The Longevity of Bitcoin's Usage and Its Future

Rogoff’s article discusses whether the use of Bitcoin and if there is a future in the technology supporting Bitcoin and weighs on whether Bitcoin’s value is justified or if it’s a bubble waiting to burst. Bitcoin, a decentralised digital currency, has become extremely popular with its current price at $14,870 per BTC (Tradeblock, 2018) which is 10,061% higher than its 2013 value (Coindesk, 2018), however, Rogoff’s perspective is that although Bitcoin is revolutionary, its future is short-lived. This essay will explore three different sections found in Rogoff’s article: whether the use of Bitcoin is purely criminal, whether Bitcoin has any value or if it’s a bubble and if the blockchain technology will be shortlived.

Bitcoin’s Use

Rogoff (2017) references how the Japanese government suggested that it’ll force Bitcoin exchanges to lookout for criminal activity and collect information on deposit holders. Regardless of its use, Bitcoin won’t display the names of the users in transactions, which has meant it’s been involved in illegal activity, leading to governments wanting to regulate Bitcoin. This is due to it being a go-to option for money-laundering for cyber-criminals (Shoshitaishvili et al, 2014), suggesting that its anonymity attracts criminal activity as it’s hard to regulate intermediaries who offer services for Bitcoin due to transaction anonymisers (Möser et al, 2013). Möser points out that Bitcoin involved in illegal activity has already started to be rejected by some regulators and he advises is more effective than tracking accounts, which Rogoff suggested to do. However, this solution has not stopped illegal activity happening as Dowd states (2014) that the nature of Bitcoin attracts criminals because as the hidden economy expands, it’ll increase the demand for Bitcoin to support its activities. Thus supporting Rogoff’s statement that tax evaders will still find methods to potentially launder money anonymously through bitcoin via Japanese accounts.

It’s evident that Bitcoin is not used widely by the public (Ali R et al, 2014) as Bitcoin is seen as a store of value rather than an exchange of goods. This can be blamed on the difficulty of Bitcoin being used in daily life, which has been highlighted by CNBC (2017) in NYC. Although Bitcoin has started to be accepted in several places, CNBC (2017) showed that the costs associated with paying by Bitcoin are far higher than with USD. Therefore, the use of bitcoin is not widely accepted due the costs of those transactions, and its lack of acceptance as a method of payment. The transaction costs have arisen due to the volume of people investing in Bitcoin right now, Lewis (2015) outlines how miners have created fees to add transactions to the ledger, thus inadvertently pushing the costs of Bitcoin up. However, Mundell (1998) uses Gremshaw’s Law to assess how, historically, more efficient currencies have won out other currencies, for example, the US dollar won outas an international currency due to its consistency, stability and high quality (Mundell R, 1998). This same idea can be applied to Bitcoin as Lewis (2015) highlights how Bitcoin can be sent from one person to another regardless of location and the payment is transferred within seconds. Moreover, its security is secure compared to other methods of payment due to the Blockchain technology supporting bitcoin, which requires each transaction to be publically authenticated by buyers and sellers (Alstynne M.V, 2014), therefore preventing users from being exposed to fraudulent activity. On the other hand, due to its high price volatility (Dowd, 2014), and its association with crime, it seems that the likelihood of it being backed by governments and the public is unlikely. Meaning that the research above supports Rogoff’s statement in saying that bitcoin’s use is due to its anonymity rather than the ease of use.

Bubble or Valueless?

The key characteristic that catapulted Bitcoin to fame is its anonymity, Rogoff (2017) argues that without this, Bitcoin will crash. This leads to the argument whether Bitcoin has any value at all or if it’s just a bubble that is waiting to burst (Rogoff, 2017). Currently, the market value of Bitcoin is estimated at around $72bn yet Cheah and Fry point out that Bitcoin’s price has speculative content within it (2015) and that the fundamental value of Bitcoin is zero. Dowd (2014) supports Cheah’s work by predicting that if the price of the Bitcoin ‘trends upward’ it can make it the subject of a speculative bubble - even if the supply of Bitcoin is predictable (21m BTCs), Dowd (2014) states that demand is highly unpredictable and Bitcoin has no system to stabilize it, unlike a central bank. To further support this, Cheung et al’s study (2014) of Bitcoin has found that it has been experiencing short-lived bubbles and have found that it has 3 major bubbles that coincide with the major events that have occurred in the Bitcoin market, such as the Silk Roads and Mt. Gox scandals. In fact, Shiller’s (2014) insight into the characteristic of a bubble supports the evidence presented as he states speculative bubbles are a ‘fad’ that arises from the irrational exuberance, the nature of news and information channels. This links back to Cheung’s and Cheah’s claim as many investors buy into Bitcoin due to its uncrackable algorithm, its claims of being completely secure alongside its anonymity. Consequently, the research supports Rogoff’s statement that there are bubble components within Bitcoin but they have always been short-lived rather than crashing to 0. However, Alstyne (2014) claims that Bitcoin has value because people accept it as a medium of exchange, shown by the fact that at least 22,000 sellers accept Bitcoin (Bogle, 2014). Likewise, the promise that Bitcoin won’t surpass its supply of 21m Bitcoins shows that there is a stable supply of Bitcoin, which is more stable than what many central banks have promised regarding their own currency supplies (Alstyne, 2014). Because of the decentralized nature of Bitcoin, the value of it can fluctuate a lot as seen in its previous value on Coindesk (2018), however Alstyne (2014) claims that as more people accept Bitcoin over time, it will stabilise. As Bitcoin steadily becomes backed by more and more governments, such as the Japanese shown in Rogoff’s article (2017), it can be said that there is a value within it because it can be transferred from one currency to another and used as a method payment to get goods and services. This can disprove the point explored in the previous section as Bitcoin is slowly being accepted into wider use.

Blockchain – Shortlived Or Revolutionary?

Although Bitcoin has its drawbacks, the technology supporting it – blockchain, can revolutionise the financial sector to make it secure and more reliable to adjusting to changes in the future. Blockchain would allow banks to remove inefficiencies in the paper manual processes regarding transactions (Macknight, 2016) by making digitalised transactions more efficient. A Santander report (Belinky, 2015) found that Blockchains could reduce infrastructure costs by up to $20bn per annum by 2022, thus showing the potential Blockchain holds for the financial sector. By allowing to cut out the middle-man due to Blockchain’s security and transparency (Underwood, 2016), the time and cost of settling transactions would be greatly reduced. Many other firms are starting to accept Blockchain technology in their operations, such as Deloitte and Nasdaq (Underwood, 2016) because the technology has started to allow market integrity and transparency because market activity can be monitored in real time. However, Macknight (2016) points out that Blockchain may not be able to solve all problems regarding the financial sectors inefficiencies but will be able to create a ‘catalyst’ to further cut through the infrastructure problems within it. Underwood also emphasises how there are still problems concerning data privacy as factors such as how much information needs to be shown to verify a transaction in the ledger as every person in the transactions will have an up-to-date ledger that reflects all the transactions information (Hamm, 2016). Subsequently, it can be agreed with Rogoff that the technology behind Bitcoin can be used to stabilise the cybersecurity of the financial sector (2017) but it still has its limitations and would require global collaboration to create a standard that is accepted by all organisations and protects individuals using the transfers whilst still maintaining market integrity.

In conclusion, Rogoff’s argument that Bitcoin’s use is done for criminal activity has been justified as the research shows that although it’s becoming more accepted to use Bitcoin, the main use of it is either a store of value or as money-laundering. In addition, the Bitcoin has shown characteristics of a speculative bubble due to pressures from governments such as China, however, Rogoff is incorrect in saying that the Bitcoin has no value as it fulfils the BofE’s requirements to be a medium of exchange (Ali, 2014). Finally, blockchain can be seen as the next step in Fintech but it still needs major adjustment and thought into how it would be applied to the financial sector. Overall, Rogoff’s claims do hold weight but the performance of Bitcoin is unpredictable due to its decentralised nature.