Bitcoin is experimental decentralized crypto currency which allows payment over the whole world. This system uses the technology “peer-to-peer” (p2p). Neither situation on the market nor central governing body affects it, all transactions control and giving of money are made in the network.
Currency in general meaning
Kate would like to buy wares, made by Dima. In her turn she has to give him something equal to Dima’s wares, because he has spent several days in order to make wares. Barter in this case is impossible because there are some difficulties in determination of the value. And currency makes the trade easier.
What does Kate undertake? Outwardly it looks like that: she transfers currency to Dima’s account. But actually there is the next situation: before Kate set up her account, she has filled an agreement and pays annually certain sum of money for service. Bank knows exactly where, how much and wherefore Kate spends her own money. For this knowledge bank takes money. Banks were created in order to track money transactions of citizens and in order to follow them in case if it’s necessary to inform some state structures about incomes.
Such system has a range of disadvantages:
- It is expensive – annual payment for credit cards’ service can be 3000 RU per year. You can pay interest to the bank from the each deal.
- It is slow – the procedure of transaction confirmation, blocking of means, and its charge-off will take about 3 weeks
- It is clear – the most of deals are not anonym, that’s why accounts can be easily frozen or fined
- It is selective – there is a range of juristic persons who could not use bank payment systems like VISA, Mastercard, Paypal and others because of refuse.
Currency as Bitcoin
Bitcoins are valuable and its quantity is limited. Such crypto currency can be compared with gold. The process of its mining is very difficult because it has appreciated value. This crypto currency can’t be duplicated or copied, bitcoins are not under control of the central governing bodies, they can’t be frozen or fined, and they can be used as a currency. Bitcoins are digital cash but not a debt issue of the issuer, this differs it from traditional non-cash payment and electronic money. They will not devaluated because of political situation of central bank of our country or any other country, like it has happened with dollar, and euro recently, and with rubles in 90th because all transactions happen without issue center.
Creation of coins
There are some restrictions for bitcoins production as well as for other currency but issue happens inside the network. Coins are mined very slowly according to all agreements. Why this process takes a lot of time? In order not to devaluate coins there was created a speed function of totally mined bitcoins, depending on time. It is inversely proportional; it means gradual decrease in speed and its urge towards zero. Every 4th year the volume of bitcoins decreases on 50%. That’s why it is clear that as a result there will be just 21 billion of bitcoins, which can be used for payment of wares and services.
How coins can be issued? The process of production of bitcoins is known as mining, from English mining means mining operations. Software with open source code is used for this purpose; it is set in participant’s PC. With the help of network protocol a lot of customer cash-boxes unite in the peer –to-peer network. Coins’ generation depends completely on computer computing power. Participants- miners write down all transactions in general Bitcoin data base, acknowledging in this way. They get compensation in the capacity of issued bitcoins.
Every 10 minutes in the system appear coins in blocks. Its quantity in these boxes decreases 2 times every 4 years: in 2008 mining compensation was 50, since 28 of November 2012 – 12. These bitcoins are a compensation for block creation. According to predictions in 2131 year an issue will be totally finished, it means that compensation for block creation will be 0 coins. In this case compensation for supply of network functioning will cross from issue of new bitcoins to commission accepting for transaction input to the new block. Nowadays some transactions have commission; miners get it including it to the next block. Transactions with commission have priority comparing to others.
Bitcoins can be sent to any participant of the system without any restrictions, without agents and financial organizations. You can even use not the total coin but its part including the 8th sign after decimal point (0.00000001), it is known as satoshi in the honor of Bitcoin founder. While transaction of the certain sum from one user to another one new transaction is being created, it includes hash from the previous one (it means a memory about all previous transactions). This information is transferred to network by means of broadcast query. In the network all other units should check the signature before processing.
All transactions have an open access, any participant can see it. But real data about owner are hidden. The place where all users’ transactions are being kept is the chain of blocks, whose transaction can be made via JSON. Each block contains a title with certain characteristics; the most important among them are hash and the list of transactions. Per se each block contains all data about transactions, which have been made from the moment of Bitcoin network creation.
Deflation of Bitcoin
Cryptocurrencies are initially deprived even of the possibility of inflation, because their number, like the amount of gold on Earth, is limited by the algorithm. To create new bitcoins it is necessary to spend time and energy – that is why they have value, as well as gold. (Demagogy. Cryptocurrency change to real currency and commodities. There are prices in the cryptocurrency. They participate in the economy like other currencies, affect prices. They change the volume of money supply in the country, leaving the commodity mass the same, with the exception of computing power of questionable utility.) And, as with gold, when most of the bitcoins are mined, the price will rise. Of course, this will happen only if Bitcoin is recognized worldwide, when more and more people will need bitcoins. And to compensate for the limited number of coins-the cost of 1 coin will increase.
It is also easy to regulate the necessary” mass ” of bitcoins for the entire bitcoin community-with the help of miners. If cryptocurrencies are produced more than the market needs at the moment of time, the value of the coin decreases and the network capacity decreases, because some of the miners are leaving because of the decrease in the profitability of bitcoin mining. Consequently, the output of bitcoins is reduced to the desired value. This situation persists until the moment when the mass of bitcoins in the market becomes insufficient to meet the purchasing power of users.
Deflation of cryptocurrencies should be considered for long periods of time, because now, in the initial period of the cryptocurrency, the price is very dependent on the actions of various financial regulators.
Bitcoin can become a good means of long-term storage savings.
Volatility and its consequences
Volatility and investors
Bitcoin has experienced at least four cycles of growth and decline in its history. Most likely, in the future he will meet many new challenges. Periodically, the price shoots to the sky and returns to the ground, each time the level of its “landing” above the previous one. This leads to an obvious conclusion: over long periods of time, the cost of bitcoin will inevitably grow. The output is supported by the digital currency supply and demand model, where the release of new bitcoins is constantly falling, creating a deficit and contributing to price growth. The long-term ownership strategy is extremely successful in reducing increased volatility. At the same time, there is a collapse or aging of bitcoin due to the appearance of a more perfect cryptocurrency.
Volatility and traders
Agile traders high volatility on hand. It not only provides a lot of opportunities to earn, but also allows you to make purchases and sales within the larger trends. Traders who are accustomed to more stable assets, will have to adjust their strategy to survive in the wild market of bitcoins. The application of volatility can be illustrated by the example of Bollinger bands. By default, this popular technical indicator draws lines on either side of the 21-day moving average, located at a distance of two standard deviations.
The bands are pressed against the moving average, indicating a decrease in volatility. When price variability increases, the shaded area expands. Usually traders open positions in the direction of a breakthrough. If the price moves steadily, it will move along one of the borders. However, in the case of sharp falls in one direction or another, traders usually trade against the puncture, betting on the return of the price to the moving average. This works because exits beyond the two standard deviations are relatively rare, and volatility spikes usually end with its rapid decline. Bollinger bands perfectly help to visualize volatility and use it in the interests of trade and common understanding of market dynamics.
Volatility and sellers of goods
The Changeable rate complicates commercial activity. Therefore, most sellers evaluate their products in the traditional currency, automatically linking the value in bitcoins to it. Provided that prices are converted in real time, the negative contribution of volatility is minimal.
Volatility and sellers of services
Service providers who charge a weekly or monthly basis, may suffer from excess volatility of cryptocurrency. For example, they can get much less bitcoins than expected due to a sharp increase in their value. In the worst case, the cryptocurrency exchange rate can take off before the payment day and collapse before the supplier has time to exchange bitcoins for dollars or other currency. Employers may suffer the opposite scenario, which will lead to unpredictable and inflated wage costs. To avoid such problems, it is necessary to think carefully about the billing process. During periods of high volatility, the amount of payment should be adjusted daily (or even hourly), and it is necessary to specify in advance such a possibility with the counterparty.
In April 2013 about 67% of all transactions have been made on the exchange ground Mt. Gox, placed in Japan. In February 2014 this ground has the 3rd place according to trade volume on the market.
More than 100 suppliers take bitcoins already in exchange for network services and real wares. Bitcoins are also actively used as a kind of help for somebody in charity. Among users there is a rule to name bitcoins as BTC. According to information in February 2014 the rate of bitcoin is 600 USD per 1 BTC.
Problems of Bitcoin
Despite the significant advantages of bitcoin over traditional money, it is not suitable for use as the main currency for a full economy. And the main reason – its deflationary nature and, at the moment, high volatility.
Deflation causes people to accumulate more and spend less, which has a negative impact on the production of goods and services. And, combined with the high volatility this leads to the fact that people can get profit only through accumulation. This will result in the production of fewer and fewer people, and it will kill the entire economy.