On Sept. 7, 2017, the president of the European Central Bank, Mario Draghi, rejected a proposal by Estonia for a state-issued cryptocurrency. At the same time, according to the BBC, China is ordering the shutdown of Bitcoin exchanges in the country. At Texas A&M, researchers are producing cryptocurrency research that will guide the future responses from national governments.
Various Texas A&M research teams are exploring different aspects of Bitcoin from the possibility of a “bubble,” to the price fluctuations and technical issues created by the increased number of transactions.
Bitcoin is an open-source, peer-to-peer digital currency and the world’s first completely decentralized digital-payments system, as explained in the report “Bitcoin: A Primer for Policymakers” by the Mercatus Center of George Mason University.
Cryptocurrencies — Bitcoin being the most common — borrow part of their name from cryptography, the technology, analogous to cash watermarks, that allows for secure encrypted digital transactions. This is accomplished by use of the blockchain, which, according to the book “Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction,” is a continuously growing list of records, called blocks, that are linked and secured using cryptography. Each block typically contains a hash pointer as a link to the previous block, a timestamp and transaction data.
“You can split Bitcoin into two separate areas,” Joshua Lutkemuller, financial econometrics graduate student said. “You have the pure speculative investors, normal people who just buy Bitcoin and then the people behind the scenes who actually produce it, i.e., the miners.”
New coins are “created” via a process called mining. The investment website Investopedia defines bitcoin mining as “the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new bitcoin are released.”
“Computers on the network work to verify transactions, encrypt them and add them to the blockchain,” said A&M economics professor Dennis Jansen, who has supervised research on cryptocurrency.
Economic theory suggests rapid increases in the amount of money created by governments erodes the value of currency. Consequently, hyperinflation in Venezuela has driven thousands to seek out Bitcoin.
“The price fluctuation people often see in Bitcoin is part of the instability we look at when we are trying to assess bubbles,” said Lutkemuller, whose research focuses on cryptocurrency bubble forecasting. “The volatility also scares people away from using it as a legitimate currency. But it is decentralized which in a place like Venezuela may be attractive.”
However, the non-governmental and decentralized nature of this currency has not eliminated the possibility of problems. There are several new types of Bitcoin, such as Bitcoin Classic and Bitcoin Gold, according to Coindesk, the cryptocurrency trading platform. Each type offers a solution to a technical issue, such as Bitcoin having a scaling problem, as explained by the website Cointelegraph.
“Without fixing these issues, I don’t see how reasonably you can expect Bitcoin to replace a fiat currency like the U.S. Dollar,” Jansen said. “One thing about currency is that it works on trust. Trust in governments. Trust in the banks. In Bitcoin, you are trusting the technology of the blockchain.”
Cryptocurrencies have frantically fluctuating values. For example, Bitcoin had a peak value of $7,380.63 on November 5, 2017.
“The erratic changes in the price of Bitcoin prevents it from functioning as a national currency,” Jansen said. “In a hypothetical world, if the government decided that everyone used Bitcoins, what would happen? You would have to pay your taxes in Bitcoin. And if you are using Bitcoin for some things, you might as well do it for other things. I suspect that once Bitcoin is held pretty widely, some of these price swings may be moderated.”
Lutkemuller said Bitcoin is in the early stages and he thinks the future of the currency is going to be very different from where the currency stands today.
“I think it is going to evolve into something completely different,” Lutkemuller said. “It is going to reach a broader market. Blockchain is the future of Bitcoin, not the currency itself.”