Bitcoins may be a revelation for currency and the online market place, but their link to the dark web due to transactions not being traceable has left them the victim of much scrutiny. Josh Brown looks at the issues surrounding Bitcoins, and the alternatives in crypto currencies.
Bitcoins are an innovative distributed crypto currency. It’s an encrypted hash code across a peer-to-peer (P2P) network. The currency doesn’t rely on central banks or authorities, therefore has very low transaction costs. The coins, which are mathematically generated, will not surpass 21 million over the network estimated for 2140.
Why do people use Bitcoins?
As the supply of Bitcoins will not surpass 21 million, they do not suffer from the same pitfalls as traditional currencies, and will experience low inflation due to constrained outside control. The supply is not controlled by central banks or even by governments, but by a process of mining (a series of calculating algorithms). As financial authorities cannot interfere with their supply, Bitcoins will maintain more of their purchasing power in comparison to traditional currencies.
One of the most appealing factors of Bitcoins for users, is that they are ‘untraceable’ (to a certain extent). Users don’t have to divulge bank account numbers, social security numbers or even physical addresses to complete transactions. With the currency being an internet based currency, it is mostly used in conjunction with what is known as the ‘dark web’. This relies on encrypting the data sent across the internet in multiple layers, which further emphasises the untraceable nature of using Bitcoins.
Why are Bitcoins under fire?
As mentioned above, the nature of the usage of Bitcoins and the uncertainty as to whether they are untraceable, is coming under fire.
All flows of Bitcoins are logged publicly in what’s known as a ‘blockchain’. Although the addresses are random, if there was ever to be a pattern emerging with them, then there’s a possibility the activity can be traced back to the original user. This is why governments are regulating exchanges, as government issued currencies which are transferred to Bitcoins can make it easier to trace identities.
The negative news associated with Bitcoins is around the use of hacking into websites and wallets, which store Bitcoins. The most famous was the online market place Silkroad, which operated on the dark web, and allowed users to buy illicit objects including cannabis. The website was closed down back in October 2013 by the FBI, with a loss of $3.6 million Bitcoins.
The second famous incident was the MtGox exchange, which dealt with the trading of Bitcoins. The hack compromised the account with losing just under $500 million worth of Bitcoins. These incidents cause concern for both users and investors who have seen the value of Bitcoins steady decline from a high of $1,500 a coin to $350 a coin as of November 2014.
One of the biggest challenges for Bitcoins is the lack of regulation and consensus from the international community. Many vendors and businesses are cautious to adopt the use of Bitcoins, as financial authorities don’t know how to regulate or even want to regulate the currency; therefore it stifles investor confidence in the currency.
What are the alternatives?
Although Bitcoin is by far the most well known of the crypto currencies, there are a number of alternatives that are starting to emerge which offer other incentives for investors to use, including greater security. For example, Litecoin offers more security and easier transferability, as well as Dogecoin, which is based on the internet meme of “doge”, and is the most widely circulated and traded cyrptocurrency out there.
The Bitcoin is a revelation for currency and the online market place, despite it having its ups and downs. However, what isn’t clear is whether the circulation of Bitcoins will be here for the future. What is clear though is that cryptocurrency will become more popular, but the design may still need to be perfected.
Grovelands can help with the response in the rise with cryptocurrencies, as we offer an extensive range of IT, technology and compliance focused specialists that will be needed as the circulation and regulation from financial authorities start to increase. Please feel free to get in touch with a member of the team to discuss your requirements.