After the invention by Satoshi Nakamoto in 2008, Bitcoin became famous across the world. It is the first cryptocurrency of the world. The design of Bitcoin focused at the peer-to-peer transactions. There are no intermediaries in these transactions. A distributed database “Block Chain” records all the transactions. For making a transaction a user must have a private key. The user will only know this key. While doing any transaction, the open-access system will verify this key. Apart from that, the user will use digital signatures in all the transactions. Failing in this procedure will not let the transaction complete. This topic has cropped up in many courses since it's inception a few years back. Students who are on the lookout for assistance with economics assignment, should go through this write-up and understand the core concept, before attempting to answer the assignment question.
Unlike the traditional transactions, Bitcoin system comes with a range of benefits. Following are some of those benefits:
• The user uses digital signatures in all the transactions.So, no third-party can control them.This security feature protects all the transaction from phishing. Moreover, the encryption is one way private-public. So, no outsider can perform the transaction without the private key.
• The Bitcoin system network performs real time account reconciliation. Thus, the system can ensure double entry book keeping for all the transactions.This also stopped the replication of the transaction entries in the record book.
• There are no chances of credit based transactions in this system. Let us assume, person A buys a product from person Bin exchange of α Bitcoins.Person B cannot transfer the Bitcoins to person C Before receiving the same.The system will allow the second transaction after the first one takes place.
• As the Bitcoin operates on digital platform, a user can alter transaction records.Absence of intermediary is the reason behind this problem.System designers anticipated this issue. They have assigned unique codes for all transactions. Let us assume that person A has made a transaction. One hour later, the person makes another transaction. Then the unique code will comprise the information of these two transactions.
These are some of the features of Bitcoins. Now, the US government declared it as decentralized currency. It has some reasons. Government cannot trackthese transactions in a direct manner, unlike the traditional monetary transactions.Government cannot issue or control the Bitcoins also. Apart from that, these transactions do not come under tax purview.So, it makes sense to call the Bitcoins as decentralized currencies.
But these features can create problems. Users are anonymous in nature. The currency is in virtual form. The account reconciliation is system driven. Government cannot track and tax these transactions.These factors make a perfect recipe to use Bitcoins in illegal activities.So, more than the mainstream economy, it helps the parallel economy to boost up.
Unlike the traditional transactions, Bitcoin system comes with a range of benefits. Following are some of those benefits:
• The user uses digital signatures in all the transactions.So, no third-party can control them.This security feature protects all the transaction from phishing. Moreover, the encryption is one way private-public. So, no outsider can perform the transaction without the private key.
• The Bitcoin system network performs real time account reconciliation. Thus, the system can ensure double entry book keeping for all the transactions.This also stopped the replication of the transaction entries in the record book.
• There are no chances of credit based transactions in this system. Let us assume, person A buys a product from person Bin exchange of α Bitcoins.Person B cannot transfer the Bitcoins to person C Before receiving the same.The system will allow the second transaction after the first one takes place.
• As the Bitcoin operates on digital platform, a user can alter transaction records.Absence of intermediary is the reason behind this problem.System designers anticipated this issue. They have assigned unique codes for all transactions. Let us assume that person A has made a transaction. One hour later, the person makes another transaction. Then the unique code will comprise the information of these two transactions.
These are some of the features of Bitcoins. Now, the US government declared it as decentralized currency. It has some reasons. Government cannot trackthese transactions in a direct manner, unlike the traditional monetary transactions.Government cannot issue or control the Bitcoins also. Apart from that, these transactions do not come under tax purview.So, it makes sense to call the Bitcoins as decentralized currencies.
But these features can create problems. Users are anonymous in nature. The currency is in virtual form. The account reconciliation is system driven. Government cannot track and tax these transactions.These factors make a perfect recipe to use Bitcoins in illegal activities.So, more than the mainstream economy, it helps the parallel economy to boost up.
ADVERSE EFFECTS ON ECONOMY
Use of Bitcoins in illegal activities became prevalent during 2010-2013. Remember “Silk Road”?This website made Bitcoins famous and infamous at the same time.There are more to it. Around the world, organizations involved in illegal activities realized the potential of Bitcoins.The unauthorized uses of this currency are many.
BURGLARY
There are several organizations, which use the online wallet services for retail transactions. Several third-party organizations use different measuresto steal the private keys of users.If someone steals that key, anyone can access the wallet of that person. As the users are anonymous, there is no way to track them down.The system can either obstruct these transactions or reverse those transactions. One of such incidents took place in Australia in 2013. The organization was “Inputs.io” and the loss was in the millions.
This kind of burglaries happened in several stock exchanges also.Virtual currency was the medium of trade in these exchanges. In 2014, Mt. Gox exchange in Tokyo lost $350 million.In 2015, two such incidents occurred. One was in Bitstamp in the UK, and another in BTER in China. In both of the incidents the loss was in the millions.
Use of Bitcoins in illegal activities became prevalent during 2010-2013. Remember “Silk Road”?This website made Bitcoins famous and infamous at the same time.There are more to it. Around the world, organizations involved in illegal activities realized the potential of Bitcoins.The unauthorized uses of this currency are many.
BURGLARY
There are several organizations, which use the online wallet services for retail transactions. Several third-party organizations use different measuresto steal the private keys of users.If someone steals that key, anyone can access the wallet of that person. As the users are anonymous, there is no way to track them down.The system can either obstruct these transactions or reverse those transactions. One of such incidents took place in Australia in 2013. The organization was “Inputs.io” and the loss was in the millions.
This kind of burglaries happened in several stock exchanges also.Virtual currency was the medium of trade in these exchanges. In 2014, Mt. Gox exchange in Tokyo lost $350 million.In 2015, two such incidents occurred. One was in Bitstamp in the UK, and another in BTER in China. In both of the incidents the loss was in the millions.
BLACK MARKET
In taking the Bitcoin into the black market domain, the Tor network plays an important role.This network is capable of IP masking, and thereby, hiding the identity of a user.The “Silk Road” used this network for their operations.People used this sitefor buying illegal drugs, ammunitions, and child pornographic films.There are also instances of hiring assassins. The medium of trade was Bitcoins in all the cases. In 2013, Silk Road seized to exist.But this organization boosted up several others across the globe.By the end of 2015, more than 400 such organizations came to an end. It was a joint operation of the intelligence agencies of several countries. These countries included Australia, Netherlands, Germany, and the US.
It was surprising to note that after this operation, demand of Bitcoin fell in a drastic way.Now the block chains of Bitcoin network are carrying the child pornographic film links as spam. So, the parallel economy made its way to bring back Bitcoin in another form.
In taking the Bitcoin into the black market domain, the Tor network plays an important role.This network is capable of IP masking, and thereby, hiding the identity of a user.The “Silk Road” used this network for their operations.People used this sitefor buying illegal drugs, ammunitions, and child pornographic films.There are also instances of hiring assassins. The medium of trade was Bitcoins in all the cases. In 2013, Silk Road seized to exist.But this organization boosted up several others across the globe.By the end of 2015, more than 400 such organizations came to an end. It was a joint operation of the intelligence agencies of several countries. These countries included Australia, Netherlands, Germany, and the US.
It was surprising to note that after this operation, demand of Bitcoin fell in a drastic way.Now the block chains of Bitcoin network are carrying the child pornographic film links as spam. So, the parallel economy made its way to bring back Bitcoin in another form.
MALWARE AND ILLICIT MINING
Black-hat hackers are using the Bitcoin network to spread malware. It has the motive of stealing the private keys.Theseare also spreading in the wallet services also. Some malware is using botnets to enter the databases and mine the Bitcoin.It is actually creating replicates of existing Bitcoins. This will increase the transaction volume.
SUMMARY
By far, we have discussed the effect of Bitcoins in the economy. We will now summarize the discussion in the following points:
• Bitcoins are a form of digital cryptocurrency.
• People are using Bitcoins in illicit activities.
• Bitcoin is helping the parallel economy to flourish.
• Bitcoin is in turn bringing down the mainstream economy.it.
Black-hat hackers are using the Bitcoin network to spread malware. It has the motive of stealing the private keys.Theseare also spreading in the wallet services also. Some malware is using botnets to enter the databases and mine the Bitcoin.It is actually creating replicates of existing Bitcoins. This will increase the transaction volume.
SUMMARY
By far, we have discussed the effect of Bitcoins in the economy. We will now summarize the discussion in the following points:
• Bitcoins are a form of digital cryptocurrency.
• People are using Bitcoins in illicit activities.
• Bitcoin is helping the parallel economy to flourish.
• Bitcoin is in turn bringing down the mainstream economy.it.