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Bitcoin: Future Transaction Currency?

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Hossin and Hosain 385
DOI: 10.6702/ijbi.201809_0005

Bitcoin: Future Transaction Currency?

Md Altab Hossin
School of Management and Economics
University of Electronic Science and Technology of China
610054 No. 4 Section 2, North Jianshe Road, Chengdu, China
Md Sajjad Hosain
School of Business, Sichuan University
610065 No. 24 South Section 1, Yihaun Road, Chengdu, China

ABSTRACT
Bitcoin is a digital cryptocurrency that has attracted substantial interest in recent
years from the general public, profit seekers, risk takers, academic practitioners,
and, last but not least, economists. Although it is referred to as new, Bitcoin has
existed since 2009 and is rooted in technology that goes back even farther. It was
the first established cryptocurrency, with the first trade in 2010. Since 2015,
Bitcoin has attracted even more attention because of its increase in value and
volume of exchange. The Bitcoin system maintains a global, distributed
cryptographic ledger of transactions, or blockchain, through a consensus algorithm
running on hardware scattered around the world. This paper discusses the nature
of cryptocurrency and blockchain, how it works, and the present status of Bitcoin
blockchain in different countries around the world. The paper also includes a
review of literature on Bitcoin engineering, Bitcoin as currency and the
cryptocurrency system, related work on queuing theory, and work on competition
and monopoly. The paper explores three possible outcomes with regard to the
future prospects of Bitcoin. The various aspects of this technology are yet to be
revealed in detail, but the authors hope that this simple, basic, and narrative paper
will be helpful to those seeking basic references regarding this newest issue.

Keywords: Bitcoin, blockchain, cryptocurrency, Internet, trading, mining, block,

transaction

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386 Bitcoin: Future Transaction Currency?

1. INTRODUCTION TO BITCOIN
Bitcoin is a peer-to-peer cryptocurrency used mainly for monetary
transactions on the Internet (Nakamoto, 2014). It is intended to be similar to flat
money and commodities. Bitcoins are inherently valueless, their worth being
determined by those trading in them (O’Dwyer & Malone, 2014). Though it was
established in 2009, Bitcoin has generated a massive amount of interest in the
media recently and has inspired a wave of copycat currencies (Litecoin, Gaelcoin,
etc.) and even a fully working parody currency (dogecoin). It has also generated
interest in intellectual circles because of issues it creates regarding user privacy
(Androulaki et al., 2013), because of attempts to gain insight into its use in
transactions (Meiklejohn et al., 2013), and because of attempts to better understand
its implications as a payment system (Karame et al., 2012).
Bitcoin is a kind of digital currency in which encryption techniques are used
to control the generation of units of currency and to verify the transfer of funds,
operating independently of a central bank. Bitcoins are produced by users who
“mine” them by lending computing power to verify other users’ transactions. They
are stored in a “digital wallet,” which exists either in the cloud or on a user’s
computer. The wallet is a kind of virtual bank account that allows users to send or
receive bitcoins, pay for goods, or save their money (Anderson et al., 2017). The
major difference between physical currency (e.g., GBP or US dollar) and bitcoins
or between bank accounts and Bitcoin wallets is that physical currency and bank
accounts insured by the Financial Services Compensation Scheme (FSCS) in the
United Kingdom or the Federal Deposit Insurance Corporation (FDIC) in the
United States, whereas bitcoins and Bitcoin wallets are not.
Fundamental to Bitcoin is a public ledger, acknowledged as the blockchain.
At the beginning, a new “block” was added to this chain or ledger every 10 minutes
(although it can take more than an hour today). This ledger records all of the
transactions that have occurred, as well as the quantities of bitcoins that are in
possession at singular public addresses, each having a related classified key. The
owner of the private key has the authority to transfer the digital coins that are held
at that specific address only. Each key is 51 characters long, in the same format as
a public address. To spend an amount of bitcoins, one must use his or her private
key to cryptographically sign the transaction, sending the bitcoins to another
address. This message or transaction is then transmitted to the network, and the
computers in the network begin to record that the address no longer has the amount
that was sent, but that it is now held at the receiving address. All of the computers
that are working to write new blocks to the blockchain are known as miners. These

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computers are all racing to solve a cryptographic puzzle, which is required to write
the new block. The computer that solves the algorithm and writes the new block
receives an award of newly created bitcoins, now worth more than $7,000 each
(Anderson et al., 2017).

2. THE CONCEPT OF BLOCKCHAIN

Blockchain is the core technology behind Bitcoin. It is a disseminated,
decentralized database and is designed to accomplish consistent and reliable
agreement over a record of events between independent participants. Participants
in a blockchain network reach agreement about changes to the state of the shared
database without needing to trust the integrity of any network participants or
administrators. Anyone who participates in the blockchain network has his or her
own data store that stores all of the transactions that ever happened on the network,
also known as the distributed ledger (Anderson et al., 2017).
Transaction entries are recorded within a cryptographic chain of blocks. At
each stage, the networks of participants are required to agree about the most recent
block of transactions. Agreement is reached through a process of mass consent,
eliminating duplicate entries and dual spending. This process and the
cryptographic layering of the blocks make the agreed blockchain irretrievable and
unchallengeable. The “history” of events within the blockchain cannot be tailored
by any one of the participants without majority consensus from the group. This
requirement is vitally important to prevent the “double-spending” difficulty (i.e.,
the same digital file being copied and transferred multiple times) without requiring
a centralized ledger or third party that prevents users from duplicating/spending
the same digital file twice. Blockchains can thus aid the transfer of assets and other
data without needing a trusted central authority (like banks or other financial
institutions).
The ability of blockchain system participants to autonomously authenticate
the reliability of the shared database without having to rely on a trusted third party
is one of the main value propositions of using the blockchain. Blockchains hold
the promise of dropping the trust gap by making actions within the system
autonomously verifiable by each participant, improving accountability, and dis-
incentivizing misbehavior through public audit ability. In other words, the rules
governing a blockchain can successfully eliminate the types of unauthorized
transfers or deceptive activity that have become all too frequent in many areas of
business and society (Anderson et al., 2017).

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388 Bitcoin: Future Transaction Currency?

3. BITCOIN AND BLOCKCHAIN: HOW THE SYSTEM WORKS

This section provides a simple explanation of the blockchain protocol that is
the basis of the Bitcoin system and also is the foundation of many other
cryptocurrencies. Before describing the economic elements and what the Bitcoin
system does, it would be helpful first to explain what is required for a payment
system such as PayPal or FedWire, or the continuance of electronic balances in a
modern bank. An electronic payment system functions as a record (or a ledger) of
accounts that is connected with a user and his or her balance. It allows users to
check their balances and allows debiting the balance and crediting the debited
amount to another account. Only an account owner can debit the account, and the
balances do not change without a legal transfer; i.e., a transfer that conforms to the
system’s stated rules.
One uncomplicated accomplishment is just a spreadsheet (or another
bookkeeping device) that only a trusted authority can change. Allowing multiple
computers to maintain and update the ledger requires a more complicated structure.
This distributed ledger structure requires synchronization across the servers, which
is, in principle, more robust than a single-server system (Narayanan et al., 2016).
Maintaining harmony in a distributed computer system has been known to be
straightforward, as long as the computers are trusted (Tanenbaum & Van Steen,
2007)). The Bitcoin system is intended for an environment that lacks a trusted
authority. Therefore, its ledger must be maintained and updated by a collection of
computer servers, called miners, none of which are trusted (Huberman et al., 2017).
They are assumed to be profit-oriented; i.e., to respond to incentives in a profit-
maximizing way. Moreover, they offer or withdraw their services according to
profit-seeking opportunities they perceive. Although legal transactions are in
possession of untrusted miners, the system as a whole is very secure; that is, it
processes all legal transactions. The collection of miners jointly holds a single
ledger, meaning that there must be consensus among miners about current
balances. Moreover, consensus must be maintained as balances change. Bitcoin’s
ledger is a public database called blockchain, which can be verified by third parties
through cryptography. The system arranges for the miners to be compensated for
their services in such a way that when each maximizes his or her profit and believes
that other miners similarly maximize their profits (Huberman et al., 2017).
Initially, all balances are at zero. Over time, the protocol mints new coins
which it adds to the balances of winning miners holding the record of all balance
changes. The demonstration of a transaction is a message that a sending account
transmits to all the miners, stating the sending account, receiving account, amount

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Hossin and Hosain 389

transferred, transaction fee, and a cryptographic signature by the sending account.

A transaction is processed by adding the appropriate message to the end of the
ledger. The cryptographic signature allows any third party to verify that the
transaction was indeed authorized by the holder of the sending account. Since the
ledger is public, any third party can verify that the sender indeed held a balance
enough for the transfer. The public ledger is saved in the shared blockchain format
where the transaction data is partitioned into a series of blocks. These blocks are
periodic updates to the ledger. Notably, the ledger does not update instantly
following the appearance of a new transaction. Rather, it updates on average every
10 minutes with a block summarizing a subset of the recent pending transactions
which had not been included in a previous block. Remaining unprocessed
transactions wait to be processed in future blocks (Huberman et al., 2017). The
maximum block size is 1MB. To ensure that each block can be transmitted
promptly throughout the network, the protocol limits each block to 1MB of data.
As of July 2017, this limits each block to no more than approximately 2,000
transactions, as the average transaction uses 0.5KB of data (Zohar, 2015).
New transactions are processed when they are incorporated in a block that is
added to the ledger, where each miner holds a duplicate of the present ledger; i.e.,
all preceding blocks. All transaction requests are transmitted to all miners. The set
of awaiting transactions that get to each miner may differ a little across miners
because of network imperfections, rendering non-trivial the choice of a
unanimously agreed-upon record of transactions. To ensure that Bitcoin maintains
an exclusive record of transactions, a solo miner is selected to add a block of
transactions to the ledger. Since there is no trusted authority to make the selection,
a competition is used to randomly select a winning miner. To participate in the
tournament, miners exert effort (known as proof of work) that is practical merely
for generating a verifiable random selection of a miner without the need of a trusted
randomization device (Huberman et al., 2017).
Periodically (currently approximately every 10 minutes), the tournament
randomly selects one miner as the winner, assigning his block as the next in the
chain, thereby making that block a mined block. The mined block is transmitted to
all the other miners, who verify the legality of that block and vet all transactions
included in the block. Miners add a newly mined legal block to their copy of the
ledger and proceed to add new blocks on top of it, ignoring mined blocks that are
not legal (Huberman et al., 2017).
The tournament-winning miner is paid a reward when he or she mines a new
block, but can withdraw his or her reward only after newer blocks augment the

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390 Bitcoin: Future Transaction Currency?

chain on top of his or her block. Other miners will build on top of his or her block
only if they consider it legally incentivizing to assemble and create legal blocks.
Consensus forms on a ledger that includes the new block. The process continues
in the same manner for the following 10 minutes, on average, and so on (Eyal &
Sirer, 2014)
The miner who produces a block is paid from two sources. One consists of
newly minted coins, the exact number of which is protocol-determined and
decreases with time. Crediting successful miners with newly minted coins moves
the system early on from having zero balances to having positive ones. The second
source consists of the fees offered by the transactions in the mined block
(Huberman et al., 2017).
According to Huberman et al., (2017), this system will have the following
desired properties:
1. All miners are synchronized to hold the same ledger of processed
transactions.
2. No single miner controls the system, because every 10 minutes the ability
to process transactions is given to a randomly chosen miner.
3. Balances change only with a legal transaction because any transaction that
is added is vetted by other miners to be valid, and transactions cannot be
deleted from the ledger.

4. RELATED LITERATURE
As relatively new concepts, Bitcoin and blockchain are the subject of only a
few previous studies. Very recently, however, they began attracting the curiosity
of researchers and continue to do so. This section reviews the studies that have
been completed on the engineering of Bitcoin (Table 1) and the use of bitcoins as
currency and the cryptocurrency market (Table 2), and discusses related work in
queuing theory, as well as work on competition and monopoly.

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Hossin and Hosain 391

Table 1
Literature on Bitcoin Engineering

Author(s) Year Topic of Investigation

Nakamoto 2008 First identified the term Bitcoin and described the
Bitcoin system
Babaioff et al. 2012 Explained the incentives to distribute information in
the Bitcoin system
Kroll et al. 2013 Offered a description of the incentives to participants
in the Bitcoin system, especially the incentives for
miners, thus concluding a brief discussion of
transaction fees
Eyal & Sirer 2014 Analyzed the regularity between miners
Sapirshtein et al. 2016 Established the proposition that appropriate design of
the blockchain protocol produces a dependable system
in equilibrium if all miners are significantly small
Narayanan et al. 2016 Offered a sophisticated explanation and analysis of the
Bitcoin system
Croman et al. 2016 Provided cost estimates for the Bitcoin system and
analyzed the potential for transaction throughout
Eyal et al. 2016 Suggested another design aimed to develop a system
with a higher transaction throughout
Carlsten et al. 2016 Analyzed how incentives for miners change when they
are rewarded with transaction fees instead of newly
created coins
Chiu & Koeppl 2017 Evaluated the welfare implications of printing new
coins, adopting a mostly experimental orientation
Easley et al. 2017 Explained contemporary design and performance of
blockchain
Huberman et al. 2017 Explained the economics behind the Bitcoin system:
How does the system raise revenue to pay for its
infrastructure? How are use fees determined? How
much infrastructure is deployed? What are the
implications of changing parameters in the protocol?

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392 Bitcoin: Future Transaction Currency?

Table 2
Literature on Bitcoin Use as a Currency and on the Cryptocurrency Market

Author (s) Year Topic of Investigation

Yermack 2013 Reviewed the history of Bitcoin and the statistical
properties of its price history, arguing that it does not
behave much like a currency according to the criteria
widely used by economists and suggesting that Bitcoin
resembles a speculative investment similar to the
Internet stocks of the late 1990s
Ron & Shamir 2013 Analyzed the use of Bitcoin and its value as a currency
Gandal & 2014 Analyzed competition between the various crypto-
Halaburda currencies
Gans & 2015 Analyzed the economics of digital currencies, focusing
Halaburda on platform-sponsored credits
Athey et al. 2016 Explained the theory of Bitcoin and using it as a
currency
Catalini & Gans 2016 Discussed possible opportunities that can arise from
blockchain technology

4.1. Related Work in Queuing Theory

Lui (1985), Glazer and Hassin (1986), and Hassin (1995) studied a queuing
system in which users with various waiting costs volunteer to pay transaction fees
(termed “bribes” in Lui, 1985) in order to gain priority in a queue to a solo service
station that serves customers one at a time (Huberman et al., 2017). The main
observation of Lui (1985) is that the server may amplify its revenues by raising the
speed of service. Hassin (1995) showed that the service rate that maximizes the
server’s profit is always slower than the socially optimal service rate. Hassin and
Haviv (2003) provided a summary of the results, and Hassin (2016) provided an
updated review.
The current study considers a queuing system where transaction arrival and
service arrival are stochastic, but the service is done in batch mode of fixed
maximal size. The prior work corresponds to a batch size of one. The interaction
among the arrival and service rates and the maximal batch size and their impact on
the transaction fees and server’s revenues are of major concern (Huberman et al.,
2017). Independently, Kasahara and Kawahara (2017) analyzed delays in a priority

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Hossin and Hosain 393

queuing system with batch service inspired by Bitcoin, but do not consider user
incentives or equilibrium considerations.
4.2. Work on Competition, Monopoly, and Its Regulation
The social welfare implications of monopolistic versus competitive provision
of a goods or service is of utmost concern to economic analysis, often leading to a
debate regarding the extent to which regulation is desired and the best means
through which to accomplish it (Huberman et al., 2017). According to Posner
(1975), a model of the social cost of monopoly and monopoly-inducing regulation
(Narayanan et al., 2016) assumes that competition to obtain a monopoly results in
a conversion of monopoly profits into social costs. A major conclusion is that
public regulation is perhaps a larger source of social cost than private monopoly.
A Posner-inspired explanation of mining is that, when a block is completed (i.e.,
the hard riddle has been solved by one of the miners), the solving miner is a
monopolistic winner who takes all the revenues associated with the completion of
that block. The social cost of one miner’s winning is the amount spent by the
community of miners to try to solve the hard puzzle. Noteworthy is that the
monopolist is not a price-setter, in contrast with standard monopoly models,
including Posner’s (Huberman et al., 2017).

5. PRESENT STATUS OF BITCOIN AROUND THE WORLD

Countries around the world have reacted to Bitcoin technology in different
ways, as shown in Table 3. A few have banned the system outright; some have
stopped short of regulation but have imposed taxes; some have acted to regulate or
are in the process of taking such action; others are undecided about digital
currencies in general; and many do not regulate Bitcoin at all.

Table 3
Reactions to Bitcoin Around the World

Name of the Country/Region Action(s) Taken

Australia, Canada, Estonia, France, Germany, Have acted or are acting to
Gibraltar, Isle of Man, Japan, Jersey, regulate Bitcoin
Luxembourg, The Netherlands, Singapore,
Switzerland, and USA

--Continued

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394 Bitcoin: Future Transaction Currency?

Table 3 (Cont’d)

Name of the Country/Region Action(s) Taken

Bangladesh, Bolivia, Iceland, and Kyrgyzstan Banned Bitcoin

Brazil, Bulgaria, Denmark, Finland, Italy, Stopped short of regulating

Norway, Slovenia, Sweden, and UK Bitcoin, but have imposed taxes

China, Colombia, Israel, Lithuania, Mexico, New Undecided with regard to

Zealand, Philippines, Russia, South Africa, digital currencies
Spain, Taiwan, Ukraine, and Vietnam

Albania, Argentina, Belgium, Croatia, Cyprus, Do not regulate Bitcoin

United Arab Emirates, Ghana, Greece, Hong
Kong, Hungary, India, Indonesia, Ireland, Malta,
Malaysia, Nigeria, Poland, Portugal, Romania,
South Korea, Thailand, Turkey, and Venezuela

Source: Anderson et al., 2017

6. FUTURE PROSPECTS
The future of Bitcoin is unknown. This means that the progression of Bitcoin
can go in any direction, which is currently and slowly evolving before our eyes.
There are too many speculations and opinions regarding its future. So far, when
cataloging the possibilities, three dissimilar outcomes rise to the top (Andersson &
Wegdell, 2014):
1. Bitcoin becomes a globally recognized currency used all over the place,
possibly even eliminating cash and credit cards.
2. Bitcoin remains active and fine, but performs in the background. Rather
than being a major currency, it could function as an attribute and an
accompaniment to the global financial sector. Just as the English language
has spread around the world without eliminating existing languages,
Bitcoin could spread around the world as a global payment system, co-
existing with other world currencies.
3. Bitcoin prices collapse to their inherent value. The collapse could take the
form of a sudden fizz or a slow fade over time. Either way, it ceases to
survive in the public eye and is ultimately forgotten as the years pass.

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Hossin and Hosain 395

Which of these possible outcomes will occur is open to conjecture. There is

also the possibility that some variation of the outcomes will occur. Each of the
three possibilities is discussed below.
6.1. Possibility 1: A Globally Acknowledged Currency
Although it seems almost impossible now, a few voices are saying that
Bitcoin could become a global currency. For this to happen, the whole world would
have to be “on the same wave length” and all the requirements for a currency would
have to be satisfied; namely, medium of exchange, store of value, and unit of
account (Andersson & Wegdell, 2014).
Bitcoin is already performing somewhat as a medium of exchange, which is
one of the three requirements for a currency. There are many ways to spend
bitcoins and many diverse services obtainable for the transactions to take place.
Bitcoin’s technological draw allows for swift transactions, and, since there is no
third party to require authentication of the legality of the transactions, fees are low
(The Economist, 2014). Although all merchandise is not tradable on the Bitcoin
market, this fact does not take away the precondition to function as a medium of
exchange.
With regard to the second requirement, store of value, Bitcoin fulfills the
obligation in the sense that it can be traded and stored for future use. The
complicated element is achieving steadiness in the value of a bitcoin, as it lacks
inherent value and is priced exclusively after demand (Yermack, 2013). One can
guess with a degree of confidence how much 100 USD today will be worth one
year from now, considering only current inflation. The price of a bitcoin, however,
is very volatile, and there is no guarantee that one’s bitcoins will be worth as much
in even a few weeks’ time. Such volatility makes the currency extremely
vulnerable to speculative attacks – in other words, to the consequences of group
psychology and collective speculation for both bull and bear markets (Andersson
& Wegdell, 2014).
Of the three requirements, the one that is farthest from being fulfilled today
is that it function as a unit of account. For a currency system like Bitcoin to be
fully accepted and adopted, people must “think in bitcoins” – that is, they must ask
themselves how much things cost in bitcoins rather than figuring how to convert
dollars into bitcoins (Andersson & Wegdell, 2014). If, for example, someone buys
a cup of coffee for $4 and the price is changed to $2 the next day, he or she can
say with certainty that the coffee is now half the price that it was the day before.
This situation does not apply to bitcoin payments because the value is too unstable.

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396 Bitcoin: Future Transaction Currency?

Although priced identically (in bitcoins) for two consecutive days, the price of the
cup of coffee during day two (in USD) could be half the price, twice the price, 10
times the price, or whatever the currency happens to be on that day. This means
that sellers who accept bitcoin payments must constantly adjust the prices of their
goods in order to represent their current value in USD (Yermack, 2013).
Many people around the globe are using Bitcoin as anticipated, hoping that
one day it will be acknowledged as a globally accepted currency. For Bitcoin to
function as a currency, it is also essential that its velocity increase and that more
people start using it to purchase goods and services. At present, however, the
typical users do not. So far, the majority of users are speculative investors who
have recently seen the possibilities of an investment profit as media coverage
increased and the price skyrocketed (Andersson & Wegdell, 2014). According to
Fred Ersham, co-founder of the digital wallet service Coinbase, about 80% of
transaction activity is related to speculation (Goldman Sachs, 2014).
6.2. Possibility 2: Complementary and Attributive Currency
If Bitcoin could by some means become a more controlled and stable
currency, this way of transferring money globally has the prospect of entirely
knocking out its present competition (i.e., cash offices). In 2013, remittances sent
by immigrants to 33 developing countries amounted to $401 billion, and this
amount was projected to increase to $515 billion by 2015 (The World Bank, 2013).
This money usually flows through third parties such as MoneyGram or Western
Union. In the first quarter of 2014, the global average total price of remittances
was 8.36%, which was a lifetime low (The World Bank, 2014). For this reason,
Bitcoin has a huge advantage over cash offices as a medium of exchange. In this
case, its volatility would not be a very big obstacle either. Money could be
exchanged to bitcoins, cheaply sent around the world, and exchanged back to a
regular currency. To do this, however, the recipient would have to have an account
on an exchange platform in order to sell the bitcoins and receive the money. The
exchange used must also be able to provide withdrawals in the currency wanted,
and, at present, many developing countries do not provide this service (Andersson
& Wegdell, 2014).
In addition to having a wide range of applications, Bitcoin could also give rise
to new lines of products and services such as micro-payments. Until now,
micropayments of less than $1 have had little success because of the
impracticalities inherent in a transaction of this kind. Bitcoin enables extremely
small payments at a reasonable cost, making the market for micro-payment

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Hossin and Hosain 397

services very much alive in a way they have not been before. It would enable a
more convenient “pay-as-you-go” world where people could pay very small
amounts for very small services or goods. Present transaction fees (using, for
example Visa, MasterCard, or PayPal) make these types of purchases impractical
as they easily could equal or even exceed the purchase price itself (Andersson &
Wegdell, 2014). One example of a micro-payment like this could be paying for
Wi-Fi access by the kilobyte when one passes a Wi-Fi hotspot (Bitcoin.org.).
Besides micro-payments and cost efficiency, other positive characteristics of
Bitcoin are its global accessibility, the possibility of multi-signature accounts, and
simplification of donations/crowd-funding. Its global accessibility allows
everyone with an Internet connection to take part in the network, thereby
increasing global access to commerce and possibly helping international trade to
flourish. Multi-signature accounts allow accounts to be shared by 34 groups of
people and do not allow any transactions to take place unless all the members are
unanimous about it. This could be of great value to, for example, a board of
directors, to make sure that no company money is spent without the knowledge of
all (Bitcoin.org.).
Crowd-funding is a type of fund raising in which members of a group each
contribute a small amount of money and collectively work toward a unanimous
economic goal. The goal could be a project such as a non-profit, political, or
philanthropic campaign (Canada Media Fund, 2012) With the help of Bitcoin
technology, there is a possibility of even pledging money to a project, but not
collecting it from anyone until the main economic target is reached (Andersson &
Wegdell, 2014).
When the website WikiLeaks announced that it needed donations to continue
its work, both Visa and MasterCard denied donations by the general public
(because of political pressure), causing donations in bitcoins to skyrocket
(Matonis, 2012). The reason is that a Bitcoin transaction cannot be stopped by any
authority. Also, in case of a catastrophe such as a natural disaster, Bitcoin
donations could be very useful in quickly and cheaply organizing an international
response, with the money arriving long before any normal currency could
(Andersson & Wegdell, 2014).
The fact that money can be programmable opens a world of possibilities. It
could be regarded as an extrinsic value; that is, the value assigned to an object
through external factors. Activities such as “earmarking” money could become
common in the future. Earmarking would make it impossible to spend the money
unless it is spent in the way intended. Earmarking could be used, for example, to

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398 Bitcoin: Future Transaction Currency?

program economic support to Third World countries so the money can be used
only for medical treatment or food and not for weapons, or it could be used by
parents to program their children’s allowances so that they cannot buy cigarettes
or alcohol, but only school lunches (Andersson & Wegdell, 2014). In this way, it
would be similar to the U.S. system of food stamps for people on public assistance.
Other applications for programmed money are cloud services. Money can be stored
in clouds and programmed to be released, piece by piece or all at once, at a certain
point. This could be, for example, on a child’s 18th birthday or even after one’s
death (Wilhelm, 2013).
6.3. Possibility 3: Fading Away or Crashing
In the event that Bitcoin becomes extinct, it seems that there are two possible
ways it might do so. One way is for it to die gradually as people lose hope and
interest. The second way is for something extreme to happen that makes public
interest change overnight from great to non-existent. In either way, this event
would have to be something so major that Bitcoin cannot fight back against it
(Andersson & Wegdell, 2014).
7. BITCOIN: A PONZI SCHEME?
A Ponzi scheme (sometimes called a Ponzi game) is a fraudulent investment
operation in which the operator provides fabricated reports and generates returns
for prior investors through revenue paid by new investors, rather than from
legitimate business activities or the profit of financial trading. Operators of Ponzi
schemes can be either individuals or corporations. In either case, they grab the
attention of new investors by offering short-term returns that are either abnormally
high or unusually consistent (Frankel, 2012).
Among the many theories in circulation about why Bitcoin was formed is the
suspicion that it may, in fact, be a Ponzi scheme or some other trick in disguise.
Some skeptics, such as American economist Nouriel Roubini, have emphasized
the view that the whole system could be a Ponzi scheme (Andersson & Wegdell,
2014). Another theory is that Bitcoin was formed, not as a fraud, but as a reaction
to the global financial crisis in 2008, when there was great malcontent concerning
the present financial system. The idea of a decentralized currency may have many
positive sides, but it also has some downsides such as instability and the lack of a
safety net for users.
A Ponzi scheme is an unsustainable business model that promises the investor
great profit opportunities. It is made possible in the short run because the profit
returns are, in fact, money collected from new investors and given to earlier

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investors. The new investors, in turn, receive returns paid by even newer investors.
In this manner, the pyramid grows, creating the illusion that all participants are
profiting from a legitimate business (FBI, n.d.).
In the long run, a Ponzi scheme is unsustainable because it can operate only
as long as more people join and supply a steady, new flow of money. In other
words, it is dependent on an ever-growing supply of enthusiastic participants and
will, in time, collapse. The collapse happens for two reasons: because the original
operator disappears with all the money, or because no new participants can be
found to supply previous investors with the money promised to them. (FBI, n.d.)
There is a risk that people like Bitcoin founder Satoshi Nakamoto and the
early adopters, who have accumulated millions of dollars, might one day start
selling their bitcoins and pulling out of the system. This scenario can happen
without the rest of the world being aware of it or realizing that the “scammers” are
deserting. Soon after, the fairy tale is likely to be over. The price could fall
precipitously, and there would be no regulations whatsoever to help innocent third-
party investors who have exposed themselves to the risks. The similarities with a
classic “pump and dump” strategy would become obvious and hard to ignore.
Attempts have been made to estimate how many bitcoins founder Satoshi
Nakamoto is sitting on, and the number is expected to be around 1 million BTC,
making him worth approximately $1 billion in December 2013 (Andersson &
Wegdell, 2014).
8. CONCLUSIONS
We have observed gold became cash and cash became credit cards. Is the next
step cryptocurrencies? It would be interesting to see whether Bitcoin finds a place
in our financial world today. It is very unlikely that it will become a real currency.
Its properties are poorer on all aspects of being a performing currency besides
acting as a medium of exchange. In theory, one solution to solve the store of value
problem could be to nail it to, for example, the US dollar, making it more stable
and predictable. Also, the unit of account difficulties would grasp to exist as people
could more easily measure and compare prices and goods in bitcoins. But, in
reality, this will never happen since the Bitcoin network is programmed to be
decentralized and unmanageable. The whole idea of Bitcoin is that it is
independent from a central entity and the price will go wherever the market drives
it. Legislation cannot solve the issue this since it would entail a comprehensive
conformity.

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400 Bitcoin: Future Transaction Currency?

Bitcoin, without a doubt, might be considered a radical innovation.

Considering our focus on its being a means of payment, Bitcoin has the prospect
to compel the existing system to adapt to it and thus become more competent than
it is today. Just as the possibility of illegal downloading has transformed the music
and movie industry, the possibility of wiring money virtually for free has the power
to beat Bitcoin rivals if no response to it is shown.
In conclusion, it can be believed that Bitcoin does have a prospective for
greater universal acceptance, depending on whether the focus is on quick,
inexpensive, and convenient transactions. This focus would necessitate simple,
more consumer-friendly services, even for those who do not wish to understand
the technicalities behind it. The path to such permanent establishment requires that
the system remain fully transparent and secure, that a network effect take place,
and that the Bitcoin ecosystem be strengthened and made more dependable.
Bitcoin might not, by definition, be a new currency, but it has laid the foundation
for potentially improving money as we know it now.

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 404 Bitcoin: Future Transaction Currency?

ABOUT THE AUTHORS

Md Altab Hossin is a final-year Ph.D. student in the School of Management and

Economics at the University of Electronic Science and Technology of China. His
areas of research interest are e-commerce, information management, information
technology, and Internet security. He has published several works in reputed journals
indexed by SSCI, EI, and Scopus.

Md Sajjad Hosain is a Ph.D. student in the School of Business at Sichuan University in

China. His areas of research interest are human resources management practices,
performance feedback, business strategy, and work behavior. He has several
publications in refereed journals with a good reputation.

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