ABSTRACT is demand for its low transaction costs,

ABSTRACT

The aim of
this report was to find out what exactly cryptocurrency, such as Bitcoin, is
and why it has value, what is its future and if it has the ability to become
the mainstream currency of the future. Bitcoin is a fully decentralized currency.
It has value because its supply is very limited and there is demand for its low
transaction costs, anonymity, investment possibilities and possibilities for
use in illegal activities. Its future presence is questionable as Bitcoin has a
few serious drawbacks such as high price volatility, susceptibility to hacking,
no protection from a central bank and no consumer protection. It is therefore
unlikely that it will catch on as an established currency to the general
public, as its two main strengths, anonymity and low transaction costs are not
necessarily what the average consumer demands. However the technology behind
cryptocurrency and Bitcoin can be applied to other currency or payment systems
which could have a lasting impact on how people spend money in future.

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CHAPTER 1

INTRODUCTION

Money is
one of the most valuable and sought after commodities in the world. Most people
interact with money in almost every phase of their life, whether a person plans
to go buy a newspaper, buy food or invest in a home or a buy a car, money is
the latest economy for transaction for goods and services. Money has had
several forms in the human history with the oldest form of money being
bartering. Without any official currency people would directly trade one good
for another, such as trading a horse for a cow. This form of money however is
very inefficient as the odds of finding someone that required a horse for the
exact same good that the other person required are very low. Clearly a medium
of exchange needed to be developed. A medium of exchange acts as an
intermediary instrument in order to make trading more efficient. During the
time of bartering this would include some easily traded goods like weapons or
animals skins. It was something around 600 that the first official currency was
minted.

Minted currency
used to be made from the mixture of silver and gold which were stamped with a
picture to denote the face value of the coin. These coins were minted by Lydia’s
(in today’s Turkey) King Alyattes and it maximized the countries trade to a
considerable amount resulting in the empire becoming one of the richest in Asia
Minor. Around 600 B.C. the Chinese started developing paper money and moving
away from coins, Europeans took more time to shift to paper currency. Eventually
banks would make bank notes for people to carry around instead of coins which
had their value backed up in silver or gold coins. Gradually paper money as we
know it today became the norm.

This is
how money eliminated the problems with bartering and acts as a stable medium of
exchange. Pricing goods and service, and trading, becomes much easier when
everyone accepts the same money as currency. In today’s economy the main source
of money is fiat money, a legal tender protected by a government using
regulations and laws that create the much needed trust in money and thus
creates its value. Fiat money is supplied by a countries central bank which
maintains the stability and supply through its monetary policy. With increasing
and innovation of new types of money.

One of the
most controversial new innovations of money are Cryptocurrencies, a form of
internet currency often called digital money or cyber currency. The most important
feature of Cryptocurrency is that it is not issued by a central bank like the
fiat currency, nor is it protected by regulations or law, making it impervious
to government interface. The most widely known and controversial cryptocurrency
is Bitcoin, which was launched in 2009. As Bitcoin is the most widely known and
used cryptocurrency in the world, the subject matter of this paper will largely
shed light on the Bitcoin. What is Cryptocurrency, why does it have value, what
is its future and could it replace the fiat currency?