Bitcoins: What Does the Future Hold?
    2013-11-27 19:23:30      Web Editor: Yangyang
The high-profile legal tangle involving two Chinese tech giants has made the first anti-monopoly case among internet firms heard by the Supreme People's Court here in China, though the final verdict has yet to come.


Bitcoins, the word on everyone's lips of late. The value of a Bitcoin has gone up in value by 60 times since the beginning of the year, jumping from 200 US dollars per Bitcoin to over 1-thousand in this month alone.

China, being home to the world's largest Bitcoin platform, now accounts for more than half of the daily turnover of Bitcoins.
So what were the aims of developers of Bitcoins? Have they been achieved? What does the future spell?

CRI's Lucy Du investigates.

Bitcoins have been in the works for decades.

It all started in the 1970s with the broader awareness of cryptography, a practice previously reserved for governments and the military.

Cryptography involves constructing and analyzing protocols for secure communication protected from the eye of adversaries.

It is also a tool for guarding individual privacy in an electronic age.

Dr Vili Lehbonvirta is an economic sociologist with the Oxford Internet Institute.

"In the early 70s and 80s there was a collective of engineers and academics called Cypherpunks who were interested in how cryptography and digital communications technology could be used for digital communication and commerce which would allow individuals to live outside the influence of governments and banks. So very libertarian ideology. "

Bitcoins are explicitly created in line with such principles.
The decentralised, peer-to-peer network allowed high-speed, low-cost and anonymous transactions, which function outside the influence of intermediaries or central authorities.

The rate of increase of the supply of Bitcoins is predetermined in its coding, whereby it grows monotonously as a function of time.

This means that central banks cannot intervene to manipulate the money supply as they with traditional centralized money systems.

For Lehbonvirta this is a key innovation:

"This is one of the great promises. Once you get the central banks out of the equation, many benefits may fall. Of course the central bank can inflate the currency. Inflate away government debt and in that way bring about redistribution of wealth against the will of those governed."

As there is a cap on the maximum number of Bitcoins to be created, it is deflationary in nature, which in turn encourages hoarding, or the practice of buying-and-holding in view of making a future profit on the sale.

Jonathan Levin is a researcher specializing in virtual currencies at the University of Oxford.

"At the moment its (Bitcoins) being treated as an asset class, especially in China, buying it now is a speculative investment. If it were to be accepted as a store of value then it would be worth a lot more than it is worth today. And that's just a pure calculation based on the number of people who want to hold it and the number of Bitcoins out there."

Such speculative behaviour hurts the integrity of the currency's function as a medium of exchange.

This in turn is a challenge to Bitcoins gaining price stability, which is required for it to become more widely adopted.

Another issue is the ability of Bitcoin transactions to circumvent the law also leaves holders of Bitcoins vulnerable to theft.
The possibility of identifying stolen Bitcoins has sparked debate over whether to introduce a feature that drops them out of circulation.

However, that requires the establishment of centralised institutions to monitor transactions and make judgements.

And these are the very types of institutions that goes directly against the ideology behind cryptocurrencies.

As is evident, the Bitcoin is endowed with enormous potential alongside salient contradictions.
Whilst it remains too early to foretell the fate of Bitcoins, its advent should be no less than a game changer in the modern financial services industry.

For CRI, this is Lucy Du.



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