How Dangerous Is Bitcoin?

Bitcoin is the first decentralised digital
currency. It works without a central bank or single administrator. It is a democratic
currency, and provides its users true anonymity. Bitcoins can be used in exchange for a variety
of other currencies, products and services. The currency itself is sought and bought by
many people like a commodity. Since its inception nine years ago, the value
of Bitcoin has increased hugely. In 2011, one coin was worth thirty cents. In March
2017, it surpassed the price of gold. Today, it is worth several thousand dollars. Yet concerns have been raised in many quarters.
Not only does anyone who buys Bitcoin take a true risk, but they may also unintentionally
do great harm to the world. Satoshi Nakamoto released Bitcoin as open
source software in January 2009. No one knows who Satoshi Nakamoto is – he could be one
person or many. Among Bitcoin’s benefits is the fact that
transactions between users take place directly, without an intermediary and therefore with
little or no fees. The transactions are verified by cryptography and recorded in a public distributed
ledger called a blockchain. Bitcoins are created by mining for them. This
involves solving complex computing problems. As more coins are mined, the problems become
harder and harder, requiring more computing power. This helps to limit the number of Bitcoins
available. JPMorgan compares the rush for the remaining
Bitcoins to an “arms race”. Entire companies now exist solely to mine Bitcoin with banks
of servers. As the computations grow more complex, they need more and more electricity.
They are consequently driving the cost of minting bitcoin to all time highs. Already, the Bitcoin miners in Iceland are
causing unforeseen problems. The small nation generates all its power from renewable sources.
But energy chief Johann Snorri Sigurbergsson says that Bitcoin miners will soon need more
energy than all the households of Iceland put together – and more than the island is
able to produce. Satoshi Nakamoto buried 21 million coins online
in 2009; almost 17 million have been mined. No one can accurately predict what will happen
when the remaining four million have been mined. Given its history, it is likely that
Bitcoin’s value will crash. The value of Bitcoin has always been volatile. On the 12th February 2018, the European Supervisory
Authorities said, “virtual currencies are highly risky and unregulated products and
are unsuitable as investment, savings or retirement planning products…[and] show clear signs
of a pricing bubble.” Since cryptocurrencies are not backed by any
public institution, investors could “lose a large amount, or even all, of the money
invested.” It’s not only that the value of Bitcoin
fluctuates so much, and buyers can make a loss on the thousands of dollars they spent
on acquiring coins. The exchanges used to trade them are not regulated either, therefore
investors are not protected if an exchange goes out of business or suffers a cyber-attack.
For instance, in January 2018, the lending and trading firm Bitconnect shut down because
of cease-and-desist letters from Texas and North Carolina securities divisions. Customers
are now suing Bitconnect to try to get their money. There are other, less obvious risks for anyone
buying Bitcoin, too. Because it is untraceable, Bitcoin is traded by criminal organisations
to avoid taxes and raise funds. An ordinary person looking to buy some Bitcoin may therefore
find themselves arrested for money laundering and funding terrorism. Furthermore, because it is unregulated, Bitcoin
is not taxed by governments. But any profits made by buying and selling Bitcoin are taxable.
At the moment, seven percent of Americans are estimated to own Bitcoin or another cryptocurrency.
A survey by Credit Karma found that 57% of American cryptocurrency owners said they’d
made profit on crypto investments. Yet 59% said they had not reported those gains to
the IRS. They are all, perhaps unwittingly, liable to spend over five years in jail for
tax evasion. Bitcoin trades also have geopolitical implications.
Michael Harris, Director of Financial Crime Compliance at LexisNexis Risk Solutions, warns
that “”[Bitcoin’s] high degree of anonymity makes it possible to transfer huge sums of
money across jurisdictional borders without detection.”” This means countries like Russia,
Iran, North Korea and Venezuela can use Bitcoin to avoid international sanctions. This explains
the recent creation of state-owned cryptocurrencies – Russia’a cryptorouble and Venezuela’s
petro. Because of the risks, Indian Finance Minister
Arun Jaitley announced his government will eliminate the use of cryptocurrencies in illegitimate
activities or as part of the payment system. Banks in India and South Korea have already
banned account users from trading in Bitcoin. In the USA, Jamie Dimon, CEO of JP Morgan
Chase, called Bitcoin a “”fraud”” and said he would fire anyone in his firm caught trading
it. In February 2018, Agustin Carstens, head of
the Bank for International Settlements, called for central banks to end what he called the
‘Ponzi scheme’ of cryptocurrencies, by restricting their access to banks and financial
infrastructure. In July 2017, billionaire Howard Marks referred to bitcoin as a pyramid
scheme. However, a 2014 report by the World Bank concluded
that Bitcoin was not a deliberate Ponzi scheme. Meanwhile, the Swiss Federal Council says,
“”Since in the case of Bitcoin the typical promises of profits are lacking, it cannot
be assumed that bitcoin is a pyramid scheme.”” Jamie Dimon apologised for labelling Bitcoin
a fraud when it emerged JP Morgan had been trading in it. On the 14th February, 2018, Mario Draghi,
President of the European Bank, said it is not the central bank’s job to ban or regulate
Bitcoin. Nevertheless, in March 2018, the world’s
largest central bank chiefs will gather at the G20 summit to discuss extending the Fourth
Anti Money Laundering Directive to cover cryptocurrencies. At the moment, Bitcoin is a potentially huge
financial risk for individuals to take. As such a new phenomenon, its effects and applications
on national and international scales is yet to be fully realised. Let’s hope Bitcoin
only benefits the world.

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