Syed Yusuf Saadat
Research Associate, Centre for Policy Dialogue
E-mail: saadat@cpd.org.bd
This is last part of a series of blog on “Bitcoin”. Read part one and two here.
Bitcoin offers many important advantages which makes it very attractive as a currency. Bitcoins users are totally free to carry out transactions in bitcoins anywhere in the world, at any time, with anyone they want. Since it is a single global currency, there is no need for exchanging currencies across borders. Moreover, because of the absence of financial intermediaries, the transaction costs of bitcoin are extremely low. In fact, transaction fees are optional and are only intended to speed up the transactions. Bitcoin transactions are secure, irreversible, and permanent and all historical records are publicly available. Freezing Bitcoin addresses is practically useless since new Bitcoin addresses can be created instantaneously. The supply of Bitcoin is steadily increasing and is capped to an upper limit of 21 million bitcoins. This means that Bitcoins are immune to domestic monetary policies of countries and international financial regulations.
In terms of privacy, there are big differences between conventional banking and Bitcoin. Firstly, each anonymous Bitcoin address is usually used for only one transaction and every Bitcoin wallet can create as many addresses as required. Therefore, a Bitcoin address does not uniquely identify any individual as a traditional bank account number would. All Bitcoin users can see every transaction, but they only see the anonymous Bitcoin addresses, the amount of funds transferred, and the time at which the transaction took place. This is comparable to the information released by stock exchanges, where the general public can know the time and size of each trade without knowing the individuals involved in trading. Thus Bitcoin offers a level of privacy which is similar to cash, and a level of convenience similar to electronic money.
Nevertheless, there are still many problems and risks associated with Bitcoin. Firstly, Bitcoin is still a relatively new currency and is therefore limited in its degree of acceptance. Therefore, at present Bitcoin cannot replace conventional currency completely. Even the most avid Bitcoin enthusiast would still be compelled to use ordinary currency from time to time, due to the limited acceptance of Bitcoin. The price of Bitcoin is extremely volatile, and is subject to incredible booms and busts. In fact, bitcoin.org itself does not recommend saving more value in bitcoin than you are ready to lose completely. The price volatility problem of Bitcoin is a strange dilemma. If more people accept and use Bitcoin, then the prices will eventually stabilize. However, since the prices are not stable people are reluctant to adopt Bitcoin.