Research Proposal

Bitcoin is a peer-to-peer digital currency conceived in a 2008 paper by Satoshi Nakamoto. Though many digital currencies had been previously imagined, Bitcoin was the first to solve the “double-spending problem,” that is, to eliminate the possibility of using the same digital coins in multiple transactions. In 2009, shortly after its inception, a major hack introduced millions of new Bitcoins into the system. The security flaw was quickly repaired and the unauthorized coins deleted.

By October of 2012,  over 1,000 merchants accepted Bitcoin in online and physical settings. Bitcoin’s growing user base began to draw regulatory attention: in July of 2013, Thailand banned the use of Bitcoin, declaring it an illegal currency. China and Russia followed suit, and a similar ban has been suggested by US Senators.

These measures have not deterred the use of (or investment in) the currency. In November of 2013, the value of 1 Bitcoin spiked to its all-time high at over $1000. It has since fluctuated in the $600-$800 range. The value on March 5, 2014 hovered around $644 USD.

How It Works
Bitcoin is a digital cryptocurrency that relies on public verification of transactions. This verification process requires Bitcoin users who are not involved in the transaction to decode randomly generated strings. This decoding process, called mining, is what gives cryptocurrencies their name. Bitcoins are stored in digital wallets, which act as decentralized bank accounts for users. Transparency is critical for a decentralized, unbacked currency, so the process used to create Bitcoins and the total number of Bitcoins in the economy is open-source and known by all users.

Bitcoins are used like any other currency for some online retailers. Other users see Bitcoins as an investment vehicle. While extremely risky, some investors have made hundreds of times their initial investment; others have lost everything. Because it is controlled by algorithms and the public, not a central bank, some citizens in inflation-plagued countries have been switching their currency into Bitcoin to preserve its value.

Major Recent Controversies
The most major threat since 2009 actually occurred the week that this proposal was written: on February 28, Mt. Gox, the leading Bitcoin digital wallet provider and exchange firm, declared bankruptcy, losing almost all of the Bitcoins held by its users. The total financial loss approaches $500 million. It still uncertain as to how the Bitcoin-vanishing error occurred.

Bitcoin has also the subject of major legal disputes. According to Forbes Magazine, the FBI seized $28.5 million worth of bitcoins from the leader of an online drug trafficking ring. Many worry that the decentralized nature of Bitcoin will create new avenues for such illegal activity. Yet Bitcoin.org reminds users that the nature of all currencies affords use for both legal and illegal activities. Clearly, the increased use of Bitcoin and other cryptocurrencies has highly-debated potential for great economic and social consequences.

Plan of Research
Our intention is to create a public resource for understanding Bitcoin in the news. We  will gain an understanding of how Bitcoin works, and break down that understanding in a way that may equip any interested reader to have an informed conversation on the topic. We will gain a holistic perspective from interviews with an economics professor, a Bitcoin user, a Bitcoin skeptic, as well as an investor. We hope that these interviews, as well as research of current publications, will equip us to provide analyses of controversies and major events concerning the Bitcoin system. These analyses will include evaluations of professional predictions on the future of Bitcoin.

Social Pros and Cons
Our cursory research has uncovered these elements for further investigation:

Pros:

  • Decentralization means increased efficiency.

  • Anonymity – transaction involves only number sequences, no form of identity between parties.

  • Transaction costs are lower than when using government-backed currency.

  • Stable alternative for countries with unreliable official currencies

Cons:

  • Lack of regulation/user protection

  • Rapid fluctuation of value

  • Inconsistent acceptance across and within economies

  • Extremely high computational power necessary for acquisition

Broader Social Implications
Bitcoin may be indicative of a larger trend of decentralization.  As one futurist states: “we are seeing technology-driven networks replacing bureaucratically-driven hierarchies” (Ignaczak 2014).  In several industries, peer-to-peer web-based business models have emerged, like Uber and Airbnb, that place power in the hands of communities and individuals, rather than large corporations.  Bitcoin takes this trend a step further in efforts to reinstate consumer privacy, eliminate middlemen (banks, government, etc.) and potentially give consumers greater cost efficiencies. Because Bitcoin is not managed by a government or central bank, it can be considered a destabilizing factor in some economies. The United States is relatively friendly toward Bitcoin, but many countries have banned or heavily restricted it to protect their citizens from massive fluctuations in value and to better control the flow of goods and wealth within their economies.

Works Cited
“Choose Your Bitcoin Wallet.” Bitcoin.org. The Bitcoin Foundation. Web. 04 Mar. 2014. https://bitcoin.org/en/choose-your-wallet.

Ignaczak, Nina M. “21 Technologies That Will Decentralize the World.” Shareable. Shareable, 19 Feb. 2014. Web. 04 Mar. 2014.

Lee, Timothy B. “Five Surprising Facts About Bitcoin.” The Washington Post. 21 Aug 2013. Web. 03 Mar 2014. http://www.washingtonpost.com/blogs/the-switch/wp/2013/08/21/five-surprising-facts-about-bitcoin-2/

Nakamoto, Satoshi. “Bitcoin: a peer-to-peer electronic cash system.”  https://bitcoin.org/bitcoin.pdf & http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf

Raskin, Max. “Dollar-Less Iranians Discover Digital Currency.” Bloomberg Businessweek. 29 Nov 2012. Web. 03 Mar 2014. http://archive.is/ncmdv

Salyer, Kristen. “Fleeing the Euro for Bitcoins.” Bloomberg View 20 Mar 2013. Web. 04 Mar 2014. http://archive.is/TJbl6

Velde, Francois R. “Bitcoin: a primer.” Chicago Fed Letter. Web. 03 Mar 2014. http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf