Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

Bitcoin in the Modern Market:

Applications of Cryptocurrencies in today’s world

Matthew Zbiegien

University of Minnesota Twin Cities

Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

Abstract

In the tech world, change is the only constant, as new ideas come about, they are

tested, and implemented, before either going entirely obsolete, or becoming the scaffolding for

the next wave of technological advance. The purpose of this research paper, is to investigate,

and identify the flaws, and ground breaking ideas brought to fruition in cryptocurrencies, built on

blockchain technologies, such as bitcoin. By using relevant, recent, peer reviewed works in

fields such as cryptocurrency, finance, banking, and commerce, I was able to weigh the different

application options of cryptocurrencies, and blockchain. What I found is that while the

cryptocurrencies themselves have been gaining much of the press, and attention surrounding

this technology, that the real future of the industry lies in the blockchain technology, rather than

its current applications. While many have been able to get rich speculating on cryptocurrency

markets, the investment industry around bitcoin is too corrupt, and unpredictable. The

possibilities for blockchain to be implemented into other fields, and streamline processes far

more efficiently than could ever be achieved by current technologies, is the safest, and most

possibly beneficial course of action to be taken with this technology.

Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

In 2010, the first bitcoin transaction was completed, when a man named Laszlo

Hanyecz paid Papa Johns 10,000 bitcoins for the delivery of two pizzas. At the time of the

transaction, one bitcoin was worth a mere $0.008, but only 5 days after the transaction, the

value of the cryptocurrency had grown by nearly 900%, making each of those bitcoins $0.08.

These values pail in comparison however to the peak bitcoin price, hit on December 18th 2017,

when the price of one bitcoin boomed to nearly $20,000. Despite its growing popularity, and

acceptance, many people still have no idea of what bitcoin is, how exactly it works, or what

practical applications it could have. Not to mention the even fewer number of people who have

heard of, let alone know anything about blockchain, the “brain” behind bitcoin.

Bitcoin, in its simplest terms, is a currency. Although it has not been officially recognized

as a currency by any other nation than Japan, its users still have a collective agreement that

bitcoin has value, and that value is determined as any other currency transaction would be.

Beyond the surface however, bitcoin becomes much more complicated than most modern forms

of currency. Rather than being issued by the government, and controlled by the central bank,

bitcoin is awarded to its users, in a lottery based algorithm, known as mining. Bitcoin miners set

up enormous servers to attempt to crack a series of algorithms, and be awarded bitcoins. All of

these awards, and transactions are then recorded on the open source server, blockchain.

Blockchain is the lifeblood of bitcoin, the blockchain software on every computer involved with

bitcoin transactions makes chronological record in a public ledger, of who sent, and received the

cryptocurrency, and how much was transacted. The names of the two parties however are left

anonymous, making bitcoin transactions almost entirely under the radar, which creates a

problem. While it was the vision of the creators to create a decentralized, anonymous currency

outside the regulatory grip of any government. The widespread use of bitcoin, along with these

principals, have made it a prime option for money laundering, and black market transactions.

Despite the shortcoming and insecurities associated with cryptocurrencies such as bitcoin, the
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

blockchain technology on which it is constructed could become the defining technology of the

mid-21st century, through implementation in bureaucracy, and other fields.

Despite the impressive technological, and ideological advances achieved through

the growth of cryptocurrencies, 11% of Americans currently believe that bitcoin is illegal, and

48% are unsure of its current legal status. This is likely due to the negative connotations that

many cryptocurrencies carry, as well as many of the fears that investors have when choosing to

buy cryptocurrency. The most commonly held connotation surrounding bitcoin, is that it is a

“Black market currency,” which was largely started, due to the deep web black market “The Silk

Road” using bitcoin as its’ form of payment (Barrett 2016). Despite the founders of bitcoin

having no connection to the website, several, most notably Ross Ulbricht, Charlie Shrem, and

Robert Faiella were all tried on money laundering charges, in connection to the use of Bitcoin on

The Silk Road. The United States claimed that these men had been complicate in, or had even

provided bitcoins for use on the Silk Road. Shrem and Faiella pled guilty to the charges to avoid

time served, but maintain that bitcoin is merely a digital currency, and just like cash, the provider

of that currency is not responsible for how the consumer spends it(Cannucciari 2016). The Silk

Road was seized and shut down by the FBI in October of 2013, and while bitcoin remains as the

most widely used currency on the dark web, allegations of complacency in money laundering

have largely died down around cryptocurrencies, especially as the investment market for these

currencies grows, and becomes more and more legitimate.

Today, the most common use of cryptocurrency is for investment. As bitcoin prices

soared to nearly $20000, Investing experts warned inexperienced buyers to “stay away” saying

bitcoin was nothing more than a speculative bubble, with no substance, with some even

comparing it to the Famous Dutch Tulip crash of 1636-1637 (Weber 2016). Many consumers

are confused as to how bitcoin has value, if it is not issued by the government, nor has

commodity value such as gold and other precious metals. Even many cryptocurrency investors

fear that if regulation interferes too much, or if the public loses faith in the stability of these
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

currencies, that the entire market could crash, and an estimated $375,000,000,000 could be lost

in one of the biggest financial bubbles since the housing market crash of 2008 (Allen 2014).

While these fears are not unfounded, we have seen similar crashes to industries such as

cryptocurrency, just as the market seems to be booming, and stable, such as the Tech crisis of

the early 2000’s, and the Housing crash of 2007, the best thing to do to keep cryptocurrency

steady is to trust the market. The only reason that anything has value, is because the consumer

decides that it has value. For example, in India, many shopkeepers, and Taxi Drivers will not

accept torn or crumpled Rupee notes, despite the Central Bank of India recognising that any bill

with a valid serial number is legal tender. This Idea has trickled down to the general population,

who know that if they have torn currency, it will not be accepted in shops, so they know that they

too must only accept crisp bills. This has inevertantly made perfectly legal tender entirely

worthless, simply because the people do not believe damaged currency has value (Wheelan

2012). This same principal can be applied when talking about cryptocurrencies. It doesn't matter

if there is a central bank, or entity deciding the value of something, but rather, value is created

when the general public decides that something does have value. Therefore, it does not matter

that cryptocurrencies are run on a decentralized server, they will remain to hold their agreed

upon value, until the average consumer has agreed that they no longer hold any real value, and

will then be phased out.

Mining for bitcoins is an extremely complex process, often involving multiple servers,

running at an incredibly high computing power, in order to crack algorithms, and be awarded

bitcoins. As one my imagine, this process has an incredibly high energy consumption, and takes

a serious toll on the environment. Approximately 12.5 bitcoins are distributed worldwide every

ten minutes, which at the current price of bitcoin translates to about $125,000 every ten
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

minutes. Due to this incredibly high potential return, investors are willing to throw huge sums of

money into enormous farms of servers dedicated to mining bitcoins. It is largely due to these

farms, which are usually stationed in Russia, or China, that combined, bitcoin mining uses more

energy annually than 159 individual countries (Shane 2017). There have been rumors that

bitcoin will consume all the world's energy by February 2020, However, this is unlikely. Due to

the recent spike in cryptocurrency prices, mining operations too saw a boom in 2017, however,

as the attention around cryptocurrencies dies down, so too will the growth of these mines, and

the growth in used electricity will also slow. This however, is not enough, for bitcoin to be a

viable currency, it cannot continue to use 0.13% of the world's annual power supply.

Cryptocurrencies need to begin looking towards investment in green energy, such as wind, or

solar, or work to make the mining process far more energy efficient(Popper 2018.).

Although there are several quite serious issues to address with cryptocurrencies at the

moment, the reason the tech industry, and financiers are so excited about cryptocurrency, it has

the possibility to change the way we view currency and banking as a whole. One very large

reason that many people choose to invest in cryptocurrencies, is because of the security, and

anonymity they are able to provide. While investing in cryptocurrencies is no safer than

purchasing any highly volatile stock, Cryptocurrencies are able to provide a much higher level of

cyber security than traditional banks, and other institutions. Banks like JP Morgan have recently

fallen victim to cyber attacks, because when data is stored on one common server, then

hackers need only one access point in order to seize the information. Cryptocurrencies on the

other hand are built into blockchain software, which resides on a public ledger, available to all

other computers connected on blockchain. This system means that even if hackers attempt to

change the ledger on one computer, it is nearly impossible to trick the entire system. Due to

this, many feel as Cryptocurrencies are a very secure option (Holdsworthy 2016.)

Another group which shows large support of cryptocurrency are staunch conservatives

and libertarians, who believe in the power of the free market, and that government interference
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

with either the supply of currency, or monitoring of currency is harmful to the economy, and

personal liberties. Resentment towards the FED was amplified in 2008, when behind closed

doors, the US Treasury department gave $16 trillion to big banks, and other corporations in the

form of bailouts. This caused many americans, who were also struggling at the time to resent

the FED, and big banks, and lose faith in the system as a whole, especially since it was widely

accepted that the poor practices of these banks which received bailouts, were responsible for

the financial collapse. Cryptocurrencies began to be viewed as a viable option to replace the

standard, centralized model of currency. Not only is bitcoin believed to provide a more fair

system of regulation, and market control, but it would also prevent big banks from being able to

trigger another financial meltdown by serving their own interests (Holdsworthy 2018). Despite

decentralization being widely supported by cryptocurrency enthusiasts, opponents say that

without a central bank such as the FED to help stabilize the economy, that the market could get

stuck in a positive feedback loop, resulting in either run away inflation, or serious economic

depression. Regardless, Cryptocurrency servers, and systems are not yet well enough equipt to

begin implementation as the new world currency, so this debate will likely not cease soon.

Whether or not the “Developed world” decides to adopt bitcoin, or other cryptocurrencies

as legal currency, the use of these softwares has exploded across the developing world. As

smart phones become more and more accessible, and with over 3 billion people worldwide now

using the internet, cryptocurrencies have become widely used amongst those in countries

experiencing economic turmoil, and those working in countries away from family members.

Worldwide, migrant, and immigrant workers send an estimated $445 billion back home to family

members, Approximately 15% of their total earnings. If these workers choose to send their

money through a wire transfer system such as Wells Fargo’s. According to wells Fargo’s

website, these workers can expect to pay a $30 fee to send that money, and then their relatives

will then need to pay an additional $15 fee to receive that money. In contrast, the current
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

average fee to send one bitcoin is currently about six US dollars. By using cryptocurrency, an

individual could send the same amount of money to a relative, but pay nearly $40 less than

using traditional wire transfers. This allows families to keep more of their hard earned, and much

needed money, and it has created a booming industry for bitcoin in the developing world. Not

only this, but with the economic insecurities surrounding many African, and several European

countries, many are choosing to keep their wealth in cryptocurrencies rather than banks, to

avoid inflation devaluing their money (Cannucciari 2016). With the increase trust in

cryptocurrency over recent months, the usage of bitcoin, not as an investment, or anonymous

payment, but as an economic necessity will continue to rise. While in the United states, it is

often taken for granted how strong the dollar is able to stay, it is not out of the question for a

struggling country to turn to cryptocurrency as an answer to their banking crisis. Last year,

Japan became the first nation to officially recognize bitcoin as a currency, and it is not unlikely

that soon they will be joined by more nations looking to put their economic trust into the free

market, rather than their government.

Cryptocurrencies have their obvious disadvantages, they make it more difficult for law

enforcement to do their job, along with being a relatively insecure investment, and taking a

disproportionately large toll on the environment. While there may be a cryptocurrency one day

that could become the new global currency, it will likely not be bitcoin, or any other current

currency, without huge modifications to the entire system, and way digital currencies are

viewed. However, despite cryptocurrency having it’s shortcomings, the bitcoin boom has

brought the world one technology with the potential to revolutionize the way the world interacts,

and exchanges information. Blockchain, the system on which all cryptocurrencies are based can

offer faster sharing speeds, a more open network of communication, and a higher level of cyber

security than any program currently in use. For example, if small towns and municipalities

instituted blockchain into their system, they would be able to use the public ledger built in to do

everything from post salaries, and job openings, to distributing building licenses, and
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

announcing public events(Ølnes 2017). This would allow for citizens to more easily be able to

access documents, understand what is going on in their town, and keep their local government

accountable. In addition, several large corporations such as Walmart, Google, and Goldman

Sachs have already started experimenting with blockchain technologies in their systems, and

well as being some of the largest funders of Blockchain development. Not only would

Blockchain be able to speed up these companies systems, but it will also help to prevent recent

cyber attacks on companies such as Target, and Equifax. Not only does blockchain have the

ability to streamline processes, and help generate more revenue, but it can also help

businesses keep their consumers safe from financial fraud. Blockchain is not yet ready for full

deployment, as research and development of the technology continues, but if it is possible to

make the blockchain system easy enough for the average consumer to navigate, the next boom

may not be with bitcoin, but with blockchain itself. While blockchain holds great possibility for the

future, at this point the system is currently not ready for wide scale implementation at this point.

The current configuration of blockchain simply requires too much computing power, and too

large of an improvement to current technological infrastructure for any company, or organization

not already using the system to upgrade to it at this time. Despite the millions being put into

research and development of this new technology, it is still several years away from becoming

efficient enough for large scale, real world applications.Until then however, there is still much

more to be learned about the full potential of this technology.

Like the tech boom of the late 1990’s, and the mortgage boom of the early 2000’s,

Cryptocurrencies are likely to see a steep decline in the coming years. Currencies such as

bitcoin have paved the way for new strides to be taken with personal freedoms, and new

conversations to be had regarding the best way to structure a national banking system, and

while decentralizing a national bank may have theoretical economic benefits, by not having a

currency’s value backed by a national government, that currency becomes vulnerable to market

swings, and could lead to unforeseen consequences, ranging to as devastating, as the entire
Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

value of the currency being nullified. While many have been able to get rich investing in

cryptocurrency markets, such investments are paramount to gambling. The industry as it stands

today is simply not well enough regulated, structured, or understood to be reliably predicted

within the same certainty as other stocks. Therefore, rather than the focus being placed on the

currencies themselves, the real excitement should be surrounding the blockchain system. If

properly developed, blockchain could make the sharing of information not only faster, but more

secure as well, as it is far more difficult to hack than current data systems. While the idea of a

decentralized currency may be enticing, the mere idea is achievable without first being able to

implement, and understand blockchain in a far more complex way than we currently do. By

perfecting, and implementing blockchain, a government could one day create its own

decentralized cryptocurrency, but until then, the focus of this debate needs to remain on the

technology itself, not the currencies.

Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

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Bitcoin in the Modern Market: Applications of Cryptocurrencies in today’s world

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