INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

The Future of Bitcoin

A report submitted to
Instructor: Prof. Jugal Choudhary
Academic Associate: Tushar Meshram

In partial fulfilment of the requirements of the course

Written Analysis and Communication – II (2016-2017)

By
Aman Bafna (16043) and K Samarth (16164)
Section C

On
February 26th, 2017
This article is meant for an audience with a basic knowledge about Bitcoin and how it works and seeks Commented [JC1]: The article seems to also cover basics?

to educate and enlighten them about the current status of Bitcoin and its future potential. It is written
with this assumption in mind and hence does not go into the details of the functioning of Bitcoin.

Abstract

This article analyses the various perceptions about Bitcoin. It examines and highlights the various
issues in using Bitcoin in today’s world. It then looks at the potential applications and how Bitcoin
may evolve into something different. The article provides a 360-degree view of Bitcoin and looks at
it in various dimensions. Commented [JC2]: Abstract should have described all
sections of the article

The Future of Bitcoin

“The issuing power should be taken from the banks and restored to the people, to
whom it properly belongs.”

-President Thomas Jefferson Commented [JC3]: Which year? President of which

country?

After almost two centuries, Bitcoin is in the process of fulfilling the wishes of one of the founding
fathers of the United States. Coming into prominence in the aftermath of the 2008 economic crisis,
Bitcoin has been claimed by many to represent the currency and monetary system of the future. Its
original application was as a “Peer to Peer” cash system in which transactions can be done without
relying on an intermediary like the banks and payment gateways that facilitate majority of world’s
monetary transactions. For many people, this was a glimpse into the future; where banks won’t exist
and individuals will have complete power and autonomy over their economic life. But almost a
decade has passed and Bitcoin is still a potentially disruptive innovation. The intense fluctuations it
has seen in its valuation over the past 5-6 years has only added to the uncertainty. From 2010-13, Commented [JC4]: ‘value’?

Bitcoin was the world’s best performing currency and in 2014, it was the worst. It has been touted as
the liberator of people which will end the tyranny of the Central Institutions. On the other hand,
Bitcoin has been blamed as a facilitator of illegal activities and having a high potential for fraud.
Which of the two views is right? No one can say for sure, except the hard core Bitcoin loyalists and Commented [TM5]: “Hardcore”
the equally vocal Bitcoin haters. But, everyone agrees that there are various issues which needs to be
resolved before Bitcoin can actually realize its potential and really impact people’s lives. Commented [JC6]: ‘benefit’?

Close Price of Bitcoin (in USD)

1400

1200

1000

800

600

400

200

Source : Coindesk (http://www.coindesk.com/price/)

Issues
Bitcoin is a Cryptocurrency, which uses highly complex mathematical functions and cryptology
concepts that are difficult to grasp for a layman. The technical competency required to earn Bitcoins
is quite high which makes it difficult for a common man to mine Bitcoins. This problem is currently
being tackled by a large community of Bitcoin users by educating the general population about
Bitcoin and by building services and businesses to facilitate the use of Bitcoin. This still remains a
work in progress with continuous improvements being brought about by the service providers.
(Problems with Bitcoin) Commented [TM7]: Use proper citation style

The digital wallet file is vulnerable to

theft or permanent loss due to deletion
Bitcoin users are expected to be well-versed in the matters related to computer security. All the
Bitcoins owned by a person are stored in a digital wallet. This digital wallet file is vulnerable to theft
or permanent loss due to deletion. While many services have taken up the security requirements of Commented [JC8]: Meaning?

the wallet from the user, there have still been many instances of theft. The aggregation of these
Bitcoin accounts under the security provided by services leaves them open to threat from attackers.
Another issue is that of trust which the customers are placing on a service provider to not steal from
them which has been broken in various instances where the bitcoin service provider has run off with
the depositors’ bitcoins. (Hern, 2014)

Bitcoin transactions are painstakingly slow for the modern world. It might take several minutes for
the transaction to be announced on the network, thus causing a delay. Moreover, for sellers to be
absolutely sure about the transaction, they have to wait for approximately an hour to confirm that
there has been no fraud committed and the transaction has been entered legitimately in the Bitcoin’s
digital ledger. Otherwise, the same Bitcoins which were promised to the dealer could be put to use in
a different transaction. In the modern world, it is very difficult to expect consumers to put up with
this constraint. (Weaknesses - Bitcoin Wiki) Commented [TM9]: This isn’t the right form of citing the
source.

One of the biggest issues with Bitcoin is lack of consumer protection that other forms of currencies
offer. Since these transactions are irreversible, it becomes impossible to collect back the amount paid
to a fraudulent seller. The underlying issue is that of trust, that the buyer places on the seller. While
this protects the sellers from fraudulent claims of money to be returned, this opens the buyers to the
risk of being ripped off by sellers. (Problems with Bitcoin)

About two billion people in the world still do not have

access to formal financial services and internet

Being a digital currency, Bitcoin requires the use of an electronic device. But about two billion
people in the world still do not have access to formal financial services and internet. (Three Quarters
of The World’s Poor Are “Unbanked”, 2012) This is the essential contradiction around Bitcoin. Commented [TM10]: The Citation could have had just
the World Bank reference. The title of the report will
While it promises to empower the masses, it is itself creating a digital elitism wherein you need to be anyway be included in the reference list.

technologically proficient in order to use Bitcoin.

“Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its
potential.”

– Marc Kenigsberg Commented [JC11]: Who is he?

Potential applications
Despite the above highlighted issues, the technology behind Bitcoin is widely considered to be
capable of being the backbone of the new structures of finance. Bitcoin is based on the idea of
Blockchain, which can be defined as a ledger or a chronological database of all the transactions that
has taken place since the beginning of Bitcoin. These transactions are grouped together in blocks and
chained together in the sequence in which they occurred, thus resulting in a blockchain. The major
innovation in blockchain is that it removes the necessity of trust, which has been the most crucial
element in the history of money. It enables strangers to reach agreement on the occurrence of an
event without any overseeing authority. Potentially, this means that there will no longer be any need
of a middleman, whose only purpose is to ensure trust and transparency. Central Banks backing a
currency, or payment gateways like Visa and MasterCard will become redundant. It can enable self-
enforcing contracts and secure systems for online crowdfunding and voting.

Commented [TM12]: Infographic is very useful!

Image Source : Financial times (Financial Times) Commented [TM13]: Why is the source mentioned
twice?

This technology is especially appealing for developing countries, where governments often grapple
with issues of transferring benefits to the needy, without having recourse to formal banking and
finance channels. Blockchain offers an inexpensive infrastructure for exchanging and transferring
money, the only requirement being a mobile phone. Stripe, a San Francisco based start-up has
already made progress in this direction with its open source payments protocol, Stellar (Metz, 2016).
 An online ledger which is designed to
oversee movement of any currency or
commodity from one system to another

Stellar uses blockchain technology to create an online ledger which is designed to oversee movement
of any currency or commodity from one system to another. A company called Oradian is using this
technology to provide services of transferring money in and out of Nigeria. This system is quite
inexpensive as compared to traditional cross country transfer systems. The average cost of an
international money transfer is around $30, quite prohibitive for citizens of developing nations. This
cost arises from the presence of multiple middlemen in the system, which leads to a drastic increase
in the transaction cost. Stellar, or any other blockchain based technology for that matter, has no need
for any overseeing authority or agent, and has almost negligible transaction cost.

It can lead to a lighter, faster and more efficient

secondary layer of payment systems which do not
have any issues of bitcoin, but all of its advantages

Many experts, including Satoshi Nakamoto and Hal Finney (the first person to undertake a Bitcoin
transaction), feel that Bitcoin has great potential to replace gold as a secure store of value and backer
of currencies (Demeester, 2016). Since the number of Bitcoins in the world will be capped at 21
million, it will be a scarce resource in the future, just like gold. The limitation of blockchain size also
implies that Bitcoin cannot scale to cover each and every transaction in the world. Rather, it can be
the basis for Digital Banks issuing their own crypto currencies, which will be redeemable for
bitcoins. Thus, it can lead to a lighter, faster and more efficient secondary layer of payment systems
which do not have any issues of bitcoin, but all of its advantages. There are already secondary
solutions being developed by bitcoin community like Lightning Network, Sidechains and
MimbleWimble. These will allow the main Bitcoin blockchain to act as a secure settlement layer,
over which other solutions will work to provide fast, high liquidity transactions.
This secure storage of value can also lead to fiscal and central bank moderation in the developing
world (Connell, 2017). When governments do not have enough money to spend, they tend to take an
easy way out and start printing money. This is what happened in Zimbabwe and Venezuela, leading
to hyperinflation, as their currencies rapidly lost value. This was followed by imposition of currency
restrictions, to prevent people from transferring their wealth to other currencies. In the presence of an
international currency like Bitcoin which is outside the purview of any government, people can
easily start transacting in Bitcoin and stop using the local currency, rendering the government efforts
to print money useless. Commented [TM14]: Fair point. However, it seems that
only people in rich or moderately well-off economies can
trade in Bitcoins because of its prohibitive cost and
technological barriers. Also, for smaller transactions of daily
Both these applications hinge on Bitcoin having a stable value and credibility, which is not a nature, would it be viable to resort to a high-value currency
like Bitcoin?
certainty in today’s scenario. Bitcoin is being used only by a small niche of tech-savvy individuals
and has largely remained outside the popular imagination. But it is quite clear that despite the many
issues assailing it, Bitcoin offers a solution to many problems that the world is grappling with. It’s a
breakthrough technology that depicts the democratic potential of the internet where everybody is
equal. Its issues can also be seen as issues plaguing any democracy- lack of consensus, creation of
strong opposing factions, possibilities of misuse and fraud. Bitcoin is here to stay; we just don't know Commented [TM15]: Interesting analogy.

in what form. Whether Bitcoin itself or its underlying technology will become mainstream, nobody Commented [JC16]: This should be a separate para

can say for sure. But now that the world knows that there is a way to remove some minority’s
monopoly over money and finance, it won’t be long till a more popular and viable form of Bitcoin Commented [JC17]: ‘before’?

and blockchain surfaces.

(Word Count: 1625 words)

The citation must be provided in the authentic APA format. Have all the sources been accounted for
with the correct citations in the article? The reference list should have one set of references in the
correct format.
References:
1. Bitcoin And The Cashless Future – Jacob Tellez
http://www.forbes.com/sites/realspin/2016/12/20/bitcoin-and-the-cashless-
future/#c89e4d94df64
2. 5 Reasons Why Bitcoin Value Must Increase In Future – Evander Smart
https://cointelegraph.com/news/5-reasons-why-bitcoin-value-must-increase-in-future
3. Review Paper on Emergence of Bitcoin in India, its Technological Aspects and Legal
Implications - Swamy Ta, Pramanshu Shukla, Shreyas Ganesan Iyer, Rishi Gupta, Sona
Global Management Review
4. http://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?sid=0c06e483-2a2a-4a53-a82a-
69b459546856%40sessionmgr103&vid=0&hid=104
5. The Future of Bitcoin Is Not as a Digital Currency – Cade Metz
https://www.wired.com/2016/12/future-bitcoin-not-digital-currency/
6. Stellar Emerges From Shadow of Bitcoin to Find a Home Overseas – Cade Metz
https://www.wired.com/2016/12/bitcoin-stellar/
7. Why Bitcoin Will Thrive First in the Developing World – Cade Metz
https://www.wired.com/2016/02/why-bitcoin-will-thrive-first-in-the-developing-world/
8. Bitcoin’s potential for going mainstream – Safari Kasiyanto, Journal of Payments Strategy &
Systems Volume 10 Number 1
9. Bitcoin: digital gold or digital cash? Both. – Tuur Demeester
https://medium.com/@tuurdemeester/bitcoin-digital-gold-or-digital-cash-both-
382a346e6c79#.41to07qrf
10. Could Bitcoin Affect Emerging Market Monetary Policy? – Justin Connell
https://news.bitcoin.com/could-bitcoin-affect-emerging-market-monetary-policy/
11. Bitcoin and beyond – Andy Extance, Nature Publishing Group
12. The Schism Over Bitcoin Is How Bitcoin Is Supposed to Work – Cade Metz
https://www.wired.com/2016/02/the-schism-over-bitcoin-is-how-bitcoin-is-supposed-to-
work/
13. Problems with Bitcoin
https://99bitcoins.com/know-problems-with-bitcoin/
14. Weaknesses – Bitcoin Wiki
https://en.bitcoin.it/wiki/Weaknesses
 15. Is Bitcoin Safe? – Asheley Kindergan
https://www.credit-suisse.com/in/en/articles/articles/news-and-expertise/2017/01/en/is-
bitcoin-safe.html
16. Three Quarters of The World’s Poor Are “Unbanked”
http://www.worldbank.org/en/news/feature/2012/04/19/three-quarters-of-the-worlds-poor-
are-unbanked
17. A history of bitcoin hacks – Alex Hern
https://www.theguardian.com/technology/2014/mar/18/history-of-bitcoin-hacks-alternative-
currency

Bibliography
http://www.coindesk.com/price/. (n.d.). Retrieved from Coindesk.
Financial Times. (n.d.).
Hern, A. (2014, March 18). A history of bitcoin hacks. Retrieved from The Guardian:
https://www.theguardian.com/technology/2014/mar/18/history-of-bitcoin-hacks-alternative-
currency
Problems with Bitcoin. (n.d.). Retrieved from 99 Bitcoins: https://99bitcoins.com/know-problems-
with-bitcoin/
Weaknesses - Bitcoin Wiki. (n.d.). Retrieved from Bitcoin Wiki:
https://en.bitcoin.it/wiki/Weaknesses
Three Quarters of The World’s Poor Are “Unbanked”. (2012, April 19). Retrieved from The World
Bank: http://www.worldbank.org/en/news/feature/2012/04/19/three-quarters-of-the-worlds-
poor-are-unbanked