EPRSauthor By / May 8, 2014

Bitcoin: Market, economics and regulation

Bitcoin is a digital currency which started circulating in 2009. It was the first form of virtual money to become…

© Mopic / Fotolia
Bitcoin
© Mopic / Fotolia

Bitcoin is a digital currency which started circulating in 2009. It was the first form of virtual money to become relatively popular. Bitcoin is public in nature as it maintains a log of all transactions. These are verified by its users in a process called mining. The extent of computing power and energy needed to mine bitcoins is set to increase over time. The main advantages of Bitcoin in comparison to traditional currencies are low transaction fees, and anonymity of use. It also has numerous drawbacks, in particular high price volatility, being prone to security breaches, inelastic supply coded by mathematical formula, lack of legal security as well as numerous risks stemming from its immaturity as a currency.

Due to the anonymity embedded in the system Bitcoin has the potential to be used for money laundering and tax evasion. However, research so far shows this potential has not yet been taken up on a significant scale. Regulation of Bitcoin is at a nascent stage with those systems so far instituted characterised by strict capital controls banning its use, and a few governments aiming to ensure it is covered for tax purposes. Many central bank authorities have issued warnings about Bitcoin, mentioning in particular its high price volatility and lack of consumer protection as the main risks to its users.

Despite demonstrating the breakthrough in technology, Bitcoin’s future as a currency remains far from certain. The inevitable increase in regulation will increase transaction fees and reduce the anonymity of its use, two of its main strengths. Bitcoin might not become an established currency due to its volatility and ensuing lack of wide acceptance, but it holds promise for its technology.

Read the complete briefing here.

Bitcoin prices (in US$ - left-hand scale) and trading volumes (in  thousands - right-hand scale)
Bitcoin prices (in US$ – left-hand scale) and trading volumes (in
thousands – right-hand scale)
Bitcoin regulation or plans therefor in selected countries
Bitcoin regulation or plans therefor in selected countries

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