Cyber Change

Four years ago bitcoins were created. It promised to be a new type of currency which avoided the banks. The idea was they should put money in the hands of the people. Banks aren’t popular now because of the financial crisis, EU sovereign debt and the Cypriot banking crisis. People want another way to be able to pay for things without a bank losing all their money. Because of this many people have invested in bitcoins and some shops accept them. But if we look closely, bitcoins are probably not going to solve the world’s financial problems.

Raise doubts: If you raise doubts, you say that you are worried about something. ‘My husband raised his doubts when I told him I wanted to quit my job. He thought I should find a new job first.’

What is bitcoin? Bitcoin exists in cyberspace. It is a digital currency. This isn’t credit. Credit gets its value from an existing or potential monetary value given in a minted currency which a person should be able to turn into cash. Digital currencies are recognized as another currency just like the Euro, US dollar or Czech Crown. There are some differences in their production which raises doubts about their use and if the system will work.

Bitcoins are generated through the solving of difficult mathematical problems, the answer to which is solved in a block. A block is a record of transactions which have not been recorded before, a reference to the most recent block and the answer to the puzzle. Trying to find the answer is called ‘solving the block’. The bitcoins are rewards for solving the problem which is really just luck. At the moment the reward for solving a block is 25 bitcoins. This will be halved every four years so that in 2017 the reward will only be 12.5 coins. This division will continue until 2140 when a maximum of 21 million bitcoins will have been produced. The final reward will be 0.00000001 of a bitcoin, the smallest division of bitcoins – then no more will be produced.

At the moment, most money exists in abstract form. It’s more convenient, especially in large transactions, to move numbers than actual money. Imagine if large businesses had to produce the millions or billions of dollar bills every time they did business. A money transfer supported by documents is much easier. But, people believe that one day the money in the bank accounts can be changed into real money. If existing currencies can become more abstract, people should move to an abstract currency like bitcoins quite easily. Right?

More than trust it comes down to belief. Even if most people know money is abstract they act and believe differently. Changing to another system of currency production means more than monetary conversion. It would be a substitution of faith.

I doubt bitcoins will become very popular. People already know and believe in the current money system. The occasional crisis or banking failure will be explained as part of the system.

Original article by Ryan Scott – Sydney, Australia. Text edited by The Word’s methodology team

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Four years ago bitcoins were created. It should be a new type of currency without banks. Banks aren’t popular now because of the financial crisis, EU sovereign debt and the Cypriot banking crisis. People want another way to be able to pay for things without a bank losing all their money. Many people have invested in bitcoins and some shops accept them. But if we look closely, bitcoins are probably not going to solve the world’s financial problems.

Raise doubts: If you raise doubts, you say that you are worried about something. ‘My husband raised his doubts when I told him I wanted to quit my job. He thought I should find a new job first.’

What is bitcoin? Bitcoin exists in cyberspace. It is a digital currency. This isn’t credit. Credit gets its value from an existing or possible monetary source. People can change credit into cash.  Digital currencies are another currency like the Euro, US dollar or Czech Crown. There are some differences in their production which raises doubts about their use and if the system will work.

Bitcoins are generated through the solving of difficult mathematical problems. The answer to the problem is solved in a block. A block is a record of transactions which have not been recorded before, a reference to the most recent block and the answer to the puzzle. The bitcoins are rewards for solving the problem but it is just luck.

Most money is in abstract form. It’s easier to move numbers than actual money. Imagine if large businesses had to produce the millions or billions of dollar bills every time they did business. A money transfer supported by documentation is much easier. But, people believe that one day the money in the bank accounts can be changed into real money. If our money now is abstract, people should move to an abstract currency like bitcoins easily. Right?

Even if most people know money is abstract they act differently. Changing to another system of currency production means more than monetary conversion. It would be a substitution of faith. I doubt bitcoins will become very popular. People already know and believe in the current money system. A crisis or banking failure will be explained as part of the system.

Original article by Ryan Scott – Sydney, Australia. Text edited by The Word’s methodology team

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Cyber Change Quiz: Mild

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Four years ago bitcoins came into existence. It promised to be a new type of currency which circumvented the banks and thus – at least in theory – should put money in the hands of the people. This intention sounds noble – at least in theory. Banks, which are rarely popular, are enjoying even lower standing in public opinion since the financial crisis, EU sovereign debt and now the Cypriot banking crisis. People want another way to engage in trade without the risk of losing life savings. Consequently, bitcoins have surged in popularity with many people investing in them. Some retailers are increasingly accepting the currency. On closer inspection bitcoins are probably not the cure for our financial ills.

So what is bitcoin? For a start it isn’t a currency you can normally hold in your hand. Bitcoin exists in cyberspace. It is a digital currency. This isn’t credit. Credit derives its value from an existing or potential monetary value given in a minted currency which a person should be able to turn into cash. Digital currencies, of which bitcoin is the most famous and most valuable, is recognized as another currency just like the Euro, US dollar or Czech Crown – but with some differences in their production which raises doubts about their use and viability.

Bitcoins are generated through the solving of difficult mathematical problems, the answer to which is solved in a block. What is a block you may ask? A block is a record of transactions which have not been recorded, a reference to the most recent block and the answer to the puzzle. Trying to find the answer is called ‘solving the block’ or ‘mining’. However, the analogy of mining is misleading. The bitcoins are not embedded somewhere in code to be extracted. The bitcoins are rewards for solving the problem which is really a matter of luck. At the moment the reward for solving a block is 25 bitcoins. This will be halved every four years so that in 2017 the reward will only be 12.5 coins. This division will continue until 2140 when a maximum of 21 million bitcoins will have been produced. The final reward will be 0.00000001 of a bitcoin, the smallest division of bitcoins – then no more will be produced.

The idiom ‘out of (or from) thin air’ means out of nowhere or nothing. ‘Out of thin air he got the idea to swim the Amazon River.’

This sounds like a strange way to base a financial system – producing money by chance and thin air. However, both critics of today’s financial system and its champions have pointed out that today’s money stands on equally insubstantial legs – namely debt. The difference is that Paul Grignon, the director of the film in the first link, sees the system as unsustainable. Niall Ferguson, the financial historian in the second link, argues that credit and debt financed social and technological development. So what does this have to do with bitcoins?

At the moment, most money exists in abstract form. For example, 90% of the US money supply isn’t in banknotes and coins. It is in credit, bonds or on accounts. It’s much more convenient, especially in large transactions, to shift numbers than bills. Imagine if large businesses had to produce the millions or billions of dollar bills every time they did business. It would require security, someone to count the money and someone to carry it. A transfer backed up by paper is much easier. But, people believe that one day those values in accounts and bonds can be converted into real money. Paradoxically, it is this very trust which keeps the money in abstract form. So if existing currencies can become more abstract, people should move to an abstract currency like bitcoins quite easily. Right?

More than trust it comes down to belief. Even if the vast majority of people know money is abstract they act and believe differently – as Mr Grignon points out. Bitcoins – a currency based on a computer lottery – seems absurd. Even if our current one is too, people are used to it. Switching to another system of currency production means more than monetary conversion. It would be a substitution of faith.

Another barrier, which is compounded by bitcoins lack of popularity, is that the currency is mainly seen as an investment – much like gold. And just as gold keeps its value because we’re not walking around with gold purses, exchanging gold coins for goods, bitcoins become more attractive as a reserve when they have limited purchasing use. As they become more attractive as an investment they are less useful as a currency.

An even bigger potential problem is the cap of 21 million bitcoins. A limited amount of money with a larger supply of goods pushes prices down – or to put it more accurately the value of money goes up relative to the goods and services. As a result people earn less for their activities. They have less money to spend, so less money is in circulation. This fact hasn’t deterred some businesses in Berlin from embracing the currency but with limited use these people will be forced to convert some into another more reliable currency, so it doesn’t really avoid the existing monetary system.

Vested interest means someone has a personal or biased interest in something, often financial. ‘Bob has a vested interest in stopping the new road through the village. He has a summer cottage there.’

I doubt this situation will change. A mixture of popular acceptance and vested interest will keep the currencies floating. The occasional crisis or banking failure will be explained as part of the system.

Ryan Scott – Sydney, Australia

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Cyber Change Quiz: Spicy

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