Bitcoin is the world’s most popular digital assets, that it is exclusively created and held electronically. But, do we actually know about digital assets and the potential of these assets to replace conventional money?
The major function of a digital asset is to serve as a means of payment, in exchange for goods or real asset, such as dollars, euros, INR etc. In addition, similar to how a normal asset’s exchange rate is set, the price for Bitcoins — per the CoinDesk Bitcoin Price Index (XBP) — is based on market dynamics and expressed as the midpoint of the bid/ask spread.
Bitcoin’s current value against the US dollar is of $6,550. The highest price for bitcoin since it was launched in 2009 was $19,497 in December 2017. After that spike, the price trended down to $6,150 in August 2018. Bitcoin’s price is gradually rebounding, buoyed by increased demand for the digital asset in China caused by the weakening yuan: digital asset, like gold, is a refuge for investors in the periods of uncertainty.
While the flow of a traditional asset is tracked by banks and controlled by governments, the circulation of digital assets is decentralized, a key factor that drives expectations for the spread of bitcoin to new markets and transaction types. Even though traditional assets now exist primarily on digital ledgers of banks like Bitcoins, the ledger for Bitcoins has no separate owner or regulator.
Instead, Bitcoin is maintained and updated by bitcoin users on the basis of the bitcoin protocol. Since the Bitcoin network is not controlled by a single institution, it has several advantages over government-controlled assets. These advantages include:
The amount of bitcoins in circulation is limited by the Bitcoin protocol to 21 million bitcoins. In contrast, central banks have the authority to issue additional asset, which, if not accompanied by GDP growth, may lead to a surge in inflation and related economic problems. As of May 27, 2016, there are 15.6 million Bitcoins in circulation with a total value of $7.4 billion.
Low-cost, open access
Due to the absence of traditional asset regulations, a Bitcoin address — analogous to a traditional private bank account — can be set up in seconds, is free of charge, and cannot be disabled by a third party.
Quick, simple account management
Many banks and financial companies have announced new investments in virtual asset technology based on expectations that Bitcoin transaction management and digital records will reduce administrative burdens and allow for more rapid transaction processing than existing systems.
The simplicity of Bitcoin has also proven attractive to the Swiss city of Zag, which plans to initiate a 6-month pilot program in July under which local citizens may pay for public services in bitcoin.
The anonymous nature of bitcoin, a byproduct of its decentralization, makes it a perfect tool for illegal activity. Examples include:
Illegal drug trade
One of the most well-known examples of the use of Bitcoins in the illegal drug trade stems from bitcoin-based transactions on the online drug bazaar Silk Road, which was launched in February 2011 and shut down by the US Federal Government in October 2013.
Cyber terrorists may similarly use bitcoins as the asset of choice to receive ransom payments. According to a Cyber Threat Alliance report, ransom payments made via the bitcoin network to hackers through the CryptoWall virus are estimated at $325 million total.
The taint of Bitcoin and other virtual assets by criminals’ use of the assets in illicit transactions coupled with the anonymity inherent to virtual asset fuels skepticism that virtual asset will achieve the level of acceptance of traditional asset much less replace it. Without meeting the essential prerequisite of trust in a asset, the widespread expansion remains doubtful.