. Simultaneously, FED (Board of Governors of the Federal Reserve System of the United States) launched quantitative easing policy. This is essentially printing a lot of money also leads to a higher prices of gold than ever before. By contrast, bit coins probably do not need to be guaranteed by policy and finance(even someone may bring the economy down).

In words, bit coins are more and more popular in the market during his earlier life.

Where amazing happen!

In the case of previous monetary system, most of the countries around the world use the fiat monetary system(which is controlled by the central bank). Characteristics of this system are guaranteed by the countries' credit.  What's more, currency is circulated by financial institutions during their business. Based on this system, countries achieve their national economic policy.

However, this economic system has effectively operated for more than 30 years after the Bretton woods system collapsing(story here). Thus many people began to doubt about such a system whether it is effective or not after the financial crisis of 2008(for more details about this financial crisis, please see the video above). Obviously, as it is the most essential part of the national rights so that it is hard to forbid over-issuing currency in reality.(Inflation usually follows by an oversupply of money in circulation for a given currency which would negatively effect the economy!). Under this circumstance, Bit coin is precisely in response to the trend of the times, came into being.

Currently, the information of Bit coin in our life everywhere, we can easily get it. Positioning as the electronic currency, Bit coin rapidly grab people's attention with its exchange price rising like a rocket.In a variety of controversy, in the view of some people, Bit coin is considered as an angel who will shake the traditional financial system soon or later. In the other hand, others holds that someone may get a new speculative tool-Bit coin as a demon friend who can help them to conduct the illegal transactions secretly. Indeed, it is a time of great uncertainty.

Behind praise and rumors, in this blog I would like to choose a relatively easy way to talk about what is the truth of Bit coin.  Now, where amazing happen!