Bitcoin

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Definition of Bitcoin:

Bitcoin is a cryptocurrency that can be used to buy and sell goods and services, anonymously. Transactions are tracked by a network of independent computers using blockchain technology. 

Detailed Explanation:

Bitcoin was created in 2009 and has sparked increasing interest because of its recent appreciation in value and more retailers are accepting bitcoin for payment. The bitcoin market is decentralized, so it cannot be regulated by any central bank or controlled by a business or individual. Users can trade in privacy. This has made bitcoin popular in the criminal world.

Is bitcoin currency? Currency must be a medium of exchange. A medium of exchange can be anything that is widely accepted as payment for a good or service. Most societies use their currency, but stones, salt, gold, and tobacco have been used as a medium of exchange. How about bitcoin? Bitcoin is becoming more widely accepted as a payment. The number of transactions using bitcoin has grown from less than 10,000 per day in 2011 to over 300,000 a day in 2017. (See Blockchain for a daily report on transactions.) Bitcoin is being accepted by many reputable establishments including Overstock.com, Microsoft, Reddit, Expedia.com, and Braintree. (For a more comprehensive list visit: Bitcoin Accepted Here.) But, in the beginning of 2018 most retailers do not accept bitcoin. Buyers are deterred by the time it takes to process a transaction. It is not uncommon to take several hours to process a transaction. (Blockchain Average Confirmation Time) Visa processes approximately 150 million transactions a day, or 500 times more than bitcoin. Most transactions are processed in less than 30 seconds.There are also fees associated with most transactions. The transaction time and fees diminishes the use of bitcoin as a medium of exchange. 

Money must also be a store of value. Store of value means that the currency must retain its value. Large fluctuations in value discourage the use of a currency. Many merchants are apprehensive in using bitcoin because the currency is not stable. Bitcoin's value fluctuated 10% or more on 25 days in 2017. Its price range was a low of $739.55 and a high of $19,870.62. (See Blockchain's graph and current price of bitcoin.) The laws of supply and demand determine the value. Speculators have purchased bitcoin in hopes of its widespread acceptance – but stabilization is needed to attract more merchants. The Wall Street Journal posted a terrific video illustrating several problems using bitcoin as currency. In it, the WSJ’s Thomas Di Fonzo uses bitcoin in several New York establishments. He pays $76 for a $10 pizza for lunch, and then waits until that evening before his order has been processed. There are two possible reasons why the pizza price was so high. Assume you are the owner of the pizza restaurant. You set your prices every day first thing in the morning. This morning a bitcoin was worth $10,000, so you set your $10 pizza price at 0.001 bitcoin. Later that day the price of bitcoin fell 25 percent, so the .001 bitcoin you accepted is now worth $7.50! You lost $2.50 because you accepted bitcoin. How could you protect yourself as a business owner? You could add to the bitcoin price to reduce your risk.

Another possible explanation for the high price of Mr. Di Fonzo’s pizza is the value of bitcoin had appreciated since it was priced. Again, assume bitcoin was selling at $10,000 when you, as the restaurant owner set your price at 0.001 bitcoin, which would be a price of $10. The value of bitcoin jumps to $12,500. The pizza now costs $12.50. That’s great for you, but your customers probably won’t be very happy. Each of these examples illustrate how bitcoin fails to retain its store of value.

Consumers also need to measure the value of one item versus another item. Because money is expressed in units of a currency, money acts as a measure of value that enables people to compare the value of different goods and services. Bitcoin can be used; however, its volatility makes the job much more difficult. The comparison would need to be made at a specific moment. Imagine you are making some improvements to your home and accept bids from two individuals. On a Monday you receive a bid of 1 bitcoin, and on Wednesday you receive another bid for 1.25 bitcoins. With a stable currency the comparison is easily made. It is more difficult when the currency is unstable. You phone the Monday vendor and tell him that he has the job, only to learn that because the value of bitcoin has decreased 50 percent he needs to increase his price to 1.5 bitcoins. You tell him sorry, but you are going to accept another bid. After hanging up the phone, you call Wednesday’s vendor to tell her that she has the job but learn her price has increased to 1.6 bitcoins! It is likely the vendors would quote a price in dollars or another currency that is more stable.

It should be safe to hold cash, but with bitcoin, holding currency carries a large risk. Bitcoin does not meet the tests of currency because its volatile value complicates transactions and detracts from its acceptance. The most common choice among vendors is not to accept bitcoin because sellers do not feel comfortable that the currency will maintain its value. Accepting bitcoin as payment is really speculating in its appreciation and most business owners have chosen not to take the risk. A more stable bitcoin would improve its store of value, make it an easier measure of value, and help it act as a medium of exchange by increasing its acceptance. Only time will tell whether the value of bitcoin is stable enough to become more widely accepted as a currency and not as a speculative investment.

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