The document discusses the history and characteristics of Bitcoin, a digital currency created in 2009. Bitcoins are created by users through mining and have a finite supply capped at 21 million. The document outlines several advantages of Bitcoin like its independence from any central authority and lack of manipulation compared to national currencies. However, it also notes challenges like Bitcoin's volatility, risk of theft, and potential resistance from governments and banks who could see it as disruptive competition. While Bitcoin may not survive long-term, the concept of an alternative currency independent of national control is seen as an idea that will continue.

1. 86 GlobeAsia July 2013
Technology
or the uninitiated, Bitcoin
is a virtual currency created
in 2009 that has of late
exploded in popularity
worldwide. Created by
a person or group of people known
collectively under the pseudonym
Satoshi Nakamoto, Bitcoins are slowly
increasing in circulation and now have
a market cap of over $2 billion.
While introducing currency had
previously been the purview of nations,
now it’s being taken over by a rag-tag
group of monetary enthusiasts who
refuse to let their government tell
them what money is worth. Bitcoin
effectively democratizes money, as
anybody with a computer and an
internet connection can create and
spend their own Bitcoins.
Since the currency is free from
any governing authority, it cannot
be artificially manipulated. Recent
occurrences such as the United States
bank bailout, the LIBOR scandal or
the crisis in Cyprus have left many
questioning whether the governments
and banking institutions in those
cases are making prudent decisions.
Considering the massive debt in the US
and the instability in Europe as the EU
struggles to stay solvent, it’s easy to see
why Bitcoins have become so popular.
Bitcoin is different
One of the main ways central
governments create money is by
manipulating interest rates. The Federal
Reserve, for example, routinely adjusts
the interest rates in the US. When rates
are lowered, banks are incentivized to
borrow money from the Fed, which
creates that money out of thin air.
Ever since the US got off the gold
standard in 1971, there is nothing
substantial that backs this money. The
bank in turn lends that money to its
customers, thus increasing the total
money supply.
While lowered interest rates are a
boon to people looking for cheap loans,
they are a nightmare for those living
on savings who just saw the interest on
those savings slashed. The only reason
the Federal Reserve is able to raise
and lower rates at will is because it has
a monopoly on issuing money that’s
considered legal tender in the US.
Bitcoin, on the other hand, is
very different. Bitcoins are created
when a so-called Bitcoin “miner” or
a team of miners are able to use their
computer processing power to decode
an unknown 64 byte number, at which
point 25 Bitcoins are released into the
system.
The software code that governs
the creation of Bitcoins ensures
each successive block of Bitcoins is
mathematically more complex to create
Bitcoin and the future
of money

2. July 2013 GlobeAsia 87
By Jason Fernandes
then the last, and also that there will
never be more than 21 billion Bitcoins
in the entire system.
While like many other currencies
there is again nothing that backs
Bitcoin, its method of creation provides
a built-in safety net for its value. Unlike
the US dollar whose supply can be
increased by $1 million or $10 million
just as easily at the stroke of a pen, each
additional Bitcoin mined requires a
steadily increasing amount of actual
real world resources, such as time and
processing power, to produce.
Why Bitcoin is the answer
Lately there is an increased concern
that governments and large banking
institutions have betrayed the public’s
trust. Those following the crisis
in Cyprus may be aware that the
government there has essentially
gone into people’s bank accounts
and taken a portion of their money
away. That which would have seemed
inconceivable a few short years ago is
now a reality these people must live
with.
This is far from an isolated incident.
The inter-connectedness of financial
institutions worldwide and the US
dollar’s status as a reserve currency
have often led to ripple effects globally.
The US bank bail-outs, for example,
resulted in the influx of billions of
dollars into the banking system and a
downgrade of the US credit rating.
While the original rationale for
the bank bailout was that the banking
institutions were “too big to fail,”
the banks have grown even bigger
since the bail-out. In the three years
immediately after the bail-out, the five
major banking institutions have gone
from managing $6.1 trillion in assets to
$8.5 trillion – an increase amounting to
13% of the entire US economic output.
One shudders to think what
would happen the next time one
of them makes a bad decision. The
ramifications on the global scale could
be catastrophic.
The US cannot be singled out for
criticism, however, as even Europe has
its own issues. The LIBOR (London
Interbank Offered Rate) scandal has
proved that major financial institutions
in the United Kingdom were not
above manipulating the interest rates
worldwide for their own profit. The
scandal revealed that traders would
routinely manipulate the LIBOR
upwards or downwards depending on
their trades for the day.
An adjustment downwards
would increase their credit score
and promote a perception of better
financial health, while an adjustment
upwards would result in higher loan
rates for customers. Since LIBOR is
the most widely used interest rate in
the world, its value also sets the rates
of US derivatives and loans. Thus the
ripple effects of the LIBOR scam were
felt throughout the global financial
marketplace.
Many view the banking institutions
and governments that control, issue
and manipulate currency as the
proverbial fox guarding the henhouse.
The machinations are too complex
and opaque for the average person to
understand and abuse is rife. Bitcoins
offer a solution because they are
capped at finite amounts and their
functioning is completely transparent.
The code also happens to be open
source and can be freely examined by
anybody so inclined. Bitcoin can never
be manipulated by a sudden increase in
supply and, instead, its supply increases
in a measured, predictable manner.
Bitcoin does have drawbacks
Some of the biggest advantages of
Bitcoin could also prove the biggest
barrier to its mass adoption. Bitcoin
is unregulated and completely
anonymous. While many herald this as
a major benefit, it puts Bitcoin squarely
in the sights of regulatory authorities
of various governments in whose
jurisdiction these transactions occur.
US prosecutors recently shut down
Liberty Reserve, the second largest
Bitcoin exchange, for alleged criminal
links and money laundering. This is the
sort of risk that’s part and parcel of the
anonymous currency concept.
People have used Bitcoin to
purchase everything from guns to
drugs, all anonymously via a website
known as the Silk Road that accepts
payment solely in untraceable Bitcoins.
It’s unlikely that the currency will
be allowed to survive in its present
form without heavy attempts by
governments to regulate it.
The other problem with untraceable
Bitcoins is that one’s entire Bitcoin
portfolio is stored on one file in one’s PC
(known as a Bitcoin Wallet) and is thus
susceptible to theft. While some have
chosen to store their Bitcoins in services
that provide essentially the equivalent
of an online vault, these too have been
targeted by hackers in the past.
Many view the banking institutions and governments
that control, issue and manipulate currency as the
proverbial fox guarding the henhouse. Bitcoins offer a
solution because they are capped at finite amounts and
their functioning is completely transparent.

3. 88 GlobeAsia July 2013
Technology
The problem is that there is no
remedy for theft because even the
Bitcoins obtained through theft are as
valid and untraceable as those obtained
through other means. If a credit card was
lost, one could just call and cancel it – but
there is no way to do that with Bitcoin.
On the other hand, one could say
the same is true for actual currency.
If you lose your wallet, you have little
means at your disposal to track that
money down and reclaim it. That
said, at least Bitcoiners do not have to
be concerned with the government
deciding it can reach into your digital
wallet and help itself to some of your
money, as was the case in Cyprus.
Another concern is the volatility
of the currency. Over the course of
their existence Bitcoins have cost
anything from $5 to a high of $266 and
everything in between. This makes it
difficult for businesses to feel stable in
accepting it in lieu of payment.
Since there is no central regulatory
authority, the buffer role that central
banks play in stabilizing currency
fluctuations just does not exist in this
case. On the other hand, services have
slowly been emerging that would ease
this sort of volatility.
Websites like Bitpay, for example,
allow merchants including those on
Amazon to accept Bitcoins and have
the funds transferred to their bank
accounts in real currency at the close
of the business day. This eases risks
somewhat for business owners, because
the currency is unlikely to have a
massive negative fluctuation simply
over the course of the business day.
Also, as more people begin
to use Bitcoins, the currency will
automatically stabilize as, with
increased usage, the market will figure
out how to price them reliably. There
are currently a little over 11 million
Bitcoins in circulation and there
is quite a bit of mining left before
Bitcoin hits the hard limit of 21 billion
Bitcoins. That means of course, that
many more Bitcoins will be introduced
into the system. More Bitcoins in
circulation will mean more people
with a vested interest in maintaining
its value.
Many have suggested that since
the system is designed to become
progressively harder after every Bitcoin
is released that miners will lose interest
in the currency once it is no longer
economical to mine. They predict
that deflation is a real possibility with
Bitcoins because increased scarcity
would change the economics of the
system.
These naysayers fail to consider
Moore’s law which, if applied to
Bitcoin, suggests that the computing
power will likely increase at such a rate
so as to offset the increasing complexity
needed to make more Bitcoins.
How will this all play out?
Bitcoin will likely face extreme
resistance from both the financial
services industry and government
regulatory agencies. Bitcoin represents
disruptive change in the way these two
groups do business and they are not
likely to take it lying down.
The financial services industry,
for example, will have to completely
revamp its business strategies. Credit
card and money transfer companies
will have to drastically drop their rates
to compete with the much lower rates
that govern Bitcoin transactions.
Governments, too, will push back
and lobby for increased regulation to
prevent things like money laundering,
but will likely be more concerned at
losing their monopoly on determining
what constitutes money.
The future for Bitcoin is wide open.
The genie has been released from the
bottle, never to return. While Bitcoin
itself may not survive long-term, the
concept itself is here to stay: record
companies were able to shut down
Napster, but file sharing lives on in the
dark corners of the internet.
Ultimately, the government cannot
prevent an otherwise legal transaction
between two parties from happening,
simply because it doesn’t like what
is being bartered. Bitcoin has value
because several people the world over
mutually agree that it does. The most
recent exchange rate has one Bitcoin
hovering at $109 and, while it has
come down off its high from several
weeks ago, it still retains quite a bit of
its value.
As the world financial markets
remain in flux, Bitcoin will continue
to be an attractive option for many
looking to diversify their cash holdings
to guard against sudden fluctuations.
Bitcoin represents a change in the way
we earn, spend and think about money.
Bitcoin is Money 2.0.
Jason Fernandes is a tech commentator
and the founder of SmartKlock.
Ultimately, the government cannot prevent an
otherwise legal transaction between two parties
from happening, simply because it doesn’t like what
is being bartered.