The consequent development of the use of the internet, has affected the way people live, collect information and pay. One of the most interesting result of these changes has been the rapid spread of virtual currencies, “a type of unregulated, digital money, which is issued and usually controlled by its developers” . Although the general definition, the digital currencies’ world comprises a wide range of virtual money, which differ from each other depending on some distinguishing features. Firstly, virtual currencies can be distinguished on the basis of the way by which users can get them: some digital currencies can be obtained by purchasing them using fiat money, on the basis of a previously established conversion rate, whereas some others can be acquired by self-involving with specific activities.
Another distinctive feature refers to the interactions that occur with the actual economy through the channel of the monetary and real flows. From this point of view, and following the European Central Bank’s classification1, three virtual currency schemes has been identified.
Closed virtual currency scheme: the virtual money can be used only to buy virtual goods and services, thus there’s practically no connection with the real economy. Virtual currency scheme with unidirectional flow: Digital money can be acquired by using fiat currency, according to a specific exchange rate, but the reverse is not allowed. Sometimes this type of currencies can be also used to buy real goods. Virtual currency scheme with bidirectional flows: Users can buy and sell virtual money freely, depending on the exchange rate with their currency, and use them to purchase both virtual and real goods.
With approximately 700 virtual currencies actually in circulation , Bitcoin is the first and most popular of what has become known as cryptocurrencies,“digital monetary and payment systems that exist online via decentralized, distributed networks that employ a shared ledger data technology known as block chain coupled with secure” . Introduced in 2009 and at that time worth less than 1$, it gained popularity thanks to the global financial crisis, “which led to ubiquitous financial and economic uncertainties that roiled the global financial systems and stock markets in both developed and emerging countries”.
Reached the maximum price on December the 18th 2017, when it attained 18.737,60 $, Bitcoin’s predominance is now brought into question, after having lost a huge part of market share in favour of other virtual currencies, as it is shown by the graph below . Figure 1: Percentage of Total Market Capitalization, April 2013 – April 2018 Bitcoin belongs to the third virtual currency scheme: it can be freely bought and sold at an exchange rate which is not fixed but depends on market’s demand and supply and it can be used as a currency for all kind of transaction. Further details would be given in the following chapter in which, after a brief historical contextualization, the main characteristics of Bitcoin’s transactions would be delineated. BITCOIN’S BASIC FEATURES Bitcoin has been introduced in 2009 by an anonymous programmer, known under the pseudonymous of Satoshi Nakamoto , with the idea of creating “a purely peer-to-peer version of electronic cash” allowing “online payments to be sent directly from one party to another without going through a financial institution” .
Noticeably, this new virtual payment mean made its appearance in the depth of the global financial crisis, which was revealing the unreliability of the banking sector, and thus it proposed itself as an alternative to fiat money. Bitcoin belongs to a particular category of virtual money called cryptocurrency, since its electronic payment system is based on cryptocurrency proof. As previously stated, Bitcoin is based on a peer-to-peer network, which means that transactions do not rely on central but rather on a decentralized computer network . In the Bitcoin framework each computer is called a node and each network node independently verifies the correctness of transactions, which are included in an accounting book called blockchain . The first block, nicknamed ‘Genesis’, has been launched on January 2009 and this act allowed the initial ‘mining’ of Bitcoins to take place . Bitcoin can be purchased on several exchange platforms that operate in real time, and Mt Gox. has always been the most widely used, handling 70% of transaction worldwide. Unfortunately, in February 2014 the system suffered computer break-in, resulting in the theft of about 450 million $ belonging to costumers. As a consequence Mt. Gox has been forced to interrupt trading and to declare bankruptcy, while the price of Bitcoin suffered a loud decrease. As far as Bitcoin released is concerned, new coins can be created by solving specific algorithms designed to discover new blocks.
To avoid inflation, in the absence of a monetary authority, the algorithms become more and more complex as the number of already discovered algorithms increased and the amount of Bitcoin generated per block is set to decrease geometrically, with a reduction of 50% each four years. On the basis on the estimates made by its creator, the total amount of Bitcoin will reach its maximum of 21 million in 2040. Fig. 2: Number of Bitcoin in circulation, 03/09 – 04/18 Fig. 3: Expected Bitcoin’s growth In order to make as clear as possible the explanation, I will give only a brief overview of technical aspects of Bitcoin transaction. Firstly, to start using Bitcoin, users must download the Bitcoin core open-source software . After the software has been installed, for each purchase occurred, the related Bitcoin address is stored in the user’s computer and it will keep a record of all of user’s transactions. Since it is saved in a local file, each user faces the risk of losing everything if he doesn’t implement an adequate antivirus system. The address, a long string of 34 letters and numbers, is also known as ‘public key’, to which corresponds a ‘private key’ of 64 letters and numbers.
To carry out a transaction, whose details should be later inserted into the Bitcoin software, it’s necessary to validate the action by using the private key. With this information, the program generates a digital signature, which is sent out to the network for validation . To finalize the transaction, confirming that the user has the coin and it hasn’t been already used, it’s enough to insert both the private and the public key into the system. When the process runs out, the Bitcoin is stored in such a way that the new owner is the only person allowed to spend it . One can now ask himself about the reasons which can induce users to prefer Bitcoin instead of fiat money. And, as it will be outlined immediately after, the benefits related to the use of cryptocurrencies are remarkable. First of all, transactions are anonymous because users do not need to identify themselves to transfer or receive money , as Bitcoins are sent directly between two computers. Moreover, since there is no way for third parties to identify, track or intercept transactions denominated in Bitcoins, one of the major advantages of this practice is that sales taxes are not added to any purchases .
Secondly, compared to normal transactions, they’re costless and faster, because there are no intermediary institutions involved and thus no authorization requirements with the consequently wait periods. Finally, Bitcoin transactions cannot be reversed, unlike electronic fiat transactions. Bitcoin are accepted as payment method for a whole range of goods and services, including online and offline stores. The map below gives an overview of bitcoin adoption worldwide. However, it should be stressed that, contrary to the initial burst of interest among merchants in accepting Bitcoin, currently the appeal has largely died down because of the increasing transaction fees and volatile price movements which made Bitcoin less attractive as a means of payment. One of the most interesting and probably less known features of this cryptocurrency is that there exist 2708 Bitcoin ATMs installed all over the world, which allow to withdraw local currency with an average fee of 8.54% . Some of these Bitcoin ATMs offer bi-directional functionality, allowing both the purchase of Bitcoin as well as the retrevial of Bitcoin for cash . The charts below show Bitcoin’s ATMs distribution worldwide, highlighting the predominance of USA in offering this service .