Bitcoin in the post-Greek crisis

One of the most interesting results of the Greek crisis has been the resurgence of interest in virtual currencies, especially Bitcoin. When capital controls were imposed, Greeks exchanged Euros for Bitcoin, and then exchanged Bitcoin for dollars.

The typical bitcoin transaction volume is 10,000 to 12,000 per day. In June and July it exceeded 120,000 per day. The price went from $220 per bitcoin on June 1 to $285 on July 24. That’s a 29% increase in seven weeks against the dollar. In euros, bitcoin went from 213 euros on June 1 to 260 euros on June 24, a 22% increase.

Every Bitcoin transaction must be authenticated. The money supply is limited. That limit increases at a decelerating rate, determined by a mathematical algorithm that controls "mining" (the process of creating new coins).

Each "coin" has a unique number. One of the headaches is making sure someone doesn't use the same number twice to complete two simultaneous transactions. It's very difficult because Bitcoin is anonymous. Therefore Bitcoins cannot be verified by linking their owner.

Satoshi Nakamoto, the creator of Bitcoin, came up with a very clever solution. Each Bitcoin transaction is time-stamped and recorded in a virtual ledger, the "blockchain". The blockchain identifies each specific Bitcoin that can be used for a transaction at a specific time. The blockchain is maintained by a peer-to-peer system of multiple computers. It can be downloaded by anyone. It is very difficult to forge because it is verified by multiple parties.

The volume of money Greece required resulted in slow blockchain processing. Transactions that normally take 15-20 minutes to complete took more than 5 hours. Yet people trying to withdraw money from Greek banks did not complain!

It is no coincidence that the Bitcoin craze also started in China. Many Chinese have formed Bitcoin joint ventures, and China contributes a large part of the transactions. In March and April 2015, almost 80% of Bitcoin transactions were conducted in RMB.

The complete collapse of the Shanghai stock market also led to a better value of Bitcoin. The People's Bank of China issued a stern warning about the circulation of Bitcoin. Several Chinese banks have blocked Bitcoin transactions for accounts held in them.

News about Bitcoin was announced. The Global Bitcoin Summit was held in Beijing in May 2014 but no Chinese media reported on it. But this did not stop the circulation of Bitcoins in relation to the RMB. In fact, Chinese Bitcoin exchanges have seen a big dividend due to higher demand and the fact that China's currency controls make arbitrage difficult. In general, Bitcoin is valued 25% to 35% higher on Chinese exchanges than elsewhere.

Blockchain in particular can be used to verify other transactions and create new decentralized, "open" markets, including prediction markets. This has led to a large amount of investment in the adoption of blockchain technology.

Nasdaq, for example, is using Bitcoin to record shares. It also has obvious applications in maintaining land registry records, small loans, and microfinance markets. India, incidentally, is already one of the largest global Bitcoin loan markets, illustrating what is happening in e-commerce that is not being improved by official data.

Along the way, investment banks like Citigroup and Barclays decided to issue their own digital currencies. If someone figures out how to solve the fractional reserve banking problem with Bitcoin, then there will be an obvious case for digital currencies to be used on a much larger scale.

So an age-old question may be relevant again. What is the use of paper money that cannot be redeemed? It is a piece of paper (or a digital account)? It promises the holder another piece of paper (or another digital account). If its utility is only as a convenient form of exchange, then why not use Bitcoin or something similar, given that their supply is governed by mathematical laws rather than political considerations?