Research: A modern look into Bitcoin’s advantages and usage risks

Research: A modern look into Bitcoin’s advantages and usage risks

DeepDotWeb

DeepDotWeb

  26 Jan 2019   0


The birth of bitcoin marks the emergence of a novel global financial system that is based on decentralization, privatization, and individualization, rather than globalization. Bitcoin omits the need for intermediaries or third parties in various forms of financial transactions. The blockchain, which is the technology underlying bitcoin, is expected to put retail banking to extinction. A recently published paper delves into the advantages and risks associated with usage of bitcoin. Let’s take a look at some of the facts and opinions presented via this paper.

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Advantages of the usage of bitcoin as a method of payment:

Bitcoin offers users lower transaction fees, high levels of privacy, and protection against inflation. Nevertheless, bitcoin still lacks a financial base and adequate number of participants to secure stability, so it exhibits high levels of volatility. Bitcoin is an excellent currency which renders the following possible:

– Purchasing anything anonymously

– Omitting banks and other forms of intermediaries and third parties from the payment chain

– Executing payments without charging any form of commission

– Resisting devaluation of currency by inflation in the future

This can be explained by how the value of the USD declined during the past one hundred years. For example, via usage of the Consumer Price Index, if one had had $100 in 1952, they would expect to have around $1,156 today secondary to inflation. With consideration of other criteria, the situation can be even worse. Table (1) shows change in value of today’s USD, from 1912 and 1962, taking today’s $100 bill as an example for measurement.

This can be explained by how the value of the USD declined during the past one hundred years. For example, via usage of the Consumer Price Index, if one had had $100 in 1952, they would expect to have around $1,156 today secondary to inflation. With consideration of other criteria, the situation can be even worse. Table (1) shows change in value of today’s USD, from 1912 and 1962, taking today’s $100 bill as an example for measurement.

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Table (1): Change of value of 2012’s USD from 1912 and 1962, as an equivalent of a $100 bill

Why did the value of the USD drop markedly? The explanation is relatively simple – the drop is due to the printing of excess money without matching backup. Until the 1970s, printing of the US dollar had been controlled by multiple restrictions. However, for the past few decades, the US Federal Reserve has been printing billions worth of US dollars, which has resulted in the devaluation of the USD.

With bitcoin, it is exactly known to everyone when and how much of bitcoin will be mined, i.e. printed. As indicated by its open source protocol, users know that the total number of bitcoins will be 21 million.

It is extremely difficult to counterfeit the US dollar, silver, or gold. Similarly, because bitcoin’s code is based on complex cryptography, it is technically impossible (or practically unprofitable) to counterfeit it. Moreover, every transaction on the network must be confirmed by miners, which prevents potential compromise of the system via double spending. Bitcoin offers users other advantages including:

– It can be transferred globally between users, wherever their location on earth, so long as there is internet access

– Accepting bitcoin transactions is totally free of charge

– Bitcoin’s payment system has no chargebacks (money refund)

– Bitcoin can currently be easily exchanged for any other fiat currency or cryptocurrency

Risks associated with bitcoin usage:

The number of bitcoin wallets has increased at a very rapid rate during the period between January 2013 and January 2014. Since its launch in 2009 until January 2013, around 50,000 bitcoin wallets have been created. Figure (1) shows the total number of wallets up to January 2018.

The number of bitcoin wallets has increased at a very rapid rate during the period between January 2013 and January 2014. Since its launch in 2009 until January 2013, around 50,000 bitcoin wallets have been created. Figure (1) shows the total number of wallets up to January 2018.

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Figure (1): Total number of bitcoin wallets

Due to the high levels of anonymity offered to users, bitcoin renders it possible to transfer, generate, steal, or launder financial assets. Bitcoin greatly challenges law enforcement agencies, similarly to other forms of digital currencies e.g. WebMoney. The FBI predicts that criminals will use bitcoin as their primary payment option in the near future. The FBI also believes that bitcoin will represent the main means for money laundering in the near future, too.

Data of bitcoin transactions are publicly available, even though the only information that can be used to identify a bitcoin user is a randomly generated bitcoin address, which renders transactions quite anonymous. However, the point at which a user exchanges their bitcoins to fiat currency can potentially lead to a breach of this anonymity, since users must provide their personal information to cryptocurrency exchanges to be able to sell bitcoin for fiat money.

Bitcoin users can evade taxes; this is a behavior pattern that was described in several research studies. One might have to weigh the expected benefit gained from evading taxes against the expenses they would have to pay if busted and punished.

Collectively, the FBI states the following as the main vulnerabilities or risks associated with usage of bitcoin’s decentralized payment system:

– Lack of reliable software that can track and identify suspicious behavior associated with money laundering

– Inability to identify the real-world owners of bitcoin addresses, as well as their geo-locations

– Lack of records of transaction history that can be linked to the real-world participants of these transactions

– A harder process for identification of the sources of payment means, as compared to other forms of digital currencies

– Law enforcement agencies can never target a central company, or switch the payment system off while investigations are being conducted

Final thoughts:

Even though the number of bitcoin users is growing, it is still limited when compared with fiat currency users and credit card users. The advantages of bitcoin will definitely outgrow its risks and will continue to boost the number of bitcoin users, as believed by most financial observers. However, the FBI predicts that during the next few years, bitcoin will become criminals’ most favorable currency for usage in various criminal activities including money laundering, illicit trading, etc.

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Source: TheOnionWeb

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