Analyzing the Bitcoin Phenomenon

Bitcoin

Explain the Functions of Money

Money as a Means of Exchange

This is a vital function of money in an economy because without money, the only way of exchanging goods and services would be by means of barter, which implies a direct exchange of one commodity for another. The economies we line in are monetary economies in which most of the goods and services produced are exchanged via the intermediary of money, rather than through barter. Whenever money is used to pay for goods and services or for the purpose of settling transactions, it is functioning as a medium of exchange (Jain et al., 2011).

Money as a Unit of Account

Money ought to be able to measure exactly what something is worth. Money should provide an agreed standard measure by which the value of different goods and services can be compared. This implies that the function of money in the economy would be to establish a common unit of measurement by which the relative exchange values or prices of goods and services can be established. Money provides a convenient means of measuring economic phenomena (Jain et al., 2011).

3. Money as a Standard of Deferred Payment

The function of money in this respect allows people to delay paying for goods and services or settling a debt, even though goods and services are being provided immediately. Money acts as a standard of deferred payment whenever firms sell goods "on credit." Money facilitates the extension of credit by specifying the unit of future payment (Jain et al., 2011).

4. Money as a Store of Value

This function of money arises when, instead of spending money, a person decides to store his or her wealth in the form of money rather than other forms of wealth such as property or financial assets, like shares. This implies that the purchasing power of money is transferred into the future, although this may be eroded by inflation. Money, therefore, permits income recipients to postpone consumption or save on the basis that the money can be used for future consumption (Jain et al., 2011).

Explain the two objectives of the Federal Reserve in managing the U.S. money supply, and how it adjusts the money supply to meet them

The supply of money can be delineated to develop into a number of secure assets that family units as well as firms can utilize for payments purposes or to influence as investments of short-term. For instance, U.S. balances and currency held in checking accounts as well as savings accounts have been encompassed in several measures of the money supply. Federal Reserve policy is the most significant determining factor of the money supply. The Federal Reserve influences the money supply by influencing its most imperative element, bank deposits. The function of the Federal Reserve has grown and in the present day, the Fed first and foremost manages the growth of bank reserves and money supply with the main objective of making sure that there is a stable expansion of the economy. The other second objective of the Federal Reserve in managing the U.S. money supply is to influence and determine the amount of money as well as credit that is there in the United States economy. Therefore, through these aspects, the Fed is able to maintain prices that are stable and as a result, supporting conditions and circumstances for economic growth in the long run and also maximum employment (Schwartz, 2008).

What functions of money are served by bitcoins?

One of the main functions of money served by Bitcoins is as a measure of value. It is very much possible to measure the value of goods and commodities in Bitcoins. To begin with, Bitcoin is not a fully reliable medium of exchange. Taking into consideration that it is less reliable in terms of being a medium of exchange, it implies that Bitcoin cannot be considered to be effective and reliable with respect to other primary, secondary and contingent functions of money. Some of these functions include the distribution of income, as a deferred form of payment and also for storing wealth.

For you as an individual, what are the drawbacks or risks of bitcoins, as compared to using the U.S. dollar?

As an individual, there are numerous drawbacks or risks of bitcoins, as compared to using the U.S. dollar. To start with, Bitcoins cannot be considered as a reliable form of storing value. To begin with, Bitcoin is in actual fact not existent in the physical world. One can only gain access to Bitcoins in computers. Therefore, this implies that devoid of power or internet to access the phone in order to pay or transact, one is not able to undertake financial transactions. For this reason, it becomes much less efficient to use Bitcoins rather than the U.S. dollar. A second aspect is with respect to safety. It is very simple for someone to hack into the online system and steal the amount of Bitcoins that another individual has. As pointed out by Goldstein and Kestenbaum (2011), an individual went online and posted that they had almost $500,000 dollars' worth of bitcoins stolen from them online. This is an aspect that is difficult to take place when using actual U.S. dollars with the money saved up in the bank or financial institution. This, points out another major drawback of Bitcoins.

In addition, Goldstein and Kestenbaum (2011) indicate that the central bitcoin exchange website got hacked, and as a result, had to be shut down for a period of time. This implies that no individuals were able to purchase the bitcoins. This also implies that consumers in general would be stranded without money, if bitcoins were used instead of U.S. dollars. This would without doubt instigate a lot of chaos in the streets and might result in violence or theft all over. Taking this aspect into consideration, individuals might use such opportunities to set high and irrational exchange rates. For instance, when starting, the bitcoin value was worth $7. However, in a few weeks this skyrocketed into $17 dollars. This indicates the unreliability of bitcoin as a currency. Lastly, bitcoins are largely used for illegal transactions and activities such as purchasing heroin, LSD as well as other illegal drugs (Goldstein and Kestenbaum, 2011).