This paper examines Bitcoin as a modern development in the long history of monetary systems, tracing money's evolution from barter and precious metals to fiat currency and digital cryptocurrency. It discusses how Bitcoin operates outside national regulatory frameworks, enabling anonymous, bank-free transactions increasingly accepted in mainstream commerce. The paper also critically evaluates Bitcoin's vulnerabilities, including susceptibility to price manipulation by individual traders and the broader instability that results from operating beyond government oversight. Drawing on sources from the IMF, Wharton School, and academic research on Bitcoin trading, the paper concludes that Bitcoin's greatest proclaimed strength — its independence from regulation — may simultaneously be its most significant weakness.
Money functions as a placeholder in any economic system; it does not have value outside of what its users place in it as a system of exchange. As noted by Asmundson and Oner (2012), the creation of money is one of the most significant developments in human civilization. Without money, human beings would be reduced to bartering for goods and services. While this may be feasible on a small-scale, community basis, it is not true for a national economy. For many centuries, gold and silver were the primary means of universal exchange, and all national currencies were linked to the possession of precious metals. Eventually, however, "the paper claim on the precious metal was delinked from the metal," and paper money became common. Although "fiat money is materially worthless, it has value simply because a nation collectively agrees to ascribe a value to it" (Asmundson & Oner, 2012, par. 10). Advocates of Bitcoin, a cryptocurrency not linked to any specific nation, argue that it is the next natural step in the development of monetary systems in the global Internet age.
On a very basic level, anything can function as money, provided the two parties involved in an exchange agree to the transaction. This is as true of shells and beads as it is of Bitcoin. What is unique and new about Bitcoin is that it is a product of the Internet age, designed specifically for online transactions in a global commerce environment. It dates back to 2009, and "transactions are made with no middle men — meaning, no banks," which is its greatest advantage according to its supporters (Yellin, Aratari, & Pagliery, 2016, par. 1). Since its creation, Bitcoin has become increasingly accepted in everyday transactions on popular sites such as Expedia and Overstock. It advertises itself as an anonymous currency, which is of interest in an era of widespread anxiety about revealing personal information online. However, it has been used primarily as a vehicle for speculation and investment rather than as an actual transactional currency — at least until recently (Yellin, Aratari, & Pagliery, 2016). The concern, of course, is that a currency not linked to a particular nation may lack stability or real functionality if individuals cease to show interest in it.
According to the Wharton School (2017), Bitcoin gives individuals the ability to create separate economic entities entirely apart from their national identity, and thus threatens both nations' ability to profit from transactions and their capacity to regulate them. The Wharton School (2017) argues that this is particularly valuable in the real estate market, where significant sums are lost to bureaucratic red tape. But like any unstable or fragile currency, Bitcoin is not immune to external disruptions, even if it cannot be affected by political wrangling in the way that conventional currencies can. According to Gandal et al. (2018), the rise in Bitcoin's exchange rate has been linked to suspicious trading activity, including a single individual whose trades drove the exchange rate from $150 to $1,000 in just two months. Much of the highest trading volume occurred on days featuring the most easily manipulated types of transactions.
"Price manipulation and lack of oversight risks"
Bitcoin represents a genuinely novel development in the long history of monetary systems, offering real advantages in terms of anonymity, decentralization, and freedom from bureaucratic friction. Yet the same features that make it appealing to its advocates — particularly its independence from national regulation — create structural vulnerabilities that conventional currencies do not share. Without external oversight, Bitcoin remains susceptible to manipulation by bad actors, and its long-term stability as a functioning currency depends entirely on the sustained collective confidence of its users.
Asmundson, I., & Oner, C. (2012). What is money? IMF Journal, 49(3). Retrieved from http://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm
Gandal, N., Hamrick, J., Moore, T., & Oberman, T. (2018). Price manipulation in the Bitcoin ecosystem. Journal of Monetary Economics.
Is blockchain the next great hope or hype? (2017). Wharton School. Retrieved from http://knowledge.wharton.upenn.edu/article/blockchain-next-great-hope-hype/
Yellin, T., Aratari, D., & Pagliery, J. (2016). What is Bitcoin? CNN. Retrieved from http://money.cnn.com/infographic/technology/what-is-bitcoin/
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