Thesis Corner: An Introduction to Bitcoin

Imagine that one day you woke up and someone told you, “Hey, these M&Ms over there have monetary value. Go ahead and buy whatever you want with them”. Okay, so M&Ms may be a bit facetious, but that scenario pretty much describes the origin of Bitcoin. If you’re a millennial like me, our trust in currency has always been anchored in the US dollar. We’ve been trained and conditioned to believe it’s worth something despite being a measly piece of paper. Now we are told these “Bitcoins” are equivalent to money too? Madness! What does this mean to money as we traditionally know it? And more importantly, why does this matter? I spoke with Emily Neville, a UPS senior studying Economics, who examined the Bitcoin fad, its implications, and its importance in online transactions in her thesis.

HR: So let’s try and break down the idea of Bitcoin for Sound Economics readers. What is Bitcoin exactly?

I can spend this? Dreams do come true.

I can spend this? Dreams do come true.

In simplest terms, Bitcoin is essentially internet monopoly money. You can use Bitcoins to purchase tangible goods and services in store (using a smart phone) or online. Unlike traditional currency, the catch with Bitcoin is that it is completely unregulated by the government, it has no physical shape, it’s easily acquirable, and spending can’t be traced back to the spender.

HR: So did people just invent Bitcoin one day? How did it come about exactly?

The purpose behind creating Bitcoin is a bit fuzzy. It could’ve been to help protect transactions between vendors and consumers in illegal markets, or a political statement. Who knows! The inventors go by a pseudonym, so we don’t know who or what group created it or for what purpose!

HR: How are governments and businesses reacting to Bitcoin?

Government reactions to Bitcoin are varied. The US recently held a hearing about the use of Bitcoin and adopted a nonintervention policy (although recently, some states, like New York, are seriously considering intervening). On the other hand, China has completely prohibited the exchange and use of Bitcoin. Bitcoin could be subject to more government intervention in the future because it’s especially popular for facilitating transactions in illicit markets. As for businesses, several well-known companies like Overstock.com, OkCupid, and Reddit accept Bitcoin as a form of currency.

HR: So why are Bitcoins so popular in illicit markets?

Bitcoins are so popular in these types of transactions because they enable anonymity. On these “Deep Web” (illicit) markets, transactions are completely anonymous. You don’t know who you’re buying from or selling to. Paying with Bitcoins allows buyers to protect themselves from giving personal financial information. Your Bitcoin wallet is unconnected with your personal bank account so no one can obtain your private information and the government can’t track your purchases.

No one can trace your purchases with Bitcoin. It enables anonymity.

No one can trace your purchases with Bitcoin. It enables anonymity.

HR: Based on your findings, do you think Bitcoin can ever emerge as the mainstream medium of exchange?

The extent of Bitcoin’s widespread applicability is being the techie’s way of laundering money. I don’t think it will be mainstream but only among illegal markets. If underground markets get too big, then government will shut it down completely or highly regulate it.

HR: Anything else you want to let Sound Economics Readers know about Bitcoin?

One thing I found interesting was Milton Friedman’s anticipation of a phenomenon like Bitcoin. He made this prediction way back in 1999, and it’s crazy to think he was absolutely right!

“The one thing that’s missing, but that will soon be developed, it’s a reliable e-cash. A method where buying on the Internet you can transfer funds from A to B, without A knowing B or B knowing A. The way in which I can take a 20-dollar bill and hand it over to you and there’s no record of where it came from. And you may get that without knowing who I am. That kind of thing will develop on the Internet”
[Editor’s Correction: The original article stipulates that the exchange and use of Bitcoin has been prohibited in China. This is inaccurate: according to a BusinessWeek article here, the Chinese government has only banned financial institutions from engaging in Bitcoin transactions.]

6 thoughts on “Thesis Corner: An Introduction to Bitcoin

  1. Pingback: Bitcoins at Puget Sound | Close to the Edge

  2. I am very disappointed by the quality of research done in this article. It is alarmist, poorly researched, and as an alumnus of Puget Sound I am a bit embarrassed.

    I would like to point out a few erogenous errors in this article.

    To say that “The purpose behind creating Bitcoin is a bit fuzzy” is silly. Of course people know the purpose for cryptocurrencies. In fact, the author herself knows and states them clearly when she writes that cryptocurrencies are “unregulated by the government”, “has no physical shape”, is “easily acquirable”, “spending can’t be traced back to the spender”. These 4 benefits of cyrptocurrencies, among others, are exactly the reason crytpocurrencies were developed.

    “Who knows!” why bit coin was cryptocurrencies were invented? Well… Milton Friendman knows… the author quoted him.

    Calling Bitcoin “the techie’s way of laundering money” is alarmist and ignorant. It’s 2014. Overstock.com make $30,000usd per day in Bitcoin transactions for blenders and baby toys: http://blog.coinbase.com/post/78558321110/coinbase-and-overstock-com-the-results-are-in You can also get a college education paid for in bitcoin: http://www.unic.ac.cy/news-and-events/73/unic-to-be-the-first-university-in-the-world-to-accept-bitcoin/112831#.UpLtcWSzszF

    “If underground markets get too big, then government will shut it down completely or highly regulate it.” Again, alarmist and ignorant. I would argue this is impossible because of the benefits of crypotcurrencies the author stated earlier in her article, namely that bitcoin “has no physical shape”, is “easily acquirable”, “spending can’t be traced back to the spender”.

    “China has completely prohibited the exchange and use of Bitcoin.” This is simply factually incorrect. As the linked article states the Chinese have outlawed “the exchanges used to convert local currency yuan into bitcoins, and visa[sic] versa”. The use of Bitcoin in China is not prohibited. In fact, trading at BTC China surpassed USD trading in late 2013. Two days ago, a new Bitcoin-CNY index was created by CoinDesk. http://www.coindesk.com/coindesk-launches-chinese-yuan-bitcoin-price-index/

    To explain bitcoin to as “monopoly money” or “M&Ms” just shows that neither the author nor the interviewees really know what is going on with Bitcoin. Cryptocurrencies have a stronger connection to the foundational laws of nature than any fiat currency. Reliance on prime numbers is far more certain than relying on a central bank’s open market operations and printing presses for your currency system. Bitcoin money supply is predictable and can’t increase every time a government wants to Seigniorage their debts away. If the author feels the need to label a currency with the moniker of “monopoly money” I suggest she look first to the list 180 currencies which are literally just back by “full faith and credit” of whomever currently owns the monopoly on violence in their geographic region.

    Cryptocurrency is a very complicated issue that warrants in-depth analysis and well-researched journalism. I must reiterate my dismay at these kinds of alarmist and poorly researched articles being published by Sound Economics.

  3. I would like to respond to the above post in defense of Holly. The purpose of this blog is to give people an opportunity to see what some of the Economics Seniors have been working on for their thesis seminar class. I believe that Holly is doing a PHENOMENAL job bringing this information to the Puget Sound community. Her postings are upbeat, easy to read, humorous, and informational.

    I’m not entirely sure where the hate comes from here, but I will ask you to check it at the door now. Please do not personally attack any student that contributes to Sound Economics. It is unbecoming of any Logger.

    Sound Economics was set up to give students an introduction to writing for a general audience, and share some of the great work that is going on in our department. This is a learning opportunity for all. Please continue to contribute in a manner that fosters this type of educational growth. The intelligent students and faculty that contribute here work hard to bring new and difficult concepts to the community in a way that everyone can enjoy and understand them. I think that Holly and her colleagues have done just that.

  4. Howdy outstanding website! Does running a blog like this require
    a massive amount work? I have no knowledge of
    programming but I was hoping to start my own blog soon.

    Anyways, if you have any ideas or tips for new blog owners please share.
    I know this is off topic however I just needed to ask.
    Kudos!

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