Bitcoins have been a hot topic since its release in 2010. The value of the coin has been in a roller coaster ever since. It was initially sold for 0.008$ per coin and peaked in November 2013 when it was sold for $1,240 per coin. Currently, a bitcoin is worth a little over $600.
Besides being a famous fluctuating currency, it had the dubious honour of being the world’s worst-performing currency in 2014, Bitcoins are also subject of discussion because there is the common belief that Bitcoins are anonymously and people can use them to buy anything from anyone online. However, recent research found that bitcoins aren’t completely anonymous, but pseudonymous. But what does this actually mean?
Researchers from the University of California and George Mason found that you can own a Bitcoin without anyone knowing that it is yours, but as soon as you move the Bitcoin, you are leaving a digital trail of breadcrumbs. Every transaction is even recorded in a public ledger, which was initially created to check if people weren’t using the same coin twice.
The trail of digital breadcrumbs has always been there, and following the trail would only lead to an online pseudonym, which can’t be traced back to a real person. However, in 2013 the Financial Crimes Enforcement Network, an agency within the US Treasury Department, took initiative to tackle this problem and under new laws, if a person wishes to convert Bitcoins to US dollars the users identity must verified. Of course, there is always the opportunity to use illegitimate exchange services like BitLaundry and BitMix to convert your bitcoins to US dollars, but these companies do not have the capacity to process large-scale transactions.
What do you think the future of Bitcoin will look like? Will it be an ongoing game of cat and mouse between law enforcement and anonymous criminals hiding out on the dark net? Or will it actually become an accepted currency to buy legitimate stuff online?
Hi Dirk,
Interesting questions you raise. You see the future of the bitcoin (excuse me if I’m wrong, but this is wat I can make up out of the questions you raise) will be that government and criminals play a cat and mouse game to buy (illegal) stuff on the internet. The solution you moot is legalizing the bitcoin as an accepted currency to buy stuff online. I disagree a bit with this reasoning, and especially about the future of the bitcoin.
The definition of money is as follows: ‘Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context, or is easily converted to such a form.’ (Wikipedia, 2016)
As you can see, Bitcoin already is money. It is a verifiable record which is accepted by a lot of firms as payment. If it will ever be accepted or introduced as a currency is therefore not so relevant. There are a lot of payment services, like paypal, which you can use to buy stuff online. The main difference is the underlying value. When a bitcoin is used, the underlying value is a bitcoin (or when you measure it on the stock market, it still is measured in dollars). When paypal is used, the underlying value is the dollar (or any other currency which is accepted in specific countries).
When the governments are arguing that there must be a underlying value they will have no leg to stand on. In 1971 the US government, and with them a lot more countries, removed gold as underlying value of the dollar. So the whole money system is based on trust and accepted because everybody accepts it.
So like airmiles or any other system which you can use to get a product or a service. Bitcoin itself is already money. It does not matter what governments think of it or if they legalize it. That is the beauty (and the dark side) of fiduciary money.
https://en.wikipedia.org/wiki/Money
To answer the question: I think Bitcoins will be obsolete for the general public (not including criminal use) within a few years.
Why?
The speed of the transaction, privacy and the near-zero costs are huge advantages of Bitcoins over ‘regular’ transactions through banks. This combination is way better than the current situation at traditional banks, where customers pay handeling fees and receivers of the money often have to wait several days for the transaction is completed. And that’s why banks have been looking at implementing the technique used by Bitcoin (1). This technology is called the ‘blockchain’ and basically works in similar manner as Bitcoins. When properly implemented, traditional banks could offer a better implementation of Bitcoins, still offering low-cost transactions with instant processing. And even better, this system would have oversight by e.g. the FED, making it more protected against misuse and banks could perhaps even offer insurance to customers against theft.
In my view, the general public is more likely to favour this implementation over the current situation with Bitcoins.
(1) http://fortune.com/2016/06/23/ripple-blockchain-banks/
Hi Dirk,
Thank you for your interesting blog. I would like to answer your question if it would be an ongoing game of cat and mouse between law enforcement and anonymous criminals hiding out on the dark net? I believe this would not be the case. The technology that underpins Bitcoin: blockchain (which essentially stores every information about a transaction like which accounts are involved and which is the amount of the transaction). As you mentioned there is a trail of breadcrumbs and if you follow this trail this would only lead to an online pseudonym. However there are multiple examples that the true identity of these thief’s eventually announced(1). A nice additional article about this subject could be found in the link below. So In my opinion can’t hide behind bitcoin.
(1) http://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin
Hi Dirk!
Thanks for sharing.
I agree that Bitcoins are a hot topic since their release, however I do not fully agree that Bitcoins are pseudonymous. I think it is still possible for criminals to use Bitcoins to buy weapons and then transfer the Bitcoins back to money. The law that says that you should identify yourself before converting Bitcoins to money only applies in the United States, however a lot of terrorist activity happens in other areas in the world were these laws do not apply.
I think that if criminals want to avoid this law, it is still very easy to do so.
Hi Dirk, interesting contemplative post. However, I am not sure that the implementation of the user indentification, required for exchanging bitcoins for dollars, will bring down the bitcoin market. Simply because I do not see an incentive to exchange them. There are many restaurants, webshops and other kind of stores where you can pay with bitcoins.
Furthermore, I think that it will be a matter of time before there will be exchange websites who will find illegal ways to laundry money just like the services you mentioned.
Nevertheless, I agree on the point that it became more difficult to legally buy weapons with exchanged bitcoins!