Logan Winston, Langone MBA Class of 2016

On March 25 over 110 students packed into KMC 2-60 to hear NYU’s resident BitCoin expert speak about the storied digital currency. The talk reviewed some of the five and half-year history and recent controversy surrounding BitCoin before exploring whether or not BitCoin and other digital currencies actually behave like currencies. Yermack’s answer: a resounding kind-of.

In terms of history, BitCoin was started by Satoshi Nakamoto, a mysterious unnamed individual or group responsible for writing the initial code for the first BitCoin. The currency is created by a distributed network of miners – like server farms – that are solving “hard math problems” and which in turn release new BitCoins into the world. There is no central computer or authority that runs the network, as it is basically an autonomous self-regulating system.   The currency doesn’t physically exist, is unconnected to governments, and has no specific authority other than code. The first ever BitCoin trade was for $0.05. It peaked at approximately $1,200 and is now trading around $577. There are roughly 12 million BitCoins in circulation, and the production of new BitCoins will cease in 2140. Its world-wide transaction volume is at 70,000 transactions per day, 80% of which, according to Yermack, are speculation.

“The liquidity is really very thin,” says Yermack. “This is a little like internet stocks from the late 90’s. 15 years ago we had a community of people we called day traders who were evangelical about dot-com stocks the way people act about BitCoin. And as long as there weren’t more shares of stocks than there were day traders, these things appeared to be very valuable. But once you started to issue more and you had liquidity of any reasonable size in the market, the whole thing collapsed and ended very badly. I would expect that to happen here.”

Yermack cited the “spectacular” Mt. Gox bankruptcy, in which a former online fantasy card game exchange (“Magic the Gathering Online Exchange”)-turned virtual currency trading shop lost to hackers 750,000 of its customers’ BitCoins, along with 100,000 of its own. Mt. Gox later found 200,000 missing BitCoins – worth $116 million – in an online “wallet” previously thought empty.

BitCoin and other digital currencies come with their own set of challenges in terms of taxation, legality, and their absence of property rights and commercial law protection. Yermack noted that if a party in a BitCoin transaction doesn’t perform, there are no means to seize assets, a fundamental piece of what he called the “infrastructure of daily commerce.” He pointed out that BitCoins can’t be stored in a real bank with deposit insurance, spent anonymously, used to procure a credit card or mortgage, or be sold short, making them sound less and less like a currency.

Yermack concluded in noting that BitCoin has the “potential to undermine public finances worldwide,” but conceded that it might encourage reforms in some of the world’s worst banking systems (read: China).

 

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