Bitcoin: What's all the Hype?

December 20, 2017

Wu He John Doukas

By Jon Cawley

Having successfully moved past its early association with the Dark Web, Bitcoin seems to be everywhere these days, mostly due to its mysterious origins and wild valuation changes that have taken investors on a wild roller coaster ride and disrupted international markets.

International news outlets seem to be reporting daily on the saga that is bitcoin, but what is it exactly? Bitcoin is an internet-based currency that operates independently of any regulation, allowing users to conduct transactions anonymously between themselves without fees or the need to exchange personal information.

The digital currency is not controlled by any government, however, there is a controlled supply of Bitcoins to ensure they retain their value. In theory, the maximum number of bitcoins is 21 million. The only way to make new Bitcoin is through "Mining," a process where advanced computers solve complex math problems in order to create new blocks of Bitcoins.

Unlike every other currency, Bitcoin cannot be redeemed for gold or some other commodity. It's peer-to-peer network relies on cryptography to maintain its integrity so individuals, organizations and governments to perform business anonymously.

Bitcoin meets some people's needs to transfer money online securely without needing a trusted intermediary such as a bank and it is highly valued because of its anonymous nature. Therefore, it does have certain values and utility. High demand and low supply of bitcoin has caused its value to spike rapidly, said Wu He, associate professor of information technology and decision sciences.

To keep and use Bitcoins, a virtual "wallet" is required to store the information necessary to complete transactions. All transactions are held on a massive online ledger known as the "blockchain." It tracks the time of transactions and amounts of each exchange, but doesn't record personal information.

Blockchain is a revolutionary technology, He said, noting that it can be applied to many fields, including finance, inventory tracking systems, healthcare, cybersecurity, education and contract management.

Bitcoin is the first successful application of the Blockchain technology.

"The main concern is how much it is worth," He said. "It is hard to predict because it's only worth what people think it's worth. Bitcoin is a great example of demand-supply dynamics. Many factors contribute to the recent price surge/drop of Bitcoin."

With the use of Bitcoins now beyond the black market and accepted more and more for normal transactions, as well as present global instability, He said cryptocurrencies like bitcoins should have a future and will likely be around for many years to come.

John Doukas, professor of finance and Eminent Scholar, W. B. Spong, Jr. Chair in Finance, said the blockchain technology behind Bitcoin has great future potential, especially when central banks jointly adopt it which could help cheaply verify attributes of a transaction.

Bitcoin as a currency or investment at the current stage represents investors' (especially in east-pacific Asia) un-hedged speculative motive, Doukas said. "It's future potential as a widely accepted currency greatly depends on whether or not central banks find a way to control its supply, as they currently do with the supply of U.S. dollars, Euros and other national currencies.