Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies

admin by admin
October 11, 2014
in Uncategorized
0
0
SHARES
2
VIEWS
Share on FacebookShare on Twitter

from the Federal Reserve Bank of St. Louis, Central Banker

Virtual currencies have taken center stage in the media, with the currency bitcoin making a number of headlines so far this year:

  • In January, the Sacramento Kings of the NBA announced it would accept bitcoin as payment for tickets and merchandise from the team store.
  • In February, the bitcoin exchange Mt. Gox halted all withdrawals and announced it had lost almost 850,000 bitcoins, which had a total value of about $480 million at the time.


  • In March, the IRS ruled that bitcoins would be treated as property, not a currency, for tax purposes.
  • In July, computer company Dell announced it would accept bitcoins as payment through its website.

With public interest in virtual currencies piqued, the Federal Reserve Bank of St. Louis presented “Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies”as part of its Dialogue with the Fed series earlier this year. Dialogue with the Fed was started in the fall of 2011 to address key economic and financial issues of the day and to provide the public with the opportunity to ask questions of Fed experts.

In this session, David Andolfatto, a vice president and economist with the St. Louis Fed, discussed the rising popularity of virtual currencies, focusing specifically on bitcoin. He explained what bitcoins are and how they work, and he addressed some commonly asked questions about the currency.

What Is Bitcoin?

Andolfatto explained that he thinks of bitcoin as a computer program designed to do two things:

  • Create and manage a supply of digital currency units called bitcoins
  • Process payments between anonymous users by debiting and crediting digital accounts with these bitcoin units

Credit for developing this program is given to Satoshi Nakamoto, though many information technology industry watchers believe the name is likely a pseudonym for a programmer or a group of programmers. The bitcoin program is open source, meaning that the program is developed in a public, cooperative manner and anyone can read the program and work to fix bugs and make improvements.

How Bitcoin Works

To begin using bitcoins, Andolfatto explained that users must download a free virtual wallet, which is an encrypted computer file used to store bitcoins. This wallet can be stored anywhere a typical computer file can be stored, and users can have multiple wallets, just like having multiple banking accounts. A key difference according to Andolfatto is that all wallets are publicly observable, though the owner’s identity remains hidden. Andolfatto likened these wallets to a glass post office box. Anyone can see what is in there, but they don’t know who it belongs to and cannot access it without a key. Only the owner has the key to get into the box and take money out.

Andolfatto compared the potential for losing access to the wallet to carrying cash in a physical wallet. Losing the key to opening the wallet or losing the wallet itself (for example, storing it on a USB drive and losing the drive) means no longer having access to that account, which is a serious concern for people with wallets containing large sums in bitcoins. He said, “What if you lost your USB drive? What would you do? If the security key was in there with the USB drive, the person who found it could use your wallet and spend it. If the security key wasn’t there … that money is gone. It will never be used.”

Andolfatto explained that one way of guarding against this risk is to use an intermediary to store bitcoins, similar to how people who don’t want to carry large amounts of cash store their money in banks.

Transacting with Bitcoins

From a user perspective, Andolfatto explained that the experience of using bitcoins to buy something is no different from typical online banking. However, the processing of payments is handled quite differently. Volunteers called “miners” review individual transactions and approve or decline them.

Once approved, transactions are added to a public ledger called the blockchain. Andolfatto explained that this blockchain contains the historical record of all bitcoin transactions in the currency’s history. Andolfatto remarked, “For the system to work, participants must trust the integrity of the blockchain. It’s absolutely critical. The power to alter or fabricate the history of transactions is the power to steal.”

The blockchain does not, however, contain the identities of the transactors or a record of the items being purchased or sold. Andolfatto explained that it only shows the amount in bitcoins that have been transferred from a specific wallet to another specific wallet.

Is Bitcoin a “Bubble”?

To discuss whether bitcoin is experiencing a bubble, Andolfatto first provided a definition of a bubble as an object’s value having a liquidity premium. He said by this definition, bitcoin was indeed in a bubble, as it has no intrinsic value.

“If you think about decomposing the market price of any security into components—some measure of its intrinsic or fundamental value—and if you take a look at the difference between the market price, if it’s trading above its intrinsic value, we could ascribe the difference to a liquidity premium. That is to say, most assets are valued not only for their intrinsic use, but how easily they can be liquidated, how easily they can be passed along in future transactions. … Most assets, like I said though, have this property, at least a bit of a liquidity premium, even gold.”

Is Bitcoin a “Good Investment”?

Andolfatto began discussing whether bitcoin is a good investment by pointing out: “We have very good economic theory that tells us that asset price changes are difficult to forecast. A lot of people have lost a lot of money not listening to this theory.”

He said in his opinion it really depends on future outlooks for this product, like any new product. Investors considering bitcoin as an investment should ask a lot of questions:

  • How rapidly and extensively will it penetrate the market?
  • How might government regulations evolve over time?
  • How easy is it to replicate the product?
  • What sort of competing products might emerge now and in the future?

Is Bitcoin a “Good Money”?

Similar to how he discussed whether bitcoin was a bubble, Andolfatto discussed whether bitcoin was a “good money,” specifically, whether bitcoin as a medium of exchange would maintain a stable purchasing power over short periods of time. To demonstrate, he plotted the purchasing power of four currencies since 1990, normalizing the purchasing power of each currency to 100: the yen, the euro, the U.S. dollar and the Zimbabwean dollar.

As Figure 1 shows, the Zimbabwean dollar experienced hyperinflation until its purchasing power essentially fell to zero. The yen, dollar and euro, on the other hand, have remained relatively stable. Andolfatto said, “The striking thing about those lines, in my view, is that they’re relatively stable. They don’t exhibit wild fluctuations. Sure, there’s a 2 percent inflation in the United States, but it’s forecastable. It’s something you can predict, you can bet on.”

Figure 2 plots the purchasing power of bitcoin against that of the U.S. dollar over a much shorter time period (November 2013 through July 2014). Andolfatto concluded that the purchasing power of bitcoin has shown significant volatility over the short term.

Figure 1

Purchasing Power of Currencies

Figure 1

Key

Sources: Bureau of Labor Statistics, Euro Stats, International Monetary Fund and Ministry of Internal Affairs.

Figure 2

Purchasing Power of Bitcoin and the US Dollar

Figure 2

Sources: Bureau of Labor Statistics, Haver Analytics and Bitcoincharts.com.

Nominal Exchange Rate Indeterminacy

Andolfatto next turned to the issue of nominal exchange rate indeterminacy, or the inability to determine the exchange rate between two intrinsically worthless objects.

Andolfatto pointed out that there is nothing in economic theory that would explain the value of one intrinsically worthless object relative to another. He gave an example of casino chips, asking how consumers would determine the value of a red versus a blue chip if the values weren’t already fixed. He then applied the example to determining the exchange rate between two virtual currencies.

“The evidence is that exchange rates of fiat currencies are excessively volatile. And as I just alluded to, the problem is that there’s no fundamental economic force that pins down the relative price of two intrinsically worthless objects.”

Does Bitcoin Facilitate Illegal Trading?

Andolfatto explained that the identities of bitcoin wallet owners are disguised, “so in that sense, they’re very similar to using U.S. cash in facilitating illegal trades.” However, the blockchain’s public availability means transactions could still potentially be linked to users. For example, discovering a wallet on someone’s computer would then allow transaction history to be viewed.

“If I’m some government authority, you’re going to have some explaining to do. That’s not a property of a U.S. cash transaction.”

Can Bitcoin Be Regulated?

Andolfatto noted that some countries have banned the use of bitcoins and that banning currencies has been a common practice for countries aiming to protect their local currencies. However, the fact that bitcoin does not have a central authority makes regulating the currency challenging. “It’s like trying to slay the hydra. You cut off one head, and three other heads appear. I mean, it’s this distributed network out there in the world. How are you supposed to regulate something like that?”

Source: http://www.stlouisfed.org/publications/cb/articles/

Previous Post

Disparities in the Regulatory Treatment of Banks and Shadow Banking Organizations

Next Post

Evaluating Executive Compensation Packages

Related Posts

OKX To Stop Operations In Canada By June 22, 2023
Business

OKX To Stop Operations In Canada By June 22, 2023

by John Wanguba
March 20, 2023
Hong Kong To Begin Regulating Crypto In June 2023, 80 Firms Ready To Join
Economics

Hong Kong To Begin Regulating Crypto In June 2023, 80 Firms Ready To Join

by John Wanguba
March 20, 2023
JPMorgan And Other Top U.S. Banks Swamped With New Clients Post SVB Collapse – FT
Business

JPMorgan And Other Top U.S. Banks Swamped With New Clients Post SVB Collapse – FT

by John Wanguba
March 20, 2023
Top Five U.S. Regional Lenders With Most Uninsured Deposits
Business

Top Five U.S. Regional Lenders With Most Uninsured Deposits

by John Wanguba
March 20, 2023
Bitcoin Reaches New Highs, Records Double-Digit Gain As Banking Crisis Fears Increase
Economics

Bitcoin Reaches New Highs, Records Double-Digit Gain As Banking Crisis Fears Increase

by John Wanguba
March 20, 2023
Next Post

Evaluating Executive Compensation Packages

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins bank banking banks Binance Bitcoin Bitcoin market Bitcoin mining blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe finance FTX inflation investment market analysis Metaverse mining NFT nonfungible tokens oil market price analysis recession regulation Russia stock market technology Tesla the UK the US Twitter

Archives

  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • OKX To Stop Operations In Canada By June 22, 2023
  • Hong Kong To Begin Regulating Crypto In June 2023, 80 Firms Ready To Join
  • JPMorgan And Other Top U.S. Banks Swamped With New Clients Post SVB Collapse – FT

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish