Bitcoin: Can It Become An Alternate Currency?
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Case Code: ECON054 Case Length: 11 Pages Period: 1982-2016 Pub Date: 2016 Teaching Note: Not Available |
Price: Rs.400 Organization : - Industry : - Countries : - Themes: - |
Abstract Case Intro 1 Excerpts
Excerpts
Brief History of Money
“Commodity-backed” money in the early eighteenth century consisted of items representing underlying commodity like gold. Though the pieces of paper did not have intrinsic value, they could be exchanged for a fixed quantity of the underlying commodity . The commodity-backed money system made transfer of large amounts of money possible. Under the commodity-backed or gold standard, governments and banks could print as many notes as they had gold. The system restricted the activities of the government as they could only spend as much they had. However, at the beginning of World War I, the British, German, and French Governments took off the gold standard and printed as much money as they needed in the new fiat money system . The United States of America adopted fiat money in 1971....
The Evolution of Digital Currency
The creation of the World Wide Web in 1990s increased the use of the internet dramatically in society. According to Internet World Stats, the number of internet users in the world increased from 361 million in 2000 to 2,267 million in 2011 . The deep penetration of the internet impacted social behavior, interaction among people, the way they gathered information, creation of internet communities, and the way they paid.
The emergence of virtual communities like Facebook, Twitter, MySpace, and Wikipedia was also accompanied by the invention of digital money. The virtual currencies could act as a medium of exchange and a unit of account. However, it was not clear whether they could become a store of value to fulfill the third criterion for characteristics of money...
The Origins of Bitcoin
In 1982, David Lee Chaum (Chaum), a computer scientist, first proposed the idea of secure digital cash and then developed the idea to make transactions encrypted and without the need for a third party . He founded Digicash to commercialize his ideas, which failed as the company went bust in 1999...
Bitcoin as Money
In November 2012, WordPress.com, an online publishing platform, became the first major company to accept Bitcoin payment. “Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of their network. Merchants who accept Bitcoins can do business with anyone. PayPal alone blocks access from over 60 countries and many credit card countries have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons...
Bitcoin: A More Efficient Monetary System?
According to Nakamoto, trust in the third party for transactions was a deficiency of the existing fiat money and created room for the powerful to make money at the cost of the public. “The root problem with conventional currency is all the trust that's required to make it work...
Looking Ahead
Legitimacy, volatility, trust, security, and consumer protection had been highlighted by economists as weaknesses and obstacles in Bitcoin becoming a mainstream currency . However, the technology behind Bitcoin i.e. blockchain, received appreciation from every section of society. Industry experts opined that in future, blockchain could revolutionize the way records were maintained...
Exhibits
Exhibit I: Volatility of Bitcoin
Exhibit II: How does Bitcoin make transactions safe?
Exhibit III: Blockchain
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