The development and risks of Bitcoin

Two years ago, Bitcoin was once the most sought-after object by investors. At its peak, 1 Bitcoin could be exchanged for more than 7,500 RMB, but the current exchange price is less than 1,700 RMB. Not only has the price plummeted, but there have also been a lot of negative news reports about Bitcoin recently. For example, Mycoin, a Bitcoin investment company where Hong Kong famous artist Pang Weihua serves as the CEO, lost nearly 2.5 billion RMB and was recently investigated by the police for fraud. This month, a Bitcoin extortion virus called "CTB-Locker" spread explosively in China, making Bitcoin the focus of attention again. What exactly is Bitcoin, what are its advantages and disadvantages, and is it worth investing in? This article will briefly introduce these issues.

Although it is only 6 years old, Bitcoin has spread rapidly around the world as the concept of "virtual electronic" currency has become popular. Bitcoin has now become the most common Internet currency in the world, with more than 100 million users. Currently, the number of Bitcoin users is more than that of the Philippines, the 12th most populous country in the world. The total market value of Bitcoin in circulation is about 3.5 billion US dollars, and the global daily trading volume has reached 200,000 Bitcoins, worth 50 million US dollars.

Advantages of Bitcoin

The unstoppable development trend of Bitcoin comes from its significant advantages as a new type of virtual electronic currency. At present, the currencies used as payment tools in various countries around the world are mainly issued by central banks. This model of central bank currency issuance has its own advantages, but it also exists in the form of a money printing machine used by the government to plunder the wealth of residents. The design principle of Bitcoin fully avoids the possibility of currency being over-issued. The number of Bitcoins is determined by a pre-set program and is not manipulated by the central bank or anyone else. After the first four years, the total number of Bitcoins produced will be halved, and the issuance speed will slow down as the number of Bitcoins increases, and the total issuance will eventually stop at 21 million. Therefore, the number of Bitcoins issued has been strictly controlled, and is in a state of "scarcity makes things valuable".

The creation of Bitcoin embodies the concept of decentralization. Unlike the central bank's monopoly on currency issuance, the creation of Bitcoin relies on users to obtain Bitcoins through specific mathematical calculations on computers. In other words, anyone can use a computer to participate in the issuance of currency, just like anyone could pan for gold under the gold standard. Therefore, the process of generating Bitcoin is figuratively called "mining", and users who use computer calculations to generate Bitcoins are called "miners". It can be seen that an important feature of Bitcoin is its decentralized design. Decentralization prevents a single person or individual organization from controlling the entire Bitcoin issuance system.

As a payment tool, one of the outstanding features of Bitcoin is that it guarantees the privacy of both parties. In the early days, Bitcoin would publish the information of both parties in the transaction records, although the information was in pseudonyms. However, this information could still be cracked, thereby revealing all the transaction information of the trader, even including home addresses and bank accounts. In order to increase privacy, Bitcoin's trading system now allows traders to use a series of trading suites to make the entire information very complicated and impossible to crack, thereby avoiding the tracking of the payer's information.

In addition, using Bitcoin to pay is also very convenient, fast and low-cost. Bitcoin electronic wallets allow users to store Bitcoin, view transaction records and save passwords. Therefore, more and more websites are beginning to accept Bitcoin, such as Overstock, Newegg, Expedia and other well-known Internet companies. If necessary, Bitcoin users can also convert Bitcoin into other currencies, but pay a handling fee ranging from 0.2% to 2%. Most of the time, Bitcoin is converted into traditional currency through a two-way auction bidding method. Since many commonly used trading tools have been gradually applied here, there are no major technical difficulties in this transaction.

Disadvantages and risks of Bitcoin

Some people predict that Bitcoin will replace traditional currencies and become the main pricing and payment currency in daily life. This view is not realistic. Although the scarcity of Bitcoin design can prevent it from being abused as a currency, this scarcity, as a "double-edged sword", will also limit the scope of Bitcoin's use. Since the issuance of Bitcoin cannot be adjusted according to the economic growth rate, and the issuance speed is getting slower and slower, it is inevitable that the price of Bitcoin will fluctuate greatly. This situation has been fully reflected in the roller coaster market of Bitcoin in the past two years. A currency with such drastic price fluctuations cannot become the main pricing and payment currency in daily life.

Another disadvantage of Bitcoin is security. Although the Bitcoin payment system protects the privacy of users, it also brings some challenges. For example, after the transaction is completed, if one party escapes with the money, it is difficult for the other party to track them through their personal information. This is why the hackers mentioned at the beginning demanded payment in Bitcoin when they ransom. Since Bitcoin payments are irreversible, there are also risks in using Bitcoin payments. When one party makes a mistake in a transaction and cannot withdraw the transaction, the buyer and seller can only discuss whether the transaction can be cancelled on a voluntary basis. In 2014, hackers used system vulnerabilities to steal customers' Bitcoins on Mt.Gox, the world's largest Bitcoin trading platform, and the loss exceeded 450 million US dollars.

Due to the privacy of transactions, Bitcoin also facilitates illegal transactions such as drugs, smuggling, kidnapping, etc. In the early days of the United States, there was an anonymous Bitcoin trading website called "Silk Road". As one of the earliest websites supporting Bitcoin transactions, its annual revenue reached 15 million US dollars. But the government later discovered that there was money laundering in Silk Road transactions and that drugs could be purchased on its website. For this reason, the FBI closed the website in 2013 and seized 144,000 Bitcoins. At that time, it was widely rumored in China that the real reason for the closure of Silk Road was that Bitcoin threatened the status of the US dollar, but this speculation was not credible. In addition, gambling game websites and international money launderers have also set their sights on Bitcoin. For example, the most popular Bitcoin gambling game website Satoshi Dice set an average monthly transaction record of 33,000 Bitcoins in 2012. Bitcoin also opens the door to illegal activities such as international money laundering, evading international capital control and international tax evasion. In December 2013, the People's Bank of China suspended Bitcoin exchange activities in banks in China. One of the important reasons was that it was worried that the RMB would be exchanged for Bitcoin and flow to overseas markets.

As mentioned above, Bitcoin is designed to be decentralized and peer-to-peer (P2P). This feature has advantages, but also problems. As the creation of Bitcoin becomes increasingly difficult, it is difficult for "miners" who mine Bitcoin to get enough returns on the Bitcoin network on their own. Therefore, some miners combine their computers to search for Bitcoin together. This model is called a "mining pool". In March 2015, the two largest mining pools, AntPool and F2Pool, accounted for one-third of the Bitcoin calculations in the entire market. These super-large mining pools run counter to the original idea of ​​Bitcoin to issue Bitcoin in a decentralized manner.

As Bitcoin develops rapidly, some of its functions must also abandon the original decentralized model. The Bitcoin community has been committed to preventing systemic risks caused by technical failures and security risks, because the market chaos caused by these problems will reduce people's trust in Bitcoin. Therefore, the Bitcoin community encourages the use of computer networks to avoid more problems caused by terminal errors. To achieve these goals, it is necessary to rely on a certain degree of centralized management. In addition, some of the media functions of the entire Bitcoin system must also be solved by a centralized model, among which the most important are currency transactions, e-wallet services, information hiding and mining, etc. Take e-wallets as an example. At present, most users use software or mobile apps that store data on public servers, which causes customers to store their Bitcoin passwords on these servers, thus putting their accounts at high risk. How to make Bitcoin more secure is not something that a single company can solve, and often requires centralized and unified coordination. If there is a unified place to store this information and manage user information, the security of Bitcoin transactions will be increased.

How to Regulate Bitcoin

In the six years since the emergence of Bitcoin, it has swept the world at lightning speed with the rapid integration of global financial activities and Internet technology. While people enjoy the convenience brought by virtual currency, they also need to be wary of its potential risks. At first, everyone believed that Bitcoin was built on the concept of decentralization and therefore did not need to be regulated, but as more and more bad behaviors related to Bitcoin emerged, regulation began to become important.

There are three main types of crimes involving Bitcoin. The first is stealing Bitcoin. Legal deficiencies, Internet security issues, and uncertainty in transaction processes have led to widespread theft of Bitcoin. Due to the irreversible transaction method, victims are often unable to recover their economic losses. The second is that criminals use Bitcoin to launder money, evade taxes, and circumvent capital controls and other economic crimes. The third is using Bitcoin to trade illegal goods and services, such as drugs, arms, and even kidnapping ransom.

For regulators, the biggest challenge is who to regulate and restrict. Obviously, it is impossible to regulate all the people in the entire Bitcoin network, and only the main transaction medium can be considered. However, the transaction medium is not willing to accept regulation because they do not want to be responsible for customers, suppliers, or even third parties. But at least when Bitcoin and traditional currencies are traded, they must be regulated by regulatory authorities, because Bitcoin, as a virtual currency, has affected the security of traditional currencies in daily life. In 2013, the Financial Crimes Cooperation Bureau of the United States signed a document requiring virtual currency operators to register and report transaction records like normal currency operators. In 2013, the Chinese government also introduced a similar policy, requiring Bitcoin intermediaries to register users with real names. Although these measures can strengthen the supervision of virtual currency transactions within the country, a broader regulatory system is still needed on a global scale.