The Death of the Dollar Bill: The Rise of Bitcoin and Other Online Currencies
With the digitization of entertainment, information, and even relationships, cyberspace is a developing network that’s changing how we live. In 2009, the first digital currency, or cryptocurrency as they are sometimes called, was invented by the anonymous entity Satoshi Nakamoto. This currency, Bitcoin, has been called a “decentralized virtual currency” by some economists, due to the fact that it is transferred from one user to another, called peer-to-peer or P2P, without the use of any central bank.
This summer, Sitong Chen ’16, a mathematics and economics double major, is working under the supervision of Professor of Economics Christophre Georges, on an Emerson project, “Analysis of the Internet-born Currency: The Birth of Bitcoin.”
Generally interested in financial markets, Chen wanted to “understand a form of currency with no central authority.” He explained that Bitcoins are “mined” through a “distributed application architecture that partitions tasks or workloads between peers, [a method] often used in torrenting illegal music and movie downloads.”
Chen described how these miners “use their computers to solve complex math puzzles and get rewarded with Bitcoins after their calculations have been verified by the entire Bitcoin community.” He went on to say that “they have monetary worth because mining cost electricity and computing power,” forming the backbone of the Bitcoin economy.
Bitcoin’s official site refers to the cryptocurrency as “an innovative payment network and a new kind of money,” a claim which seems to be accurate given that today, bitcoins are worth about $600 each and can be used to purchase real life items or pay others for a service. For example, booking trips with Expedia, or buying a computer from Dell can be facilitated with bitcoins. Perhaps the most futuristic of these purchases, however, would be a ticket on a suborbital spaceflight with the British space tourism company, Virgin Galactic.
Chen himself does not use Bitcoin, but said that “the convenience of internet-based transactions seems to be a promising future of currency,” especially given the lack of a prying and regulating authority.
Due to the anonymity afforded by virtual currencies, requiring no name, credit card or contact information, Chen noted that, “it has been reported that bitcoins are often used in drug trade, money laundering and human trafficking.” He explained that thanks to a recent rise in Bitcoin usage, “their monetary worth increases as more people accept them, an idea called network effect.”
“Since Bitcoin relies heavily on network affect,” Chen explained, “any news that affect users' expectation of the currency heavily influence Bitcoin price.” Regardless of their purported illegal usages, Chen claims that “now people purchase them more as an investment option,” seeing their value exponentially increase from $10 to $1,000 before shifting to their current worth.
For his project, Chen is “exploring Bitcoin’s credibility, its short history, its potential as a new form of currency and the use of computer program modeling to understand its rapid price changes.” Overall, he is “hoping to understand how news events and trading affect [Bitcoin’s] price and its potential to stabilize that price.”
Chen is reading papers and books about various forms of currency and the network effect, as well as documenting the price index of Bitcoins in relation to current events. He is also investigating social psychology in the stock market, and is developing a computer program to model the Bitcoin market.
Chen will synthesize the information he has gathered during the course of his project to present in the fall. Referring to his research, Chen said he was surprised “that government and financial institutions still have a relatively huge impact on this non-government currency,” and noted that cyber security constantly threatens the safety of digital currency.
Sitong Chen is from Chengdu, China and is a graduate of Cascadilla School, Ithaca NY.