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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