Does the purpose of creating something determine its usage or does the way it is eventually used determine its purpose? Alfred Nobel’s deep regret after realising that his invention for saving lives, the dynamite, had been weaponised for mass destruction may help us deduce that praxis determines purpose. The same theory holds true for Bitcoin. With the paradigm shift in the way the world’s economy has become more interconnected than ever, it is but befitting to analyse the potential of Bitcoin and other cryptocurrencies in heralding the internet of things and ushering in the age of decentralisation and universal democracy.
The Oxford dictionary defines Bitcoin as an uncountable noun that “represents a system of electronic money, used for buying and selling online and without the need for a central bank”. The foundation of Bitcoin is based on the ideas laid out in a 2008 whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” published by an anonymous computer programmer with the pseudonym, Satoshi Nakamoto. The idea of Bitcoin is based on decentralisation of money wherein no bank or institution or nation may dominate the economy of world anymore. In the reference literature that inspired the idea of Bitcoin, as published by Nakamoto on the official Bitcoin website, one may find the reference to “AREOPAGITICA”, a work by John Milton from 1644, at the height of the English Civil War, titled after a speech written by the Athenian orator Isocrates, in which Milton criticises the censorship of private publications imposed by the Licensing Order of 1643. Bitcoin too wants to revolutionise the world economy by abolishing the hegemony of nations in exploiting the monetary systems to extend their dominion over the lives of its citizens. Assisted by Martti Malmi, a second-year student at the Helsinki University of Technology at the time, the foundational framework for Bitcoin was laid out by them and within three years the idea became a reality. Bitcoin may also be interpreted as a commodity, one that holds value as it is a finite asset. Unlike a tangible commodity, Bitcoin is a digital one that is broken down into its smallest unit called Satoshi, which is a hundred millionth of a single Bitcoin (0.00000001 BTC) making it easily purchasable for anyone for even less than a dollar.
Bitcoin works on the blockchain system which is essentially a chain of digital blocks of information. Originally described in a 1991 paper by a group of researchers who devised a technique of timestamping digital documents with no way of backdating them or tampering with them, almost like a notary; Santoshi Nakamoto used this technique in 2008 while devising Bitcoin, which uses a distributive ledger, which is completely open to anyone. The unique property of Bitcoin is that once some data has been recorded inside a blockchain, it becomes impossible to change it without leaving a record. Each block of data in the Bitcoin blockchain stores the details about the transaction such as the sender, the receiver, and the number of coins. A block also contains a hash of the block and the hash of the previous block. A hash may be compared with a fingerprint which is unique for each block and helps to identify a block and all of its contents. Once a block is created, it attains a unique hash and every minute change in the block renders a new hash to the block, which means that it creates a new block, thereby making a chain of blocks, called a blockchain. This is how Bitcoin becomes free from any kind of fraud. Every transaction using Bitcoin stays recorded forever.
The blockchain race between China and the USA speaks volumes of the significant traction afforded to the cryptocurrency sector worldwide. The think tank Astamuse, based in Tokyo, reported that China, in as early as 2016, had already overtaken the USA in filing a record number of cryptocurrency patent applications. The International Data Corp reported that the global value of blockchain investment was touted to reach a $16 billion valuation in the next five years. Emerging economies such as India and the Philippines have not only legalised cryptocurrency but also initiated local crypto exchange licensing regulations while strengthening investor protection, and countries such as Singapore have already received over $700 million in investments.
Speculators and people with the desire of making fast and easy money have always affected the market and the valuation of assets. The California gold rush of the 1850s for instance, saw its population increase by over 400% within a decade. The FOMO (fear of missing out) saw a similar effect on the price of Bitcoin, which started trading at around $0.08 in 2009 to reaching an all-time high of $68,892 on Nov 8, 2021, having a colossal rise of 85,986,150% in value in little over a decade, giving rise to the term “To The Moon”. The ease of transaction and new exchanges opening up gave access to almost anyone with an internet connection and a smartphone to trade in crypto within the comfort of their homes.
The high volatility of the crypto market has attracted millions of uninformed and impatient youngsters blindly diving into the market for having a piece of the crypto pie and making some quick money. It has brought them to their ruin as a result of unsustainable investment decisions and panic selling whenever there have been dips in the price of crypto. Each time there is a market crash, hundreds of billions of dollars are lost and it culminates in a spate of suicides. The internet is filled with news of investors ending up murdering their families and committing suicides after heavy losses during a crypto crash. Psychologists too are flooded with patients who suffer from anxiety and depression after getting introduced to the crypto markets.
Many governments around the world have been very suspicious of Bitcoin and have advised their citizens against investing in cryptocurrencies. In the United States, The Financial Crimes Enforcement Network (“FinCEN”) for instance, has been issuing guidance on Bitcoin since March 2013 declaring the enforcement rules for cryptocurrency traders and exchanges which have been aimed at deterring its citizens from trading in cryptocurrencies. The Chinese Government has been clamping down on cryptocurrencies since 2016 and imposed a blanket ban on crypto-mining activities since 2018. Once the world’s biggest crypto mining hub, China used to account for nearly 75% of the total “hash rate” — or processing power — of the bitcoin network, which plummeted to zero by August 2021. The European Banking Authority (EBA), in its report on crypto-assets, published in January 2019 cautioned Europeans against cryptocurrencies stating that “risks exist for consumers that are not addressed at the EU level” and also cautioned against “other risks, including money laundering”. In October 2021, Bank of England governor Andrew Bailey was “very nervous” about people using Bitcoin for payments and cautioned over Bitcoin’s use as a payment method saying he found no “intrinsic value,” in Bitcoin.
Cryptocurrency has, however, led to the emergence of new markets, start-ups, products, and services, in a wave of fresh innovation leading to the birth of several aligned industries while boosting the IT job market – of course, with nurturing and support from financial institutions and Fintech companies. Japan, which recognises the validity of digital currencies as legal property since 2017. According to a 2017 Business Insider report, this led to an increase in the trading volume of Japan which jumped from one to six percent. The same report mentioned how currency turbulence issues in China led to cryptocurrency being perceived as more stable than a traditional currency, culminating in increased investment by their citizens. El Salvador became the first country in the world to allow Bitcoin as a legal tender in June 2021 after the country’s Congress approved a proposal by President Nayib Bukele to formally adopt Bitcoin as a form of payment. Despite the Covid pandemic and economic decline, the Indian crypto industry has shown record-breaking growth, registering a whopping 883% increase in the trading value of Bitcoin compared to last year. Paxful data even goes as far as to claim that three out of four Indians who are aware of cryptocurrency have invested in it. OKEx, a globally established crypto exchange platform, reported that registrations from Indian users increased to almost 550%, which ultimately reflected in both local and global trading volume boosts.
Ask a Bitcoin trader what a whale is and instead of Moby Dick, they shall tell you of multimillion-dollar investors who hold the potential to bring down the market causing it to crash single-handedly. All it takes is for a few whales to get together and sell off their Bitcoin holdings which cause the cascading effect of panic selling and the market collapsing. Once the prices are low, the whales gobble up more Bitcoins at a cheaper price. According to BitInfoCharts, the top 100 wallets holding Bitcoin account for almost 20% of the total Bitcoins which is valued at over a whopping 58 billion dollars. Some of these “crypto whales” or publicly-known crypto holders with large amounts of cryptocurrency are Sam Bankman-Fried, Micheal Saylor, and Brian Armstrong. Billionaire Elon Musk’s car firm Tesla announced in January 2021 that it bought about $1.5bn (£1.1bn) of the cryptocurrency Bitcoin and expected to start accepting it as payment in the future. The news caused the price of Bitcoin to jump 17% to a record high. Musk’s infamous Twitter post on May 13, 2021, that “Tesla has suspended vehicle purchases using Bitcoin” slumped Bitcoin prices by 17% overnight. Seasoned investors are always on a whale lookout and keep track of their wallet addresses when they are selling or buying Bitcoins.
One of the main concerns that surrounds Bitcoin is the huge amount of energy that is consumed while mining Bitcoin, which has been increasing at an unprecedented rate. The prime concern that adds to the liability side of Bitcoin is that the fossil fuels used to make electricity are fast depleting and adding to the already culminating environmental disaster. The Cambridge Bitcoin Electricity Consumption Index estimates that around 10 Giga watts of power is consumed per day by the Bitcoin ecosystems which can easily power 55,000 London homes for a day. There has been a gradual shift towards renewable energy for Bitcoin mining and an eventual transition is imminent.
A project by Stanford University students Azmaan Onies, Giancarlo Daniele and Tunmise
Olayinka in 2011 proposed the most valid disadvantage that Bitcoin has is its “Built-in
Deflation” as it is a finite asset, capped at 21 million, it is bound to face Deflation once all the Bitcoins are mined. The Bitcoin economy does indeed “fluctuate rapidly” and has no guarantee on its minimum valuation. Losing a wallet too can render one at a complete loss and there have been precedents of Bitcoin holders committing suicide after losing access to their crypto wallet.
The overarching message seems to be clear – there is hope that cryptocurrency has the potential to generate entrepreneurship and job growth and pave worldwide social and economic growth in the face of newly emerging fiscal needs, and fuel financial freedom for future generations who can easily adapt to cryptocurrencies like Bitcoin. The purpose that its developers intended Bitcoin to serve was for it to act as a decentralised currency that is safe and secure, but what it has turned out to be today is a virtual betting ground for the young and uninformed users who find it a curse while margin trading in crypto as speculators without having a vision for the future of Bitcoin’s scalability and network adaptability and end up panic selling and becoming food for crypto whales.
