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Bitcoin: A Unique Financial Instrument


Among the multitude of existing cryptocurrencies Bitcoin remains the most important and popular. Without a doubt, the incredible rise of Bitcoin led to an interest in all areas of life: commercial, investment, academic, and others. Bitcoin was invented at the appropriate time, during the global financial crisis of 2008 and deep mistrust of the banking system. Investors’ considerations regarding Bitcoin were different. Some believe it is a fun asset for speculation, while others believe that it has an outstanding future in a modern digital reality. Bitcoin has had its ups and downs, but it remains a very promising digital financial asset.


On the contrary, The Payment and Clearing Association of China notified the banking industry to stay away from digital currencies. The cause of this determination is the will to strengthen social responsibilities in banking and other financial institutions. Banking authorities especially emphasized that enterprises should not use digital currencies to set the prices of products, and services and underwrite insurance businesses associated with crypto (PYMNTS, 2021). Reserve Bank of India did not ban the trade in digital currencies, but it also ordered banks and other financial entities that are directly subject to it, not to provide services to companies whose activities are related to cryptocurrencies (Pleaders, 2020).

The article highlights the first and most popular cryptocurrency's advantages and features. In addition, it explains the impossibility of making pricing forecasts and the main disadvantage of blockchain technology which is the basis of bitcoin. The article substantiates the fact that the rate of Bitcoin is independent of inflation, corporate earnings, and other external factors that affect fiat currencies. Moreover, it reveals the cause of interest of traders, financial experts, and large corporations in digital gold as it has been called.

The Basis of Bitcoin

Bitcoin is based on blockchain technology that allows one to conduct and verify financial transactions without an intermediary like a bank or other financial institutions (Duggan, 2022). Blockchain is a digital ledger of transaction records that are copied and distributed across the entire computer network. The block contains a vast amount of transactions. Whenever a transaction occurs on the blockchain, a record of it is attached to a ledger of every participant (Ateniese, G., Magri, B., Venturi, D., Andrade, 2017). Cryptocurrencies even make it possible for banks to settle accounts among themselves without the need to obtain consent from the state's central bank. Bitcoin became officially the first decentralized currency system in the world that works. Bitcoin is an alternative to fiat currencies, such as the U.S. dollar, that are controlled by governments and central banks. Transactions are authorized and confirmed by a proof-of-work consensus algorithm. This requires computing mathematically challenging puzzles to create new blocks in the Bitcoin blockchain just like the Bitcoin mining process. Since Bitcoin mining is a process of creating new coins by computing complex mathematical problems (Duggan, 2022).


A History of Ups and Downs

The fact that a lot of people believe Bitcoin has great value is the most significant and amazing achievement of this currency (Vince, 2022). The first public auctions were held in 2010, Bitcoin has increased tremendously in value. The rapid growth of Bitcoin’s rate is also caused by the information that its issue is limited to 21 million coins. Financial experts expect the price of Bitcoin only to rise due to growing interest in the currency (Ateniese, G., Magri, B., Venturi, D., Andrade, E. 2017). When Bitcoin reached its highest value in 2021 the total market value was more than 1 trillion U.S. dollars (Levin, 2022). Experienced traders will assure you that it is impossible to predict the price of a risky asset in the short run (Adams, M., Ashmore, D. 2022). The chart in Figure 1 shows the rising trend despite ups and downs throughout the period 2010-2022 (Figure 1).


Figure 1: Price history of Bitcoin 2010-2022

Bitcoin’s value crossed the mark of 1 U.S. dollar in 2011. Along with the popularity and value of Bitcoin, its volatility also increased rapidly. The appearance of competitors (other cryptocurrencies) contributed to the higher volatility of Bitcoin’s rate. The first competitor appeared in 2011 and it was Litecoin (LTC). Another significant competitor is Ethereum, which launched four years later in 2015. The value rose to 1,000 U.S. dollars in 2013, but in 2017 unexpectedly reached 20,000 U.S. dollars. The highest historical price of Bitcoin was fixed at the level of 68,991 U.S. dollars in 2021.


Incredible Features of Bitcoin

Many of the large businesses in the United States: including Zynga, Las Vegas Casinos, Golden Gate Hotel & Casino, TigerDirect, Overstock.com, Newegg, Dell, and Microsoft started accepting payments in Bitcoins. Besides, in the same year, U.S. Commodity Futures Trading Commission (CFTC) authorized to begin listing of an over-the-counter swap product whose underlying asset is Bitcoin. The most likely cause of the rise in the value of Bitcoin was the announcement about entering into futures contracts at the end of 2017 by CME (Chicago Mercantile Exchange) Group Inc. (Chohan, Usman W., 2022).



Figure 2: No matter what bitcoin will always recover keep calm& hodl -Hold On for Dear Life

Bitcoin technology is relatively safe. But the main disadvantage is the fact that it is anonymous and relies on passwords. Anonymity means that the owner of the cryptocurrency is not defined. And if your password is not reliable it can be hacked. By losing your wallet password you are losing your coins. Bitcoin integrated into traditional financial markets. Also, it is accepted in retail and by institutional investors. Despite its volatility, it has become the leading alternative financial asset that corresponds with large-cap tech companies (Hicks, 2022). Bitcoin’s value and turnover are independent of the influence of other financial instruments. Differing from fiat currencies it is a hedge against inflation. This is because the amount of coins that can be issued is limited. And the mining of new coins has become increasingly complex and expensive. When the dollar and euro lose their value Bitcoin remains stable. Since Bitcoin was invented, many things have changed in the modern financial system in the short term. Cryptocurrencies persistently alter all areas of our life. Without a doubt in this way, the Metaverse will be built (Levin, M., 2022). Central banks and governments around the world are not in favor of Bitcoin. Cryptocurrencies can become strong competitors to banks and financial institutions shortly (Wigglesworth, 2022).


Figure 3: Bitcoin is a digital gold

Traders and investors consider Bitcoin digital gold. Similar to gold, but much more convenient. Bitcoin is allowed to sell, buy, own, and trade legally in most countries. Also, it becomes a legal tender, a taxable asset, and is used for investment purposes like gold. Bitcoin is a highly liquid asset as it can be easily exchanged for fiat currency. Besides, it is a rare and valuable asset like gold. Finally, it is a hedge against inflation. Because despite its volatility, the value of Bitcoin increased significantly over the years (Musharraf, 2022). Bitcoin is constantly headlining the most influential financial publications, but it is only one of the numerous digital assets with enormous unexplored potential. To fully reveal all the possibilities, it is necessary to establish the required legislative framework (Vince, 2022).



Conclusion


Differing from other financial instruments Bitcoin has many advantages distinguishing it from other financial assets. Bitcoin is based on cryptographic proof (blockchain technology) instead of trust in banking entities, like fiat currencies. So, it is an alternative to other currencies. Besides, it gives you full control of your money. There is a possibility to buy and sell bitcoins without an intermediary like a bank or other financial institution which limits your transactions. Moreover, it allows banks to settle accounts among themselves without relying on centralized entities. Bitcoin transactions are cheaper than wire transfers or money orders. Bitcoin is not affected by inflation and is considered digital gold. Furthermore, it opens possibilities to people who are out of the banking system because of the country where they were born. Bitcoin remains a risky financial asset. And there is no reliable way of assessing or forecasting its value has been proposed at the moment. But most investors and stock traders believe that the future is in favor of this unique financial instrument.



Bibliographical Sources

Adams, M., Ashmore, D. (2022). Why Is Bitcoin Going Up? Forbes advisor. Why Is Bitcoin Going Up? – Forbes Advisor Ateniese, G., Magri, B., Venturi, D., Andrade, E. (2017). Redactable Blockchain – or – Rewriting History in Bitcoin and Friends. IEEE European Symposium on Security and Privacy (EuroS&P), 2017, pp. 111-126, DOI: 10.1109/EuroSP.2017.37. [PDF] Redactable Blockchain – or – Rewriting History in Bitcoin and Friends | Semantic Scholar Chohan, Usman, W. (2017). A History of Bitcoin. SSRN papers. Elsevier. A History of Bitcoin by Usman W. Chohan:: SSRN Duggan, W. (2022). The history of Bitcoin, the first cryptocurrency. U.S. News. The History of Bitcoin, the First Cryptocurrency | Investing | U.S. News (usnews.com) Hicks, K. (2022). Is Bitcoin Safe? Forbes Advisor. Is Bitcoin Safe? – Forbes Advisor Levin, M. (2022). The only crypto story you need. Bloomberg. Business Week. The Only Crypto Story You Need, by Matt Levine (bloomberg.com)


Musharraf, M. (2022). What makes bitcoin “digital gold”? MoonPay blog.

https://www.moonpay.com/blog/bitcoin-gold

PYMNTS. (2021). JPMorgan: Institutional Investors Ditch Bitcoin For Gold. PYMNTS TV.

https://www.pymnts.com/news/investment-tracker/2021/jpmorgan-institutional-investors-ditch-bitcoin-for-gold/


Pleaders (2020). Analysis of the Cryptocurrency judgment and way forward. leaders blog. in

https://blog.ipleaders.in/analysis-cryptocurrency-judgment-way-forward/#Observations_and_Decision

Vince, R.(2022). Time for a reset of the crypto opportunity. Financial Times. Time for a reset of the crypto opportunity | Financial Times Wigglesworth, R. (2022) Bitcoin’s ‘artificially induced last gasp before the road to irrelevance. Financial Times. Bitcoin’s ‘artificially induced last gasp before the road to irrelevance’ | Financial Times (ft.com)



Visual Sources

Cover image: What is bitcoin? (2019) Coinbase. [Illustration].

https://www.coinbase.com/ru/learn/crypto-basics/what-is-bitcoin


Figure 1: Edward, J. (2022). Bitcoin's price history. Investopedia. [Graph].

https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp


Figure 2: No matter what bitcoin will always recover. (N.D.) Pinterest. [Illustration].

https://www.google.com/search?q=No+matter+what+bitcoin+will+always+recover


Figure 3: PYMNTS. News. (2021). Investment tracker. [Illustration].

https://www.istockphoto.com/uk/%D1%84%D0%BE%D1%82%D0%BE%D0%B3%D1%80%D0%B0%D1%84%D1%96%D1%97/bitcoin-gold











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Yuliia Sivitska

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