In: Economics
How is Bitcoin trading changing our perception of investment and money, either in positive or negative way?
Solution:-
“The future of money,” “drug dealer’s dream,” “transformative,” “disruptive”– Bitcoin has been called many things. Beyond its anonymous nature, bitcoin has the potential to change the way we bank, make transactions, and view money. Let’s examine bitcoin’s potential and its challenges.
• A Quick Primer
One can earn money (dollars/pounds/euros) by working, selling
things, or exchanging other currencies. Similarly, one can earn
bitcoins by mining (working in virtual world), getting paid in
bitcoins for selling goods, or purchasing bitcoins by exchanging
existing currencies (like US dollars). Earned or purchased bitcoins
reside in safe wallets, which are online secure bitcoin storage
provided by bitcoin service providers. Wallet owners can use
bitcoins for any transactions where the counter party accepts
bitcoins. Every transaction gets recorded onto the bitcoin network
(through block chains), which authenticates the transaction. (See
Related: How Bitcoin Works.)
• The Speculative Nature
Any currency's primary usage is for transaction-based trades, i.e.,
buying and selling things. Bitcoin is not yet widely accepted by
buyers or sellers, and its valuation has been a speculative game.
The use of bitcoins for illegitimate purchases (like drugs and
gambling) can make buyers pay a premium due to nature of goods or
services involved (See Related: How Bitcoin Casinos Work?).
Moreover, anyone purchasing legitimate goods or services through
bitcoins would make a comparison with the dollar equivalent, and
opt for the cheaper option. In the last quarter of 2013, bitcoin
was trading above $1200. Since then, it has seen a steady decline.
From around $800 in January 2014 to $330 in December 2014 and to
yet another low of $170 in early 2015, bitcoin has lost significant
ground.
The dotcom bubble may have burst in 2000, but overall Internet use
has grown exponentially, making it a mandatory framework for the
present day economy. Recent valuations of bitcoin may be perceived
as a similar bubble burst. In 2014, bitcoin saw some significant
developments, which indicate the long-term positives and adoption
potential of the currency .
1.The largest increase in bitcoin trading volume.
2.The number of bitcoin wallets grew from 3 million to 8
million.
3.Large corporations, such as Microsoft, Dell, Expedia and Dish
Network, have joined the list of merchants accepting bitcoin.
4.The number of merchants accepting bitcoins grew from 36,000 to
82,000.
5.The number of bitcoin ATMs grew from just 4 to 340
worldwide.
6.Venture capital investment in bitcoin shot up significantly, from
$98 million in 2013 to $335 million in 2014.
Yes, bitcoin valuations are at rock bottom, but these recent developments demonstrate the strong future potential of the currency. And venture capitalists, pouring in large amounts of capital into the currency, are in it to reap great returns from long-term potential.
A rare combination of technology and finance with global reach, bitcoin’s framework is impressive. Its real potential is not in its high exchange rate valuation or in providing an additional virtual currency that is free from governmental or political interference. Bitcoin’s potential lies in its underlying technology, a secure system with built-in authentication of transactions and record keeping, which could change the global financial ecosystem
• Future of Bitcoin Adoption
To transfer money to a friend, my bank takes a cut for providing
services. To purchase a house, I pay significant fees for
registration and stamp duty charges to register my ownership in
multiple books and records. Through digital labeling, the indelible
record of a bitcoin transaction has the potential to eliminate such
third parties (and their costs).
Zerohedge cites findings by a Goldman Sachs analyst, “in 2013 money
transfer fees would have fallen by 90% if bitcoin had been
used...Global transaction fees at retail point of sale, meanwhile,
were $260 billion on over $10 trillion of sales. Using bitcoin,
those fees fall by almost $150 billion to $104 billion.” In
addition, currently credit card companies charge 2%-4% to retail
merchants. Using charge-free bitcoins would be a game changer for
small businesses running on thin margins, as these are businesses
with low sales volumes.
A World Bank report estimates that by 2016 international
remittances will be worth over $700 billion. Banks and money
transfer services take significant cut ranging from 4% to 10% on
the transferred amount. This charge may be direct (such as a
standard quoted percentage) or indirect (such as a less favorable
forex rate). Bitcoins allow free transactions beyond geographical
boundaries (or for a simple 1% charge if using bitcoin service
providers like Coinbase or Bitpay). A mere 3% savings on such
transactional costs on the projected figure of $700 billion would
result in a savings of $21 billion, leaving more money for the end
consumers.