tag:theconversation.com,2011:/fr/topics/online-currencies-8946/articlesOnline currencies – The Conversation2021-01-06T00:50:38Ztag:theconversation.com,2011:article/1526162021-01-06T00:50:38Z2021-01-06T00:50:38ZWhy is Bitcoin’s price at an all-time high? And how is its value determined?<figure><img src="https://images.theconversation.com/files/377133/original/file-20210105-15-1aid1vl.jpg?ixlib=rb-1.1.0&rect=220%2C187%2C5223%2C3248&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Bitcoin <a href="https://coinmarketcap.com/currencies/bitcoin/">continues to trade</a> close to its all-time high reached this month. Its price is now around US $34,000 — up about 77% over the past month and 305% over the past year.</p>
<p>First launched in 2009 as a <a href="https://bitcoin.org/bitcoin.pdf">digital currency</a>, Bitcoin was for a while used as digital money on the fringes of the economy. </p>
<p>It has since become mainstream. Today, it’s used almost exclusively as a kind of “<a href="https://www.amazon.com/Digital-Gold-Bitcoin-Millionaires-Reinvent/dp/006236250X">digital gold</a>”. That is to say, a scarce digital asset. </p>
<p>In response to the risk of economic collapse due to COVID, governments around the world have flooded global markets with money created by central banks, in order to boost spending and help save the economy. </p>
<p>But increasing the supply of money erodes its value and leads people to look for inflation-resistant assets to hold. In this climate, Bitcoin has become a hedge against looming inflation and poor returns on other types of assets. </p>
<h2>What is Bitcoin?</h2>
<p>Bitcoin, the world’s largest cryptocurrency by market capitalisation, has a current circulating supply of 18,590,300 bitcoins and a maximum supply of 21,000,000. </p>
<p>This limit is hard-coded into the Bitcoin protocol and can’t be changed. It creates artificial scarcity, which ensures the digital money increases in value over time. </p>
<p>Whereas government-issued currencies such as the Australian dollar can have their supply increased at will by central banks, Bitcoin has a fixed supply that can’t be inflated by political decisions.</p>
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<a href="https://theconversation.com/curious-kids-why-dont-poorer-countries-just-print-more-money-107633">Curious Kids: why don’t poorer countries just print more money?</a>
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<p>Bitcoin is predominantly traded on online cryptocurrency exchanges, but can also be sent, received and stored in “digital wallets” on specific hardware or smartphone applications. </p>
<p>But perhaps the most groundbreaking aspect of the Bitcoin network is that it draws on the work of <a href="https://en.wikipedia.org/wiki/DigiCash">cryptographers</a> and <a href="https://coincentral.com/what-is-bit-gold-the-brainchild-of-blockchain-pioneer-nick-szabo/">computer scientists</a> to exist as a blockchain-based digital currency.</p>
<p>A public blockchain is an “immutable” database, which means the record of transaction history can’t be changed. </p>
<h2>A functional and decentralised digital currency</h2>
<p>Bitcoin is “<a href="https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274">decentralised</a>”. In other words, it functions via a dispersed peer-to-peer network, rather than through a central authority such as a central bank.</p>
<p>And it does this through the participation of Bitcoin “<a href="https://www.bitcoinmining.com/">miners</a>”. This is anyone who chooses to run software to validate Bitcoin transactions on the blockchain. Typically, these people are actively engaged with cryptocurrency.</p>
<p>They are rewarded with bitcoins, more of which are created every ten minutes. But the reward paid to miners <a href="https://theconversation.com/bitcoin-halving-qanda-what-its-all-about-and-what-it-means-for-the-cryptocurrency-138570">halves</a> every four years. </p>
<p>This gradual reduction was encoded into the network by creator Satoshi Nakamoto, who designed it this way to mimic the process of extracting actual gold — easier at first, but harder with time. </p>
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<a href="https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Anonymous person in dark room." src="https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377138/original/file-20210105-21-x072sh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">While several have laid claim to it, the true identity of Bitcoin creator Satoshi Nakamoto (a psuedonym) has never been confirmed. His last written post on the forum bitcointalk.org was on December 12, 2010.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Bitocoin miners today earn 6.25 bitcoins for every block mined, down from 50 bitcoins in the early years. This creates an incentive to get involved early, as scarcity increases with time.</p>
<p>Because of this, the price is expected to rise to meet demand. But because future scarcity is known in advance (predictable at four-year intervals), the halving events tend to already be priced in. </p>
<p>Therefore, massive surges and falls in price typically reflect changing demand conditions, such as a growing number of new institutional investors. More and more public companies <a href="https://bitcointreasuries.org/">are now investing in bitcoin</a>.</p>
<p>But what function does Bitcoin <a href="https://kelsienabben.substack.com/p/the-possibilities-of-ad-hoc-decentralised">provide for society</a> that has people so invested?</p>
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Read more:
<a href="https://theconversation.com/bitcoin-halving-qanda-what-its-all-about-and-what-it-means-for-the-cryptocurrency-138570">Bitcoin halving Q&A: what it's all about and what it means for the cryptocurrency</a>
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<h2>Why does Bitcoin matter?</h2>
<p>There are a few possible explanations as to why Bitcoin is now deemed significant by so many people.</p>
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<li><strong>It’s a “safe” asset</strong></li>
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<p>In the face of global uncertainty, buying bitcoins is a way for people to diversify their assets. Its market value can be compared
to that of another go-to asset that shines in times of trouble: <a href="https://www.forbes.com/sites/bobhaber/2020/12/14/the-great-gold-vs-bitcoin-debate-currency-debate/?sh=7f1c344716e0">gold</a>. </p>
<p>Amid the turmoil of a global pandemic, an unconventional US presidential handover and geopolitical power shifts the world over, it’s possible more people view gold and Bitcoin as better alternatives to dollars.</p>
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<li><strong>It ties into privacy-oriented ideologies</strong></li>
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<p>Bitcoin (and cryptocurrency in general) is not politically and ideologically neutral. It was born of the internet era, one plagued with <a href="https://www.activism.net/cypherpunk/manifesto.html">grave concerns</a> for privacy. </p>
<p>Bitcoin’s intellectual and ideological origins are in the “cypherpunk” movement of the 1990s and early 2000s. </p>
<p>Records of online forums show it was advocated for as an anonymous digital currency that allowed people to interact online without being tracked by governments or corporations, offering an alternative for anyone who distrusts the Federal central banking system. </p>
<p>Perhaps the overt rise of digital surveillance in response to the COVID pandemic has further stoked fears about <a href="https://theconversation.com/the-covidsafe-app-was-just-one-contact-tracing-option-these-alternatives-guarantee-more-privacy-137400">online privacy</a> and security — again piquing the public’s interest in Bitcoin’s potential. </p>
<h2>Why is Bitcoin booming?</h2>
<p>Bitcoin’s recent boom in value comes down to a combination of three factors: ideology, social sentiment and hope. </p>
<p>But although these are variable factors, this doesn’t discredit the significance of the <a href="https://theconversation.com/bitcoins-rebound-3-reasons-this-bubble-may-not-burst-150731">digital economy</a>, interest in the technology as it matures and the influence of institutional investors in cryptocurrency, including Bitcoin.</p>
<p>Bitcoin is in an upward market trend, also known as “bull market” territory.</p>
<p>It was designed to increase in value over time through the rules Nakamoto wrote into its software code — which Bitcoin’s most outspoken advocates, known as “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852691">maximalists</a>”, vehemently defend. </p>
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<a href="https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Small bull figurine among various printed charts." src="https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377139/original/file-20210105-19-utp6cd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">A ‘bull market’ occurs when securities are on the rise, whereas a ‘bear market’ is when securities fall for a sustained period. Both terms are metaphors; a bull thrusts its horns into the air and a bear swipes its paws down.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Imagining new futures</h2>
<p>From a larger frame of reference, decentralised cryptocurrencies allow new ways to <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3752531">coordinate without the need for</a> a central arbiter. </p>
<p>And decentralised blockchain-based networks don’t just enable digital money. Similar to ordinary smartphone apps, software developers around the world are building decentralised applications (<a href="https://ethereum.org/en/dapps/#explore">DApps</a>) on top of Bitcoin and other blockchain protocols. </p>
<p>They have introduced other cryptocurrencies, such as <a href="https://ethereum.org/en/dapps/#explore">Ethereum</a>, which are also open platforms for the public. </p>
<p>Other DApps include decentralised financial (DeFi) tools for prediction markets, cryptocurrency borrowing and lending, investing and crowd-funding. </p>
<p>Nakamoto’s audacious experiment in digital currency is working as intended. And what really deserves attention now is what this means for our digital, physical and social futures. </p>
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Read more:
<a href="https://theconversation.com/bitcoins-rebound-3-reasons-this-bubble-may-not-burst-150731">Bitcoin's rebound: 3 reasons this bubble may not burst</a>
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<p class="fine-print"><em><span>Jason Potts receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Kelsie Nabben does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An increasing number of individuals and companies are now investing in Bitcoin, the world’s largest and first fully-functioning cryptocurrency. But why? And which way is the market headed?Jason Potts, Professor of Economics, RMIT UniversityKelsie Nabben, Researcher / PhD Candidate, RMIT Blockchain Innovation Hub / Centre for Automated Decision Making & Society / Digital Ethnography Research Centre, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/895852018-01-03T13:15:17Z2018-01-03T13:15:17ZThe Bank of England is planning a bitcoin-style virtual currency – but could it really replace cash?<figure><img src="https://images.theconversation.com/files/200674/original/file-20180103-26166-17d08zw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/image-depicting-golden-bitcoin-british-pound-775989712?src=DdfR8dqeEhSQEqeppiVA4A-1-12">Shutterstock</a></span></figcaption></figure><p>Governments are extremely worried about cryptocurrencies such as bitcoin. These virtual currencies mean you can make payments without involving the banks that most economies and government financial models are built on. People can transfer large amounts of money without the authorities knowing, potentially making it easier to evade tax or launder money.</p>
<p>So several countries’ central banks, including the <a href="http://www.telegraph.co.uk/news/2017/12/30/bank-england-plots-bitcoin-style-digital-currency/">Bank of England</a> and the <a href="https://www.reuters.com/article/us-israel-cenbank-currency/israel-central-bank-mulls-issuing-digital-currency-for-faster-payments-idUSKBN1EI0D5">Bank of Israel</a>, are reportedly planning to launch their own digital currencies. This could help lure people back into using an official system that combines some of the benefits of both traditional and crypto- currencies. But the risks involved may be too great for many typical cash users to bear.</p>
<p>One of the major drawbacks of existing cryptocurrencies is that their value tends to <a href="https://www.ft.com/content/4682c87c-d560-11e7-a303-9060cb1e5f44">swing widely</a> and it is often difficult to pinpoint how much they are really worth. National cryptocurrencies would be tied to the value of the country’s official currency, making them less volatile and easier to actually use as a way of spending.</p>
<p>National cryptocurrencies would also make payments much faster because transactions would be recorded instantly and wouldn’t have to be cleared by a bank (although some implementations require around eight minutes to be verified). The existing systems for electronic payments and transfers can often involve several banks and companies sending each other data and running security checks that add time and expense <a href="https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp">to transactions</a>. Cryptocurrencies are able to bypass this clearing process altogether because they don’t actually involve transfers from one entity to another. </p>
<p>Instead they use a technology known as a blockchain, which keeps a public but encrypted <a href="https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain/">record of all transactions</a>. Basically, as illustrated in the figure below, the payer (in this case, Bob) signs a transaction to agree to pay someone (Alice) a given amount. The transaction is then validated using Bob’s personal encryption code known as his “private key”. If the transaction is valid, it is added onto the blockchain, recording how much money Alice and Bob now have.</p>
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<img alt="" src="https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=593&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=593&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=593&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Outline of traditional transactions and blockchain based ones.</span>
<span class="attribution"><span class="source">Author supplied</span></span>
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<p>Because all transactions would be recorded in this way, the government would have much greater oversight of who is paying whom and how much, helping to crack down on financial crime. Unfortunately, because transactions on blockchain ledger are typically kept as a public record, it might also be possible for other people to access this information and see how much you or anyone else is spending and what you’re buying.</p>
<p>Your money might also be at greater risk if it’s stored as a cryptocurrency. Currently banks guard your wealth and will always release it if you can prove your identity, while credit card companies insure you against fraud. If your bank account is hacked, there is a good chance you will get your money back. But cryptocurrencies store money in independent digital wallets that can be <a href="https://www.linkedin.com/pulse/looking-cryptocurrency-wallets-prof-bill-buchanan-obe-phd-fbcs/">lost or broken into</a>. If that happens there is no one who can help you.</p>
<h2>Currency needs trust</h2>
<p>For a typical shopper, there would be little difference between using a national cryptocurrency and something like Apple Pay, which makes payments at the click of a trusted application on a mobile device. I love using Apple Pay on my iPhone to purchase my coffee in the morning, as well as my bus tickets and even my parking. I now have little use of cash and only carry around my credit cards in a wallet as a backup in case my battery fails.</p>
<p>Having found out over Christmas that most supermarkets now do not have a limit on Apple Pay, I see it as one of the most trusted methods of payment, especially as I trust the <a href="https://support.apple.com/en-gb/HT204587">fingerprint scanner on my phone</a>. I also know that my bank is involved in the transaction. So I believe the days of paper money – and even carrying around cards – are rapidly fading. Our mobile phone and our trust in our apps provide us with more trusted ways of making transactions. </p>
<p>But Apple Pay is still backed up by trusted financial institutions. The step to cryptocurrency may be one step too far for most people. Few people would actually understand the risks of storing the cryptocurrency in a digital wallet and could leave themselves open to losing all their money.</p>
<p>I believe that most countries will deal with cryptocurrencies by regulating them and monitoring their use rather than co-opting them. But it will be interesting to see whether regulation or competition will win in the battle of crytocurrencies. While the encryption of crytocurrencies can create strong digital trust in the technology, human trust in the transactions themselves will likely be the key factor that determines whether citizens adopt government-backed cryptocurrencies.</p><img src="https://counter.theconversation.com/content/89585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bill Buchanan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>National cryptocurrencies could make payments faster and prevent crime, but they come with their own risks.Bill Buchanan, Head, The Cyber Academy, Edinburgh Napier UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/524112016-01-07T11:16:19Z2016-01-07T11:16:19ZQuest to find bitcoin’s founder highlights currency’s biggest threat: the taxman<p>Bitcoin enthusiasts have recently been roiled by <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">claims</a> that an Australian named Craig Wright and his deceased partner are the mysterious founders behind the cryptocurrency. </p>
<p>Of course, we’ve been down this path before. <a href="http://www.nytimes.com/2015/05/17/business/decoding-the-enigma-of-satoshi-nakamoto-and-the-birth-of-bitcoin.html?ref=topics&_r=0">The New York Times</a>, <a href="http://www.fastcompany.com/1785445/bitcoin-crypto-currency-mystery-reopened">Fast Company</a>, <a href="http://www.newyorker.com/magazine/2011/10/10/the-crypto-currency">The New Yorker</a> and Newsweek have all made similar claims about different people, only to be proved wrong. And last month, Wired – the magazine behind the most recent claim – said there are <a href="http://www.wired.com/2015/12/new-clues-suggest-satoshi-suspect-craig-wright-may-be-a-hoaxer/">reasons</a> to believe Wright is actually a hoaxer and not “Satoshi Nakamoto,” as the currency’s creator is known.</p>
<p>Regardless of whether the new claims are correct, it has resurrected a worry that has long plagued bitcoin users. Around one million bitcoins were mined early in the currency’s history and have never been transferred. Were they to be sold en masse, bitcoin’s value could drop precipitously, wiping out a lot of wealth and threatening its status as a reliable alternate currency, independent of banks and governments. </p>
<p>However, the reporting about Wright and the bitcoin businesses and trusts he has established – presumably for tax and secrecy purposes – reveals an even bigger threat to bitcoin users and other supporters of virtual currency: how will such currencies be treated for tax purposes? </p>
<p>This is a question I have been exploring for the last decade, both with regard to virtual currencies designed to be used solely online, such as for World of Warcraft, and those designed for use in the real world, such as bitcoin.</p>
<h2>Currency or investment?</h2>
<p>Bitcoins are created by a computer algorithm and are initially allocated through a process colloquially referred to as “<a href="https://www.bitcoinmining.com">mining</a>.” Miners collect bitcoins by solving complex mathematical equations used to authenticate transfers and in so doing both bring more of the currency into the world and maintain the system.</p>
<p>Bitcoin users have a public key and a private key associated with the bitcoins they own. To effect a transfer, one must use the private key. However, transfers are recorded on a public “block chain,” which uses the associated public key. </p>
<p>This secure public record-keeping obviates the need for third-party intermediaries, like banks. While the world can see the public key and how many bitcoins are associated with it, the owner of the bitcoin can remain anonymous if he keeps his association with that key secret.</p>
<p>Approximately 15 million bitcoins have been issued to date, and they are currently valued at about US$430 each, for a total of approximately $6.5 billion. The algorithm <a href="http://www.cnbc.com/2014/01/23/cnbc-explains-how-to-mine-bitcoins-on-your-own.html">is designed</a> to generate 21 million bitcoins, and experts anticipate that the last bitcoin will be issued sometime between 2110 and 2140. </p>
<p>Bitcoin is designed to be used as a currency, though some hold it as an investment. The difficulty is that governments have taken a <a href="http://www.forbes.com/sites/kellyphillipserb/2015/10/23/virtual-heads-or-tails-eu-says-bitcoin-is-currency-for-tax-purposes-while-us-disagrees">variety of positions</a> on the nature of bitcoin for tax purposes. </p>
<p>For instance, some countries, including those in Europe, have classified bitcoin as a currency for consumption tax purposes, meaning that the various value-added taxes do not apply to bitcoin exchanges, while others, such as <a href="https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/">Australia</a>, have not. Similarly, the U.K. <a href="http://www.taxation.co.uk/taxation/Articles/2015/03/10/332784/cryptic-currency">treats</a> bitcoin as foreign currency for income tax purposes, while the U.S. <a href="https://www.irs.gov/pub/irs-drop/n-14-21.pdf">regards it</a> as property. </p>
<p>Those who “mine” bitcoins will likely be subject to income tax on the value they receive under the theory that they are being compensated for validating bitcoin transactions and maintaining the block chain that records all transfers. But this is true regardless of whether bitcoin is recognized as a currency. In other words, they are not really mining and not subject to the complex rules governing mining operations. Instead, they are being compensated for services. </p>
<p>The difficulty arises when people try to spend their bitcoins, however acquired.</p>
<h2>How cash transactions are taxed</h2>
<p>Those who spend local currency, such as dollars (U.S. or Australian) or euros, do not report a gain or loss when they do so. For instance, if I buy a hamburger, I don’t have a gain or loss on the currency used, regardless of whether it has changed value relative to other currencies.</p>
<p>As the baseline currency, a dollar is worth a dollar, even though it may fluctuate against other currencies or be affected by inflation. </p>
<p>Foreign currency is different. If I buy a euro for $1 and spend it later, when it is worth $1.10, theoretically I have a $0.10 gain that I should be taxed on. Different countries have different rules, but in the U.S., taxpayers need not pay taxes on such gains if they are under $200 in a given year.</p>
<p>By refusing to classify bitcoin as a currency for income tax purposes (local or otherwise), tax authorities effectively treat bitcoins as any other property, meaning that those who buy items with bitcoins must report any gain on the transaction associated with a change in its value. That is, it is treated like an investment, regardless of how the owner actually uses it. </p>
<p>It is as if they sold their bitcoins for cash and then used that cash to make a purchase. Worse yet, if the bitcoin has gone down in value, <a href="https://www.irs.gov/pub/irs-drop/n-14-21.pdf">taxpayers</a> might not be able to deduct the losses, because they could be considered personal. Thus, anyone using bitcoin as a currency has to keep track of each bitcoin’s cost so that he can accurately calculate gain or loss. </p>
<p>This administrative task, combined with the potential need to pay income taxes, could make bitcoin too difficult to use as an alternate currency.</p>
<h2>Wright’s woes</h2>
<p>Wright’s tale of woe with the Australia Tax Authority (ATA) (<a href="https://assets.documentcloud.org/documents/2644012/20140218-Transcript-Redacted.pdf">revealed</a> in a transcript made public as part of the effort to prove that he is Satoshi Nakamoto) shows how the decision not to classify bitcoin as a currency creates problems with a tax on goods and services (GST). </p>
<p>Among other things, Wright sought to create an exchange to buy and sell bitcoin. If bitcoin were considered a currency, such exchanges would be exempt from the GST, and the exchange could operate economically. However, if the GST applied to such transactions, as the ATA claimed, the exchange would be forced to purchase $1 of bitcoin for $1.10 (assuming a 10% rate). </p>
<p>In other words, if you use normal currency, it would cost you $1, but if you use bitcoin, it would cost $1.10. Bitcoin becomes a lot less attractive under those conditions.</p>
<p>To avoid this result, Wright and his lawyers established a number of offshore trusts and argued that, for many of the transactions the ATA was investigating, no bitcoin was actually transferred. Instead, the beneficial interests in the trusts, which were not subject to the GST, were transferred. The bitcoin itself was purportedly held offshore, and any transfer of the bitcoin or rights to it were outside the reach of the ATA.</p>
<h2>The problem for tax authorities</h2>
<p>It’s not clear whether such arguments would actually succeed, but they illustrate a real problem that intangible assets raise for both consumption and income taxes, especially for countries that use a territorial tax system (that is, one that doesn’t tax foreign income). </p>
<p>If assets are considered to be outside a given country, they will not be subject to that country’s GST or equivalent tax. Moreover, if the asset can be “wrapped” in a trust or other entity whose ownership interests are exempt from the GST, it can potentially escape tax even if it is held locally. </p>
<p>Similarly, if such assets generate income, for instance when they are bought or sold, under a territorial system, that income will be taxed in the country where the sale occurred. </p>
<p>It is not surprising that Wright <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">established</a> at least some of his trusts in known tax havens, such as the Seychelles. Even if his efforts to shield bitcoin from tax through these efforts succeed, they are far too complicated for the average user and will likely further impede bitcoin’s adoption as an alternate currency.</p>
<h2>Bitcoin’s challenge</h2>
<p>Much of the recent focus has been on whether Wright really created bitcoin and whether he is sitting on a <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">hoard</a> worth close to a half billion dollars, which could potentially destabilize the market. </p>
<p>However, the real threat to bitcoin and other similar products may come from a far more mundane source: the world’s tax authorities. Absent favorable rulings, every bitcoin transaction could generate both income and consumption tax liability, rendering bitcoin impractical as an alternate currency. </p>
<p>Sophisticated tax planning to avoid such outcomes might succeed but would make bitcoin harder to use. </p>
<p>Thus, while bitcoin was developed as a means to free individuals from the need to interact with third parties, including the government, it nonetheless needs governmental cooperation if it is to move from the fringes to the mainstream.</p><img src="https://counter.theconversation.com/content/52411/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adam Chodorow does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How tax authorities decide to treat virtual currencies like bitcoin may determine whether they thrive or die.Adam Chodorow, Professor of Law, Arizona State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/326362014-10-07T11:45:07Z2014-10-07T11:45:07ZIts price may fall but bitcoin’s value is that it is useful<figure><img src="https://images.theconversation.com/files/61044/original/5qvmn45d-1412682849.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Maybe so, but it's true values lies in more than shopping.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/fstorr/13884256287">fstorr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The price of bitcoin has <a href="http://www.bbc.co.uk/news/technology-29507443">crashed to below US$290</a>, its lowest since November 2013, and far below its <a href="http://blogs.marketwatch.com/thetell/2013/11/29/bitcoin-hits-record-1242-as-it-nears-value-of-ounce-of-gold/">all-time-high of US$1,242</a> later that same month. For about three hours the price sat <a href="http://www.coindesk.com/price/">below US$300</a>. </p>
<p>This relatively mundane observation is actually merely the tip of the iceberg for bitcoin, the poster child of cryptocurrencies.</p>
<p>Bitcoin has been falling since its peak last year and during the past six months that slide has accelerated, pushed down by scandals such as the <a href="http://www.computerworld.com/article/2475915/security0/bitcoin-crash-as---bankrupt---mt--gox-leaks-its-own-acquisition.html">collapse of the major bitcoin exchange MtGox</a> in February and then again in April following the <a href="https://gigaom.com/2013/04/12/why-bitcoin-crashed-and-how-ripple-might-avoid-the-same-fate">delayed reaction and uncertainty</a>. </p>
<p>The second fall can be seen in part as a result of bitcoin’s own success and increased recognition which equally opens markets up to smaller investors and the possibility of <a href="http://www.bbc.co.uk/news/technology-22105322">panic selling</a>. Bitcoin recovered against the US dollar until August. Promises of fixes to prevent the perceived problems of bitcoin were presented that appear to have reassured the market with <a href="http://www.joh.cam.ac.uk/virtual-vault-established-protect-bitcoin-users">promises of more security</a> for bitcoin virtual “wallets”, and better <a href="https://ripple.com/bitcoiners">mechanism for funds transfers</a>. </p>
<p>Ripple, for example, is a <a href="https://ripple.com/about-ripple/">person-to-person money transfer system</a> that recognises cryptocurrencies and automatically manages the complexity of exchange rates. But even the technical promise of Ripple <a href="http://www.coindesk.com/price-ripple-xrp-plummets-co-founde-9-billion-selloff/">was marred</a> by the decision of its founder to sell his stake, causing the price to plummet. </p>
<h2>Bitcoin comes of age</h2>
<p>Applying some technical analysis to the situation shows a currency that was wildly overpriced during its climb to its peak in 2013 and then continued to be trading above the moving average in January, March and May and June of 2014.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=368&fit=crop&dpr=1 600w, https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=368&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=368&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=462&fit=crop&dpr=1 754w, https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=462&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/61030/original/72jwv474-1412675324.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=462&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitcoin’s wild peak in Nov 2013 and steady decline.</span>
<span class="attribution"><span class="source">Coindesk.com</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>However since early August it has been consistently undervalued, with the price meeting resistance and bouncing away from the lower price band three times. Similarly the price has become more volatile since mid-September, pointing to a lot of buying and selling based on taking a profit or minimising investors’ losses.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=368&fit=crop&dpr=1 600w, https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=368&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=368&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=462&fit=crop&dpr=1 754w, https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=462&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/61029/original/78h5nj78-1412675173.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=462&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitcoin’s dollar descent, July-October 2014.</span>
<span class="attribution"><span class="source">Coindesk.com</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Its value is more than its worth</h2>
<p>The causes for this decline are complex but three general themes are emerging. Bitcoin has truly reached the mainstream, with small investors buying into the currency with the hope of quick wins. The tendency then has been to pull the price downwards as currency trades become disconnected from the real capabilities or potential of bitcoin itself.</p>
<p>Taking this further, bitcoin the technology – the blockchain – is being confused with bitcoin, the traded currency. For example, the prospects of <a href="https://theconversation.com/bitcoins-blockchain-could-revolutionise-more-than-just-how-we-do-business-32343">Ethereum</a> which is based on the blockchain technology, are at best marginally linked to the traded price of the currency. </p>
<p>And finally, the emerging theme is that bitcoin is highly susceptible to the practices of <a href="https://theconversation.com/its-no-bubble-insane-dotcom-valuations-reveal-how-integral-tech-is-to-our-lives-31870">high valuations of technology companies</a> no matter <a href="http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/?_php=true&_type=blogs&_r=0">how remote</a> the linkage might between them.</p>
<p>Take a look at the <a href="https://blockchain.info/">record of bitcoin transactions</a> since this latest prince tumble and you’ll see – in real time – that it’s business as usual. This is a reminder that bitcoin is a currency with practical uses and one that people will continue to use while there are sellers prepared to accept it. Its value in relation to other currencies, so long as it is known, isn’t relevant. There is no shortage of actual, state-backed fiat currencies around the world that face regular fluctuations in value – but still business must, and does, carry on.</p><img src="https://counter.theconversation.com/content/32636/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gordon Fletcher previously received funding from InnovateUK.</span></em></p>The price of bitcoin has crashed to below US$290, its lowest since November 2013, and far below its all-time-high of US$1,242 later that same month. For about three hours the price sat below US$300. This…Gordon Fletcher, Centre for Digital Business, University of SalfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/249822014-03-28T14:36:51Z2014-03-28T14:36:51ZBitcoin’s strength lies in its libertarian status<figure><img src="https://images.theconversation.com/files/45005/original/r92h5cxy-1396000857.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1022%2C726&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Too tangible. (Keyrings, not currency)</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/100239928@N08/11297228794/in/photolist-idifwN-fur6LV-fuFoAG-j1XXSa-idhQXW-idhGX6-idiemF-idhL1R-idhJ4V-idifen-i5Ki1a-fDWc6s-fD4SZs-e3sApC-fuFouL-gAtcyN-gAtHgq-gAtfuY-gAtJLD-gAtK29-gAteZE-iVmcmj-jPXX7v-gAunBn-dqRE9e-dPcqJ1-jjkaZK-edhswK-edo3nm-e9SmUj-idhSTu-gAu7Tc-gAub5c-hWQeQb-ec7iAz-frRZfV-frS6bV-fs7uhY-frS34B-kDPmMr-jh3G25-fs7uis-frS28r-fs7ujE-fs7ujW-frRZVT-frS2vz-frS19n-ihv7wk-jgW4ZL-jh1EUQ">BTC Keychain</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>A turbulent last few months have seen numerous pieces announcing the end of Bitcoin, its imminent collapse, or the bursting of the bubble. Commentators are missing the point: the key to Bitcoin’s surprising resilience lies outside of traditional economic thinking.</p>
<p>Mark Williams of Boston School of Management predicts that Bitcoin will drop to <a href="http://www.businessinsider.com/williams-bitcoin-meltdown-10-2013-12#ixzz2sZtZXjLV">$10 a share by the first half of 2014.</a> In recent months Bitcoin transactions have been curbed in China on the orders of the central bank, declared illegal in Russia, and associated with <a href="http://www.theguardian.com/technology/2014/jan/27/bitcoin-foundation-vice-chair-arrested-money-laundering">money laundering</a>. </p>
<p>Yet subsequent to each apparently terminal problem – the latest of which was the bankruptcy of the largest Bitcoin exchange site, <a href="http://dealbook.nytimes.com/2014/02/28/mt-gox-files-for-bankruptcy/?_php=true&_type=blogs&_r=0">Mt. Gox</a> – and wave of ensuing negative coverage, after an initial substantial drop Bitcoin has picked up value again fairly rapidly. Remarkably the Bitcoin <a href="http://preev.com">exchange rate</a> still sits at somewhere between $500-600 (at last check, although this is prone to drastic fluctuations). This suggests that the numerous economists who have prematurely dismissed Bitcoin are at least missing something in their analyses.</p>
<p>The electronic currency was created in 2009 by the pseudonym <a href="https://bitcoin.org/bitcoin.pdf">Satoshi Nakomoto</a> – possibly a group of hackers and cryptographers – and operates as an electronic peer-to-peer network transaction system that works through an expanding chain of numbers. This cryptographic system generates a fixed number of Bitcoin and the currency is released at 15-minute intervals in set quantities, Bitcoin will reach a final total of 21 million by 2140. They are released through a process known as mining, although the currency is most commonly acquired through exchanges with national currencies. Mining consists of expending computer power at considerable <a href="http://www.bloomberg.com/news/2013-04-12/virtual-bitcoin-mining-is-a-real-world-environmental-disaster.html">environmental cost</a> to find the hash key that generates the release of the next set of Bitcoin.</p>
<h2>Bitcoin Bubble</h2>
<p>The consensus amongst the majority of economic bloggers seems to be that Bitcoin is not a viable currency and a bubble that is soon to burst; most famously the Nobel laureates <a href="http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/?_php=true&_type=blogs&_r=0">Paul Krugman</a> and <a href="http://rt.com/business/bitcoin-shiller-bubble-davos-127/">Robert Shiller</a> have expressed this view. If Bitcoin’s continued high valuation after several reportedly terminal crises should tell us anything: it is that it may be a bubble but it is not a conventional one, and this is because owners of the currency have longer-term political and ideological reasons for holding it. </p>
<p>Dismissing Bitcoin as a financial bubble misses precisely what is most significant about Bitcoin: First that it shows that alternative forms of community currency not created or backed by the state are at least possible. Second, it suggests people can invest in currencies and assets for other more durable reasons than short-term economic gain, like underlying beliefs and political ideology. Arguably economists have been so confused by Bitcoin because these are both points that contemporary mainstream economics tends to neglect.</p>
<p>One of the main reasons why Bitcoin may well be a bubble in the longer term is that there is a tendency to <a href="http://www.npr.org/blogs/money/2014/02/05/272113082/episode-515-a-bet-over-bitcoin">hoard the currency</a> as some (but not all) individuals keep hold of it in the expectation of a continuing increase in value. Yet the finite number of Bitcoin means that <a href="http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdf">its value as a currency is limited</a>, since if individuals see their Bitcoins as a store of value rather than spend them this damages its status as a currency. </p>
<p>Consequently Bitcoin drifts towards having a strong financial asset status as many people keep hold of the currency. With national currency, of course, central banks have the option of printing money when there is a lack of liquidity. This tendency to store has been noted in some <a href="http://cseweb.ucsd.edu/%7Esmeiklejohn/files/imc13.pdf">social network analysis research</a>, which estimates that in the first part of 2013, 64% of newly mined Bitcoin were not circulating.</p>
<h2>Bitcoin Community</h2>
<p>While Bitcoin’s status as a currency may not be sustainable, its continuing value as an asset does require further explanation and this can be found in the community of Bitcoin holders. Social anthropologists seem to be one of the few groups of writers that give primary attention to the underlying character of this community. For example, in <a href="http://simulacrum.cc/2013/03/04/the-demographics-of-bitcoin-part-1-updated/">the most extensive survey of the Bitcoin community to date</a> with more than 1,000 participants, curiosity and politics are strong reasons for holding the currency ranking closely alongside profit.</p>
<p>The survey also finds that the community seems to be overwhelmingly male and economically libertarian in spirit. In the context of political and economic beliefs there are clear echoes of the Austrian School of economists and Ludwig Von Mises. As Von Mises notes in The Theory of Money and Credit: “It is not the state but the common practice of all those who have dealings in the market, that creates money”. In line with Von Mises a key aim of the Bitcoin network is to challenge the idea that only the state can maintain a money system. The economic libertarianism of parts of the Bitcoin community seems to be anti-central banking, anti-governmental oversight and anti-state intervention.</p>
<p>The community has changed in recent months, for example <a href="http://www.marketoracle.co.uk/Article43897.html">hedge funds</a> have become more involved in the currency. How could speculators resist an asset so free from regulation and so volatile? Parts of the community are likely to be less enamoured of this than others, but presumably if you’re a good economic libertarian –- which Bitcoin owners tend to describe themselves as – you think that speculation is par for the course. In short, let the market decide.</p>
<p>Whether we have any sympathies with this political agenda, or whether we would strongly reject it. Bitcoin does illustrate that the durability of assets is determined by the beliefs of the communities that sustain them, and when an asset is underpinned by political values this can only add to its longevity. If something as volatile and improvisatory as Bitcoin can generate and sustain a significant degree of traction despite major set backs, surely it is only a matter of time before another electronic currency asserts itself on an international stage. In online circles a number of alternative candidates, like Dogecoin and Litecoin, are already circulating.</p><img src="https://counter.theconversation.com/content/24982/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sam Dallyn does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations. He owns a small number of Bitcoins purchased as part of his research into the subject.</span></em></p>A turbulent last few months have seen numerous pieces announcing the end of Bitcoin, its imminent collapse, or the bursting of the bubble. Commentators are missing the point: the key to Bitcoin’s surprising…Sam Dallyn, Lecturer in Management and Organisation Studies, Manchester Business School, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/241432014-03-07T18:30:58Z2014-03-07T18:30:58ZUniversities should ban Facebook before punishing Dogecoin miners<figure><img src="https://images.theconversation.com/files/43415/original/zv5qm6hc-1394214292.jpg?ixlib=rb-1.1.0&rect=6%2C17%2C593%2C500&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Students are busy mining Dogecoins at night.</span> </figcaption></figure><p>Universities are facing a dilemma now that students have been discovered mining cryptocurrencies using campus facilities. Are these students displaying entrepreneurship or unacceptable behaviour? </p>
<p>Harvard has decided it’s the latter, <a href="http://www.thecrimson.com/article/2014/2/20/harvard-odyssey-dogecoin/#">permanently banning</a> an unidentified person from using its computer research facilities after they were found using a supercomputer to mine dogecoin. It is not known if the punished miner was a student or member of staff.</p>
<p>Imperial College London now needs to choose a side in this argument after a student – who also remains anonymous – revealed that they had been using campus facilities to mine around £20-worth of the cryptocurrency.</p>
<h2>Many grey area</h2>
<p>This campus-based Dogecoin generation follows several months of intense interest in Bitcoin mining. The spectacularly sudden rise and fall of bitcoin prices has shown that other cryptocurrencies also have the potential to bring further massive windfalls. With at least 200 cryptocurrencies that can currently be exchanged into bitcoin and then onto more familiar forms of everyday <a href="http://www.forbes.com/sites/pascalemmanuelgobry/2013/01/08/all-money-is-fiat-money/">fiat money</a>, its no wonder people are tempted to try to get rich quick.</p>
<p>In both cases, computing power and electricity were being used without the official knowledge or approval of the university so Harvard’s response is not necessarily that surprising. But other universities may well be wondering what their position should be on this issue in anticipation of finding one of their own students mining.</p>
<p>A quick search throws up no reference to bitcoin or cryptocurrency within the acceptable use policies published by IT departments. Although there are coverall policies about not using facilities for commercial purposes or for loading software without permission, miners could still technically continue with their activities without breaking a specific rule.</p>
<h2>Such learning</h2>
<p>There are only two valid arguments that a suitably informed IT manager could fall back on if they decided to pursue a miner caught in the act.</p>
<p>Computers, and particularly their component chips, quickly fail when they operate at a high temperature for too long. Any enthusiastic miner with access to “free” computing power will want to run a computer at 100% of its capacity for as long as possible to extract the maximum number of coins. This will reduce the lifespan of any computer – potentially quite significantly.</p>
<p>The more invisible but equally important cost of mining is the value of the electricity consumed. All the <a href="http://www.coinwarz.com/calculators/dogecoin-mining-calculator">online calculators</a> for determining return on investment for mining cryptocurrency consider this important factor. If you’re spending hundreds of pounds to produce a handful of Dogecoins, it’s probably not worth the effort, but in a university environment, the cost of electricity is a more complicated equation.</p>
<p>While mining on a computer for long periods of time will consume electricity, this will be only marginally greater than a computer in a common access lab being used for Facebooking or watching cat videos on YouTube – two activities that appear to represent much of the activity that goes on in any university’s common-use computer labs. The key difference is that mining directly converts electricity into exchangeable value for the student. Using Facebook on a university computer only converts the university’s electricity into value for Facebook, by enabling the delivery of advertising to students. You don’t often see universities [banning Facebook](<a href="http://www.npr.org/templates/story/story.php?storyId=129940063">http://www.npr.org/templates/story/story.php?storyId=129940063</a> though.</p>
<p>And over in the business school, where students are encouraged to be entrepreneurial, understanding cryptocurrencies could bring some very real benefits. Cryptocurrency mining requires a student to think about the likelihood of successfully mining a particular coin and the best way of pooling resources to increase success. It also requires an appreciation of the costs associated with the activity, even if the resources are free to the student.</p>
<p>If they go on to trade their cryptocurrency, still more skills need to be developed. All of the coin exchanges mirror the functions and principles of a more traditional securities market. Trading cryptocurrency can give students the chance to experience a form of trading floor without the issues of access or cost associated with more mainstream exchanges.</p>
<p>Most importantly, actively encouraging an understanding of mining among students would help to avoid “futility mining”, mining for those coins that produce such a low return on investment that the setup, electricity and maintenance costs are never recovered. With awareness, students would avoid mining Bitcoin entirely. Those using a desktop computer with no specialised hardware such as a graphics cards designed for high-end gaming would learn to steer clear of mining cryptocurrencies that are based on the calculation function used by <a href="https://litecoin.info/User:Iddo/Comparison_between_Litecoin_and_Bitcoin">Bitcoin technology</a>.</p>
<p>Without <a href="http://motherboard.vice.com/blog/a-guide-to-bitcoin-mining-why-someone-bought-a-1500-bitcoin-miner-on-ebay-for-20600">specialist technology</a> mining these coins is simply not viable. My own experience mining coins based on the original Bitcoin technology is evidence of how difficult it is and how unimpressive the returns can be for small-scale mining.</p>
<p>After three weeks of mining with a specialist USB-based device, my portfolio of 134,000 coins represented in 13 different currencies are nominally worth 94.5 US cents at March 2014 prices. Of course, with time and some luck these coins could become much more valuable but nothing is certain in cryptocurrency.</p>
<p>This is why the two anonymous individuals from Harvard and Imperial College were mining dogecoin. Based on an alternative technology to bitcoin, dogecoin and other similar coins are easier to mine in a university computer lab. However, it will not be long before even this phase of the cryptocurrency gold rush will become the domain of large scale operators with <a href="http://cryptomining-blog.com/tag/dualminer-usb-asic/">custom equipment</a>.</p>
<p>All of these interrelated complexities coupled with cutting edge concepts and technologies are exactly the types of knowledge and skills that universities seek to teach to their undergraduate and postgraduate students. Rather than pursuing the anonymous Imperial College student perhaps he or she should be invited to offer guest lectures to the computer science, business and management, IT and MBA students. That is, if they can be dragged away from Facebook long enough to listen.</p><img src="https://counter.theconversation.com/content/24143/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gordon Fletcher receives funding from the Technology Strategy Board.
Gordon has a portfolio of cryptocurrencies numbering in excess of 100,000 coins but approximately valued -- on current prices -- at less than 2 USD.</span></em></p>Universities are facing a dilemma now that students have been discovered mining cryptocurrencies using campus facilities. Are these students displaying entrepreneurship or unacceptable behaviour? Harvard…Gordon Fletcher, Centre for Digital Business, University of SalfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/230612014-02-11T14:45:10Z2014-02-11T14:45:10ZFree cash for Iceland, but it pays to keep cool about Auroracoin<figure><img src="https://images.theconversation.com/files/41252/original/g848gzcc-1392118445.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Its about to rain pennies from heaven in Iceland.</span> <span class="attribution"><span class="source">Jokull Masson</span></span></figcaption></figure><p>The Bitcoin craze has hit Iceland, where an entrepreneur has set up his own cryptocurrency and announced plans to give every citizen a handful for free.</p>
<p>Baldur Odinsson says he is setting up a new cryptocurrency called <a href="http://auroracoin.org/">Auroracoin</a> and that on 25 March each of Iceland’s 320,000 citizens will have the chance to get their hands on around 31.8 coins each. Based on the handful of trades that have already been carried out with the new cryptocurrency, 31.8 Auroracoin is worth roughly 31,800 Icelandic Krona, or 200 Euros.</p>
<p>Auroracoin is the newest cryptocurrency going around, but the most famous of them all is <a href="https://theconversation.com/bitcoin-a-pirates-booty-or-the-new-global-currency-3130">Bitcoin</a>. Others such as <a href="https://litecoin.org/">Litecoin</a> and <a href="http://dogecoin.com/">Dogecoin</a> began to spring up as soon as Bitcoin began to gain traction.</p>
<p>Iceland, one of the smallest economies in the world, has become something of a poster child for the economic crisis, and is striking out with something different. What sets Auroracoin apart from other cryptocurrencies is that it will, at least in the very beginning, be given to a whole nation for free.</p>
<h2>Pennies from heaven</h2>
<p>AUR, as the Auroracoin is to be abbreviated, will be 50% “pre-mined” so half of its total supply will already exist on the formal launch date. This stock will be shared out among the Icelandic population, making use of the publicly available national identity numbers that are assigned to each citizen. They’ll then be free to spend their Auroracoin however they like.</p>
<p>By doing this, the makers of Auroracoin ensure there will be a stock ready for when formal use of the currency is to commence. The rest will be <a href="https://bitcoin.org/en/faq#mining">mined like other cryptocurrencies</a>.</p>
<p>This all sounds like a splendid idea. Who wouldn’t want 200 Euros for free? But there are still a lot of questions left unanswered about Auroracoin.</p>
<p>For a start, nobody knows much about who is organising the whole show. Odinsson has set up a website with a countdown to launch and a lengthy briefing on the economic mistakes made by the Icelandic government, but information about him and his background is thin on the ground. That might not be a problem for cryptocurrency enthusiasts but the everyday Icelander might be more suspicious of taking virtual handouts from a stranger. It is also not yet entirely clear how the AUR will be handed over to the public. And even if that runs smoothly, things could get even more complicated after launch.</p>
<p>Given the circumstances, the Auroracoin bonanza comes with a high risk of speculation. People may start bidding up the worth of the currency in hope of being able to sell it at a higher price to “the greater fool”. Bitcoin has its share of this particular problem, which causes its value to fluctuate, sometimes violently.</p>
<p>But the biggest concern ahead of the Auroracoin launch should be reciprocity. Cryptocurrencies need to be generally accepted to survive. It is not enough to blindly agree to being paid in Bitcoin or Dogecoin or Auroracoin. You have to be certain that you will be able to get rid of your coins too. The currency has to reciprocate, otherwise the number of people or organisations who will deal in it will get smaller and the value will fall. The fluctuation in the value of Bitcoin, as news has surfaced about governments banning or restricting its use, is a case in point about the importance of reciprocity if a currency is to be a viable medium of exchange.</p>
<p>This kind of risk doesn’t affect standard currencies such as the Icelandic krona. Anyone can use Iceland’s national currency and citizens need krona in order to pay their taxes to the Icelandic government. This creates demand for it amongst the Icelandic public, practically creating the reason for its very being. There will be no such tax-created demand for Auroracoin. This might severely limit the number of people that are willing to accept it as a means of payment.</p>
<h2>Crazy, but it might just work</h2>
<p>Despite these potential problems, Icelanders are normally quite open minded when it comes to new technology so it’s a good place to start a cryptoeconomy.</p>
<p>The use of Bitcoin is, per capita, quite high in Iceland compared with other countries. The concept of Auroracoin is therefore not completely alien to some of us. Many Icelanders would also like to adopt another currency, as inflation of the Icelandic krona has always been a problem. Here is most definitely their chance.</p>
<p>If Auroracoin becomes generally accepted in Iceland, its introduction would be a most welcome addition for the economy.</p>
<p>It would, at least temporarily, boost aggregate demand because individual Icelanders will suddenly have money in their virtual pocket. The fact that it will be equally distributed to everybody also helps the poor relatively more than the rich, almost adding a sense of social justice to its introduction.</p>
<p>Like other cryptocurrencies, Auroracoin could have an impact, in the long run, on the development of banking and financial systems, in particular payment systems and credit intermediation. If all goes extremely well and speculation is kept to a minimum, we can even dare to hope that the new Auroroacoin will be stable enough for it to be a realistic store of savings for the average Icelander.</p>
<p>All in all, it should be safe to encourage Icelanders to accept Auroracoin into their lives. Its success in fact hinges on its ability to become a household meme. But for the love of Odin, Frigg, Thor and Loki, don’t turn this into a speculation frenzy. Nobody will profit from that except he who finds the greatest fool. And that fool might be you.</p><img src="https://counter.theconversation.com/content/23061/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olafur Margeirsson received funding from University of Exeter during the first years of his PhD research, which focuses on financial stability and foreign direct investment. As an Icelandic citizen he may also receive part of the initial Auroracoin handout.</span></em></p>The Bitcoin craze has hit Iceland, where an entrepreneur has set up his own cryptocurrency and announced plans to give every citizen a handful for free. Baldur Odinsson says he is setting up a new cryptocurrency…Olafur Margeirsson, PhD student, University of ExeterLicensed as Creative Commons – attribution, no derivatives.