ABSTRACTThe aim ofthis report was to find out what exactly cryptocurrency, such as Bitcoin, isand why it has value, what is its future and if it has the ability to becomethe mainstream currency of the future. Bitcoin is a fully decentralized currency.It has value because its supply is very limited and there is demand for its lowtransaction costs, anonymity, investment possibilities and possibilities foruse in illegal activities. Its future presence is questionable as Bitcoin has afew serious drawbacks such as high price volatility, susceptibility to hacking,no protection from a central bank and no consumer protection. It is thereforeunlikely that it will catch on as an established currency to the generalpublic, as its two main strengths, anonymity and low transaction costs are notnecessarily what the average consumer demands. However the technology behindcryptocurrency and Bitcoin can be applied to other currency or payment systemswhich could have a lasting impact on how people spend money in future. CHAPTER 1 INTRODUCTIONMoney isone of the most valuable and sought after commodities in the world.
Most peopleinteract with money in almost every phase of their life, whether a person plansto go buy a newspaper, buy food or invest in a home or a buy a car, money isthe latest economy for transaction for goods and services. Money has hadseveral forms in the human history with the oldest form of money beingbartering. Without any official currency people would directly trade one goodfor another, such as trading a horse for a cow. This form of money however isvery inefficient as the odds of finding someone that required a horse for theexact same good that the other person required are very low. Clearly a mediumof exchange needed to be developed. A medium of exchange acts as anintermediary instrument in order to make trading more efficient. During thetime of bartering this would include some easily traded goods like weapons oranimals skins. It was something around 600 that the first official currency wasminted.
Minted currencyused to be made from the mixture of silver and gold which were stamped with apicture to denote the face value of the coin. These coins were minted by Lydia’s(in today’s Turkey) King Alyattes and it maximized the countries trade to aconsiderable amount resulting in the empire becoming one of the richest in AsiaMinor. Around 600 B.C. the Chinese started developing paper money and movingaway from coins, Europeans took more time to shift to paper currency. Eventuallybanks would make bank notes for people to carry around instead of coins whichhad their value backed up in silver or gold coins. Gradually paper money as weknow it today became the norm.
This ishow money eliminated the problems with bartering and acts as a stable medium ofexchange. Pricing goods and service, and trading, becomes much easier wheneveryone accepts the same money as currency. In today’s economy the main sourceof money is fiat money, a legal tender protected by a government usingregulations and laws that create the much needed trust in money and thuscreates its value. Fiat money is supplied by a countries central bank whichmaintains the stability and supply through its monetary policy.
With increasingand innovation of new types of money. One of themost controversial new innovations of money are Cryptocurrencies, a form ofinternet currency often called digital money or cyber currency. The most importantfeature of Cryptocurrency is that it is not issued by a central bank like thefiat currency, nor is it protected by regulations or law, making it imperviousto government interface. The most widely known and controversial cryptocurrencyis Bitcoin, which was launched in 2009.
As Bitcoin is the most widely known andused cryptocurrency in the world, the subject matter of this paper will largelyshed light on the Bitcoin. What is Cryptocurrency, why does it have value, whatis its future and could it replace the fiat currency?