Friday 29 March 2013

Bitcoins, the new currency?

I just happened to come across online articles describing the potential usage of bitcoins after the series of irrational govenment policies were passed in Cyprus to control the flow of money within its country to tide through the tough period.

Bitcoins were developed in 2009 and circulated around the computer savy people as a virtual currency for services online. It is similar to the then second life currency which burst its bubble in the early 2000s. Since the start of 2013, its exchange rate of 1 BTC (bitcoin) for 10USD has risen till 1BTC for 90USD. It is an astounding 9 times increase in value! On hindsight, I should have bought some last year when I first gained knowledge of it through online forum discussions. T_T But, I was ignorant of the workings of bitcoin and I could not blame anyone for my failure to explore more on virtual currency usage.

In fact, Bitcoin is considered a self-deflationary currency as it is designed to halt production once it reaches 21 million BTC. BTC is produced through a form of lottery (64 letters combination!) and at first it gave 50 BTC to the fortunate computer that struck upon it every 10 minutes. After 4 years, it will decrease by half to 25 BTC (the current mining rate) every 10 min to the lucky computer and so on and so fro. The projected end of production of BTC is thought to be 2140 (I would have been dead...) and by then, 21 million BTC will have been in circulation.

However, I firmly do not believe in Bitcoin as a possible takeover of real life currency as it has no backings or what-so-ever and the hype of a possible virtual currency started by media mongrels in response to the EU failing economy is a possible speculation tactic used by risk-taking firms or hedge funds to earn short-term cash.

Bitcoins are virtual and they are also kept in virtual wallets (you don't say haha). If a hacker hacks your account or you lose your data through a computer reformat, you will lose all your money without any insurance to back it. In the early days of BTC, people who used to use bitcoins would have most probably thrown away their wallets or lost them due to the infamous glitch that caused a massive inflation of BTC. In 2011, the value of BTC dropped drastically from 30USD to a few cents within minutes when a group of hackers reportedly took control of a major BTC account and disposed all of the coins into the market. Fears soon arised and people who thought the BTC bubble had burst started dumping BTC too. It was sort of a Big Depression for virtual currency.
Of course, people can say real life currency can also be destroyed through the forms of irresponsible disposable notes and coins. However, take note that the market of real life currency is too big to be affected by the hands of the minorities and BTC market is self-deflationary. The actions made in the past by people who had lost hundreds of thousands of BTC (back then 100,000 BTC was worth nothing. Now, it is valued at 9,000,000 USD) could have a great impact on the future circulation of BTC as there will be limited circulation. People will hoard large amounts of BTC in hope that it will further deflate to earn more from the rising exchange rate. This will cause the supply of BTC to be price inelastic as the proportion of supply of BTC in the market will increase less than the price. With the demand being price elastic, people will forcefully rise up the value of BTC until one day someone decides to cash out on his big fat BTC wallet causing supply to increase suddenly.


I will continue this next time...
Note: Bitcoins is like the dotcom bubble. With no regulation, it is bound to be in the hands of the rich who controls the market. The small fish will always be the one to suffer when the big fish get away with their profits.

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