The aim of this paper is to make a statement about the future viability of the Bitcoin system by comparing opportunities and risks. In particular, the effects and existing risks for the conventional banking system will be discussed.
The digital currency Bitcoin enjoys great media interest. Its origins can be traced back to 2008. The timing of its introduction was extremely appropriate at the time, as the global economy was still dealing with the aftermath of the financial crisis and confidence in the existing banking system was shaken. A revolutionary payment system, detached from state control, thus gained a large number of users and supporters within a few years. In addition, the very pronounced critical discussion of Bitcoin on the part of the press and regulatory authorities shows the necessity for states, banks, companies and private consumers to seriously deal with the topic of Bitcoin.
At first glance, the technically complex concept of the Bitcoin system is very complicated and abstract. In addition, the currency exists exclusively digitally and is therefore difficult for ordinary consumers to grasp. Nevertheless, the density of users, Bitcoin transactions and the number of acceptance points are constantly increasing. Due to this, a controversial public discussion has arisen in which banks and even state institutions evaluate Bitcoin differently.
Table of Contents
1. Introduction
2. Fundamentals of monetary theory
2.1 Forms of money
2.2 Functions of money
2.2.1 Payment function
2.2.2 Value retention function
2.2.3 Computing unit function
2.3 Demand for money
2.4 Definition of the money supply
2.5 Money creation
3. Bitcoin
3.1 The story behind Bitcoin
3.2 How Bitcoin works
3.2.1 Basis cryptography
3.2.2 Peer to Peer Network
3.2.3 Wallet and Bitcoin addresses
3.2.4 Transactions
3.2.5 Blockchain
3.2.6 Mining
3.3 Bitcoin in practice
4. Bitcoin and the conventional banking system
4.1 Are Bitcoin Cash?
4.2 Legal framework
4.3 Bitcoin as an object of speculation
4.4 Risks for the banking sector
5. General risks
5.1 Risk
5.2 Risk of prohibition
5.3 Control risk
5.4 Risk of deflation
6. Opportunities
6.1 Opportunity for value enhancement
6.2 Market opportunity
6.3 Cost opportunity
7. Alternative digital currencies
7.1 Cryptic currencies
7.2 Other digital currencies
8. Conclusion
Research Objective and Topics
The objective of this work is to evaluate the future viability of the Bitcoin system by conducting a comprehensive comparison of its opportunities and risks, particularly focusing on the implications and existing threats for the conventional banking sector.
- Fundamentals of monetary theory and the classification of money
- Technical architecture of Bitcoin, including cryptography, blockchain, and mining
- Legal and regulatory framework surrounding virtual currencies
- Critical analysis of risks, including volatility, security, and potential for deflation
- Assessment of Bitcoin's potential as a payment and investment alternative
Excerpt from the Book
3.2.1 Basis cryptography
The basis for the security of the Bitcoin system is the transmission with encrypted information. The origins of cryptography lie in ancient Egypt, where it was used for secret writings. The concept of the well-known encryption machine "Enigma", which was used by Germany during the Second World War, was also based on a cryptographic technique.
Modern cryptography works asymmetrically. This means that a digital key pair is used. The public key encodes the message and the user-held private key is used to decrypt the message.33
Bitcoin are also based on this asymmetrical method. The private key allows the holder to decrypt data encoded with the public key. In addition, the private key can create digital signatures and authenticate transfers. Therefore, this is comparable to a personal signature. The digital signature is calculated from the private key and the data or hash values to be signed.34
A hash value or hash algorithm is a data set with a predetermined length, which is encoded as a hexadecimal string and can be obtained from any input data. It is calculated using an algorithm that maps a large amount of input to a smaller target set. The name comes from the English "to hash", in the German translation "Zerhacken", which applies to the input data. It is theoretically not possible to infer the underlying amount of data from a hash value. In addition, a hash value is always unique, which is why computer scientists speak of the finality of a hash value in the context.35 This feature makes the system very interesting for the treatment of sensitive data, such as passwords.
Summary of Chapters
1. Introduction: Outlines the origins of Bitcoin and establishes the research goal of comparing the opportunities and risks of this virtual currency for the banking sector.
2. Fundamentals of monetary theory: Defines the core concepts of money, its functions, the theory of money demand, and the process of scriptural money creation by banks.
3. Bitcoin: Details the historical background of Bitcoin and provides a thorough technical explanation of its infrastructure, including peer-to-peer networks, wallet management, transaction processing, and the mining process.
4. Bitcoin and the conventional banking system: Examines Bitcoin from the perspective of the banking industry, analyzing whether it classifies as money, the legal environment, and specific risks for financial institutions.
5. General risks: Discusses risks affecting all users, such as loss of assets, potential regulatory prohibition, operational control risks, and the impacts of a deflationary currency model.
6. Opportunities: Analyzes the positive potential of Bitcoin, focusing on its use for value enhancement, market expansion, and the cost advantages it offers in payment transactions.
7. Alternative digital currencies: Explores the broader landscape of cryptocurrencies, discussing technical alternatives to Bitcoin and the impact of other large-scale digital currency projects.
8. Conclusion: Summarizes the findings, noting that while Bitcoin offers innovation, it faces significant hurdles and currently poses little competitive threat to the traditional banking system.
Keywords
Bitcoin, Monetary Theory, Blockchain, Mining, Cryptography, Digital Currency, Banking Sector, Financial Regulation, Volatility, Peer-to-Peer, Value Retention, Electronic Payment, Speculation, Deflation, Financial Innovation
Frequently Asked Questions
What is the core focus of this publication?
The work provides a scientific assessment of Bitcoin by analyzing its technical foundations, its legal classification, and its impact on the conventional banking system.
What are the primary themes discussed?
The central themes include monetary theory, the technical design of Bitcoin (blockchain and mining), risks associated with virtual currencies, and the future potential for both Bitcoin and other digital alternatives.
What is the main research objective?
The goal is to determine the future viability of the Bitcoin system by comparing its identified opportunities against its inherent risks, specifically for the banking sector.
Which scientific methods are applied?
The author uses a literature-based analysis of monetary theory, a review of technical white papers, and an assessment of current legal and regulatory interpretations regarding digital currencies.
What topics are covered in the main section of the book?
The main part covers the historical story behind Bitcoin, its functionality (cryptography, P2P network, mining), the practical application of Bitcoin for payments, and an analysis of specific bank-related risks.
Which keywords define this work?
Essential keywords include Bitcoin, Blockchain, Mining, Monetary Theory, Financial Regulation, Volatility, and Digital Currency.
How does the author evaluate the threat to banks?
The author concludes that Bitcoin currently poses little threat to conventional banking because its transaction volume is too low and it is technically limited in supply.
What role does the 'Genesis block' play?
It is cited as the starting point of the blockchain, generated on 03.01.2009, which serves as the foundation for the entire Bitcoin transaction chain.
Is Bitcoin considered 'money' by the author?
No, the author concludes that Bitcoin does not fully fulfill the three classic functions of money (payment, value retention, and unit of account), particularly due to extreme price volatility and a lack of general acceptance.
- Citar trabajo
- Oliver Cherek (Autor), 2014, Bitcoin. Opportunities and Risks of a Digital Currency, Múnich, GRIN Verlag, https://www.grin.com/document/1151960
