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Bitcoin, a cryptocurrency based on blockchain technology where every transaction is recorded chronologically in a publicly distributed ledger, enables worldwide transaction between two parties directly without any financial intermediaries. Its value is derived mainly from the trust of its users. It is protected by its limited nature and the cryptography by which the currency is secured and authenticated.
Satoshi Nakamoto first introduced the concept of Bitcoin in 2008. This is a radical libertarian idea which can be an existential threat to century-long financial intermediary called bank. Currently, there are also other types of cryptocurrencies emerging in this new field of digital currency market like Ethereum, Zcash, Litcoin, Ripple etc.
Many claim Bitcoin is a digital gold as it has the characteristics of safe haven asset like gold. Others consider it as speculative bubble and Ponzi scheme as it has no or very weak fundamental value. Bitcoin price experiences high volatility. Is the volatility coming from speculation? or do people really value the digital currency and consider it as an alternative investment? At the moment, academia as well as investors are widely divided on the issue.
Bitcoin has already emerged as an independent payment system. Japan has recently made it a legal form of payment. Even it has been rolled out as an investment asset and is regulated as a commodity in the United States and many other countries.
According to many, Bitcoin can be considered as a synthetic asset as it combines features from gold and sovereign currencies like Dollar and Euro. Interestingly, Bitcoin price first exceeded the price of an ounce of gold in April 2017, which may be a sign of growing confidence in digital currency.
Bitcoin price has sky-rocketed from less than US$ 10 in August 2011 to $18,940.57 in December 2017. At the end of August 2018, it was traded at $7,017.35 and still shows an upward trend. Many investors and researchers see the high volatility as a consequence of speculation. China is highly sceptical and has outlawed cryptocurrency exchange.
It is still too early to conclude whether digital currency is a hype or is going to stay for long and challenge other sovereign currencies. Broadly speaking, currency is anything that can be used as a) a medium of exchange, b) a unit of account, and c) a store of value. Cryptocurrency like Bitcoin has got almost all the basic characteristics of currency or money. However, historic and existing volatility have significantly weakened its position as an alternative monetary system.
Dr. Md. Akther Uddin is Programme Coordinator and Senior Lecturer, School of Business, University of Creative Technology, Chittagong.