Running head: THE CASE FOR BITCOIN 1

The Case For Bitcoin

Keaton P. Inglis

Shelby Public Schools

THE CASE FOR BITCOIN 2

Abstract

The following paper analyzes and defends multiple topics of using Bitcoin as the main

currency in the United States. The online and decentralized peer to peer (P2P) network known

as Bitcoin (BTC) was released to the public January of 2009. This paper will identify and prove

the positive impacts of Bitcoin on the United States government, influences on the economic

system, and peer to peer transactions. The United States dollar will be challenged and compared

to Bitcoin from a governmental and individual standpoint.

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The Case For Bitcoin

Since its inception in late 2008, Bitcoin has shocked the financial industry with

unprecedented investment returns and opportunity. The never before seen idea of a decentralized

online currency turned heads as Bitcoin was first released to the public by Satoshi Nakamoto, an

unknown individual developer or group of developers on January 9, 2009 (Brown, 2011). With

the new idea of cryptocurrency development, the knowledge and notoriety of Bitcoin was

minimal. On January 12, 2009 the first Bitcoin transaction took place between Satoshi

Nakamoto and Hal Finney, a developer and cryptographic activist (Brown, 2011). Quickly after

the first transaction took place, New Liberty Standard published an exchange rate that establishes

the first monetary value of a Bitcoin at one U.S. dollar equalling 1,309.03 Bitcoins. This

exchange rate was established using an equation that includes the cost of electricity to run a

computer that generated Bitcoins (Brown, 2011). The set value of Bitcoin is simply the rate of

which an individual will pay for one Bitcoin or partial Bitcoin. The actual Bitcoin value is solely

dependent on the price at which another person will pay for it. For a transaction to take place, a

buyer and seller must agree on a price for the Bitcoin. The price for the Bitcoin over a long time

period then becomes the Bitcoins market price. With the event of the first Bitcoin transaction

and the newly implemented exchange rate, users from around the globe began to take notice of

the new online currency idea. Due to this, the Bitcoin transaction volume began to take off by

2010, with Bitcoin hitting the achievement of one million transactions (Fung, 2017). Since its

establishment, Bitcoin has been on a constant increase in volume, price, and notoriety around the

globe. The main purpose of this paper is to influence and change your traditional ways of
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thinking towards everyday use of currency with primary focus on reasons why individuals

should switch from using the U.S. dollar to Bitcoin as their daily currency because of the

overwhelming benefits Bitcoin brings.

How to Obtain Bitcoin

Bitcoin Mining

The process of obtaining Bitcoin during the early stages of development was gruesomely

difficult. To acquire Bitcoin, users had to go through a process of solving mathematical

equations and problems using specialized computer software. While the software solves the

mathematical problems, the user is issued a certain number of Bitcoins in exchange for the

completion of the problems, this process is called mining. To put this thinking into everyday

terms, Bitcoin mining can be directly related to a squirrel harvesting fallen acorns (Bitcoins).

Like Bitcoin, there is a limited number of available acorns to be harvested by the squirrel

(miner). The squirrels hard work of carrying the acorns back and forth (mining Bitcoins) from

the wilderness (public ledger) to their home (Bitcoin wallet) is finally rewarded when the job is

complete. This reward for the squirrel (miner) is the acorns (Bitcoins) at the end of the day.

Mining in the world of Bitcoin is transaction processing, in which transactions are recorded in

part of the current Bitcoin public ledger, known as blocks, while the blocks are added to the

record of past transactions, known as the blockchain (Nakamoto, 2009). Bitcoin provides a

reward in exchange for the mining services provided by several miners throughout the world.

This is a necessary incentive, as without the miners, the Bitcoin technology would not be able to

operate. If Bitcoin miners were not rewarded partial Bitcoins for their work of confirming

transactions, nobody would be at Bitcoin miner. The reasoning for this is because of the cost to
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operate a successful Bitcoin mining operation, both in startup equipment and electricity needed

to run the specialized computers. Therefore, a Bitcoin miner is credited a small amount of

Bitcoins per transaction that they confirm, this allows for miners to cover the cost of operation

and receive a profit for the work. For being an effective miner, specialized and

high-performance equipment is used. For even more efficient use of resources, mining pools

are created. A mining pool is a large number of miners mining on selective blocks as a group.

To put Bitcoin mining pools into everyday terms, we can use the squirrel example once again.

The squirrel in the previous example could only acquire as many acorns (Bitcoins) as it could

handle at one time. With the idea of Bitcoin mining pools, the squirrel invites his other squirrel

friends (Bitcoin miners) to come help collect acorns (mine Bitcoins). At the end of the collecting

time period (mining) the squirrels collect far more acorns (Bitcoins) than the first squirrel could

have collected on his own. The squirrels (miners) divide their acorn collection (Bitcoin mining

profits) evenly throughout the squirrels (miners) that helped collect acorns (mine Bitcoins).

Even though the blocks are mined faster, the Bitcoin rewards are divided in proportion to the

efforts put in by individual miners as compared to the entire group. The procedure of Bitcoin

mining provides a smart, easy, and decentralized way to issue the cryptocurrency and while

creating an incentive for more people to mine Bitcoins.

Bitcoin Exchanges

As Bitcoin grew in popularity, potential users had the ability to purchase Bitcoin through

online exchanges. These exchanges act as either brokers or dealers in allowing users to convert a

major currency such as the Euro or U.S. dollar into Bitcoins. The first of these exchanges,

Bitcoin Market, was released to the public in February, 2010 (McCallum, 2015). Soon after the
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release of Bitcoin Market, another exchange MtGox founded by Jed McCaleb was launched in

July of the same year (McCallum, 2015). Based on the dollar values at these exchanges, the

market capitalization of Bitcoin (the number of Bitcoins in circulation multiplied by the market

price in dollars) exceeded $1 million by October 2010 (Wu, 2014). By March 2013, the market

cap surpassed $1 billion (Wu, 2014). At the time of this rapid growth of Bitcoin, it has had

people question the future of what Bitcoin can bring and the potential of how much further it can

grow.

Macroeconomic Benefits of Bitcoin

Investment Returns

Bitcoin simply outperforms the U.S. dollar when it comes to macroeconomic benefits to

ones country. There has been a dispute about the reliability and stableness of Bitcoin

throughout the years. However this claim is absolutely incorrect as Bitcoin, since its creation,

has outperformed the U.S. dollar every year. There are multiple reasons why one should choose

Bitcoin as their daily currency but none greater than the reasoning that Bitcoin is a continuous

compounding investment. While holding Bitcoin in your Bitcoin wallet, you are constantly

investing your Bitcoin holdings as the price of Bitcoin is steadily fluctuating. While holding

U.S. dollars, you are not obtaining interest or earning profit from the changes in price. To earn

an investment return with the U.S. dollar, you have to place your money in a mutual fund

portfolio. This requires you to place aside a set amount of capital that is unable to use for daily

purchases or emergencies. As the U.S. dollars price is held at a continuous price of one dollar,

Bitcoins markets are forever changing and never close. While holding Bitcoin, your funds

would work for you even while you are asleep, every single day.
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A mathematical approach of this concept can be shown using the growth of Bitcoin since

its creation in 2009 versus the U.S. dollars growth in the same time period. Placing an initial

investment of $10,000 at a basic savings account interest rate (.03%) for the growing period of

six years would give you a final balance of $10,018. This six year growth period while holding

$10,000 in your basic bank savings account gives you a measly return of $18. However, if you

take this same six year time period and take the same initial value and buy $10,000 worth of

Bitcoin, your final balance after six years is $38,225,172. This astonishing difference may be

difficult to visualize and put into perspective, to help understand Bitcoins dominance over this

six year time period (refer to Appendix A) (Bilello, 2017).

Additionally, Bitcoins performance compared to the financial stock markets are

astonishing, with the levels of investment return are simply unprecedented. The average mutual

fund return for a stock market portfolio look to return between ten and twelve percent a year.

With Bitcoin, an investment from January 2016 to December 2016 would have returned one

hundred and ten percent. Using this same time period, the DJIA (Dow Jones Industrial Average)

returned a five year high of seventeen percent. While the Nasdaq Composite returned a seven

year high of eighteen percent. Rounding out the top three market indexes the S&P (Standard and

Poors) also returned a seven year high of fifteen percent. Even with the financial markets at an

all time high, Bitcoin outperforms all of them by nearly ninety percent. For more clarification on

this idea, the comparison between Bitcoin and the top three market indexes can be shown in the

chart below (refer to Appendix B).

The impact of unprecedented investment returns that Bitcoin brings can help an

individual obtain wealth throughout the years much easier than holding or investing the U.S.
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dollar can. With the benefits of using Bitcoin instead of the U.S. dollar as your daily currency,

you will automatically be investing your Bitcoin holdings each second of the day.

Another benefit to Bitcoin investing is the avoidance of taxes. Since Bitcoin is

decentralized, meaning no central government or ruling, there is no third party to collect taxes

from your investing income. Unlike using the U.S. dollar while investing in stocks, options, or

bonds, an individual does not need to pay any taxes. This factor is very important as for an

average of six percent of U.S. dollar investing profits are claimed due to taxes. Unlike the U.S.

dollar, Bitcoins investing returns are one hundred percent profit gains, every dollar you make

investing will be returned to you tax free.

Inflation Occurrence on the U.S. Dollar

The differential between Bitcoin and the U.S. dollar is extremely vast when it comes to

the aspect of inflation. Inflation can be easily described as when the price level of goods and

services rises, the value of currency reduces. The idea to manage inflation and the price of the

U.S. dollar was implemented by the Gold Reserve Act of 1934. This gave the government

power to peg the value of the dollar to gold and adjust the price as it pleased (Andrews, 2016).

While the stated mission of the Federal Reserve and Treasury is to ensure a stable value

and supply of money, this has not been the case. That would suggest working to create both

inflation and deflation, at different times, in a constant balancing act, to mirror the markets

fluctuations. Every year since the Gold Reserve Act of 1934, the U.S. dollar has experienced

inflation, with exception of the years: 1938, 1939, 1949, 1955, and 2009. This fact represents

that the U.S. dollar has undergone inflation seventy-eight out of the eighty-threes years (94%)

since the gold backed idea was implemented.

THE CASE FOR BITCOIN 9

The statistical fact of the U.S. dollar experiencing inflation at a rate of 94% would be

meaningless without any economical effects. However, this high level of inflation has caused

the U.S. dollar to be worth seventeen times less today than in 1934. In other words, a dollar in

1934 would represent $17.37 today (Andrews, 2016). This drastic level of inflation can be easily

shown in the cumulative consumer price index chart from 1800-2005 (refer to Appendix C)

(Andrews, 2016).

Additionally, the negative impacts that inflation carries with the U.S. dollar are nearly

limitless. There are two very damaging effects that inflation brings to the United States of

America as a whole. The first is the falling value of real household incomes, with millions of

people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real

incomes. This harsh negative effect of the U.S. dollar experiencing inflation causes millions

around the country suffering and at a loss for everyday needs because of the inability for the

dollar to purchase as much as it could in the past. As stated before, inflation can be easily

described as when the price level of goods and services rises, the value of currency reduces. The

second damaging effect that inflation of the U.S. dollar brings refers to the business side of

things rather than personal impact. With the rise of inflation on the U.S. dollar, the country as a

whole will make its exports less competitive in the world markets. Eventually this may show

through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a

countrys trade balance (Davis, 2014).

Avoidance of Inflation on Bitcoin

With the negative effects of inflation on the U.S. dollar out of the way, let it be clear that

Bitcoin does not bring the aspect of inflation. With the design of Bitcoins programming, there
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are a limited number of Bitcoins in creation. As of February 2017, there are sixteen million

Bitcoins currently in circulation, with the capped total of Bitcoins being twenty one million

(Oppong, 2016). By programming preferences, Satoshi Nakamoto, the creator of Bitcoin, has set

this number to be reached by year 2040. The ability for Bitcoin to avoid inflation is in direct

correlation to Bitcoin mining. The level of difficulty of Bitcoin mining is increased every two

weeks. In other words, the ability of obtaining Bitcoin for Bitcoin miners becomes harder at

each interval of two weeks. The reason for the difficulty increase is because of the rise of

complexity in the mathematical problems that need to be solved in order to mine Bitcoin.

The benefits of not having the aspect of inflation are overwhelming. Without having the

causes of inflation, Bitcoins value will remain true to its face value. To put into other words,

Bitcoins price point will have the same monetary value as what it is shown. Unlike the U.S.

dollar where the value of the dollar changed throughout the years, Bitcoin will remain the same.

The positives of having a true stable value to a currency are fully shown in a macroeconomic

way. With having a stable price point connected to Bitcoin, consumers and businesses are better

able to make long-term plans because they know and understand that the purchasing power of

Bitcoin will remain the same throughout this time period and will not be steadily eroded year

after year. Additionally, with no inflation, individuals remain confident on their real world

wages and the steady purchasing power Bitcoin brings. The concept of an inflation free currency

brings a sense of security to individuals that use Bitcoin. While the U.S. dollar is forever

changing in face value due to inflation, the value will be on a steady decrease for years to come.

On the other hand, one Bitcoin will consistently have the face value of one Bitcoin. By using

precedent since its creation, Bitcoin will continue its increase in value (Kroeger, 2014).
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Region Neutrality

One of the largest and completely unavoidable problems that the U.S. dollar carries is the

localized issues that come along with being a national currency. These problems range from

political, cultural, and economic issues of a country. A common example of this is the

fluctuating unemployment rate of the United States correlating to the value of the U.S. dollar.

For an individual, the ability to control the full national unemployment rate is impossible, but the

same individual will feel the hardship that the pullback of the economy carries, leading to a

weaker and less valued U.S. dollar (Davis, 2014).

The issues of the U.S. dollar are held in the hands of the U.S. government and the nation

as a whole, these issues do not come in effect when using Bitcoin. With Bitcoins advantage of a

decentralized currency, there is not a national government backing. This leaves all political,

cultural, and economic issues of a country out of the way. The advantages of an individual not

dealing with these issues gives the person a sense of relief when holding onto Bitcoin. An

example of the importance of this was during the recent presidential election. The unknown

factor of who was becoming the next president was shown in the loss of value to the U.S. dollar.

This outside noise that affects the price of national currencies will never impact Bitcoin because

the origin of Bitcoin is unknown.

Bitcoin Brings Security and Anonymity

Decentralization

With the U.S. dollar, the United States government holds power of the national currency.

While your funds are in your safe, secure, and reliable bank account, your bank holds the

power of your money. If you are making an online purchase or transfer using the popular
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internet company known as Paypal to transfer funds, the company itself holds final say of your

money. Your financial assets can be frozen at anytime with these businesses. Not only can these

institutions freeze your balances at any moment, they can also watch over your transactions

without notice. It is vital for someone to have total control over their personal financials. With

the U.S. dollar this is impossible. Every transaction made between these institutions, let it be a

bank, credit union, or online company, your funds can be frozen at any moment without the need

of a reason. These services own your money and you have the right to spend it without proper

notice. With Bitcoin, you own your funds completely and have total control of your transactions.

You will not need to worry about your assets being frozen by OFAC (The Office of Foreign

Assets Control) while making an international transaction.

With the security of Bitcoin, your assets are completely yours. A bank or institution does

not own the rights to your funds. One of the most common reasons why an individual switches

from using the U.S. dollar to Bitcoin as their daily currency is the security of holding their assets.

The process of owning one hundred percent of your financial assets is known as decentralization.

Bitcoin is the first currency to be completely decentralized (Davis, 2014). Decentralization can

be easily described as the process of redistributing or dispersing functions, powers, people, or

things away from a central location or authority. With Bitcoin, this definition of decentralization

is connected between having complete authority over your financials. While being in possession

of your Bitcoin funds, you can feel safe and secure knowing you are the only one who knows

your balance and transactions.

Transactions
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One of Bitcoins greatest attributes as a currency is the security of each transaction. A

Bitcoin transaction uses the same technology as military level application and programming to

create a safe, fast, and secure way of transferring funds (Nakamoto, 2009). Unlike Bitcoin, U.S.

dollar transactions are very unsafe. Transactions using the U.S. dollar leave personal data behind

including addresses, bank account numbers, and social security numbers. In 2016 alone, over

ninety six thousand credit cards were compromised (Holmes, 2016). With this staggering

number of compromised credit cards due to faulty and logged U.S. dollar transactions, nearly

fifty three million dollars were stolen (Holmes, 2016). While these scary statistical numbers are

out there, people would not have to worry if they used Bitcoin as their daily currency.

Counterargument

Bitcoins Volatility

The greatest Bitcoin currency critics state their main reasoning for not switching from the

U.S. dollar to Bitcoin as their daily currency is because of Bitcoins high level of volatility.

Volatility can be described as the ability for a price point to fluctuate rapidly. The statement of

Bitcoin having a high level of volatility is absolutely true. People are sometimes afraid of the

volatility because individuals are unsure of what the future price will be.

With Bitcoins volatility stated, users should not be afraid of the change of price. In fact,

individuals are able to take advantage of Bitcoins price movement. This can be done through

buying or selling Bitcoin in the Bitcoin exchanges. The ability to trade the moving price point

can be learned very quickly. With the ability to buy low and sell high throughout the day, week,

month, or year, an individual can profit from Bitcoins change of price.

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Bitcoins Acceptance

Furthermore, Bitcoin critics also mention the lack of locations in which Bitcoin is

accepted throughout the United States. Although there are a limited number of locations to

purchase items using Bitcoin, the acceptance rate is increasing throughout the country. Online

stores including Overstock, Expedia, and eGifter and multiple others are now accepting Bitcoin

as payment. In person stores are also accepting Bitcoin as a form of payment. These stores are

primarily located in large cities and are growing to new regions. As of February 2017, there are

nine thousand stores around the nation (Fung, 2017). The increase in Bitcoin notoriety through

businesses is spreading rapidly, in 2015, only two thousand stores accepted Bitcoin as a form of

payment (Fung, 2017). Bitcoins payment acceptance is growing daily and expanding outside of

urban areas. Even though the finest Bitcoin critics state their opinions about the lack of stores

accepting Bitcoin, new store locations accepting Bitcoin are appearing everywhere around us.

Bitcoins Governmental Backing

The final point a world class critic has about Bitcoin is the fact that Bitcoin is not insured

or backed by any national government or bank. This point is commonly misunderstood. With

Bitcoin, the exact reasoning for creation was to be decentralized. Decentralization allowed for

users to be completely secure and anonymous. If Bitcoin had a centralized government or bank,

the users would lose their anonymity.

Conclusion

As Bitcoin becomes more accepted throughout the world, it will undoubtedly be a

favorable replacement for an individuals daily currency. Within the short eight years of its

existence, Bitcoin has seen unprecedented levels of success in the financial industry. Bitcoins
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impressive accomplishments since its inception has led to multiple macroeconomic benefits to

the nation as a whole. As more people begin using Bitcoin and transition away from the U.S.

dollar, users will acquire more wealth and adapt increased financial transaction security. With

all of the stated benefits of Bitcoin throughout this paper, individuals should undoubtedly switch

from using the U.S. dollar to Bitcoin as their daily currency.

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References

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January 23, 2017, from https://99bitcoins.com/bitcoin-gold-usd/#prettyPhoto

Bilello, C. (2017, January 4). Bitcoin Six Year Run. Retrieved January 23, 2017, from
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Brown, R. (2011, March 12). Bitcoin History: The Complete History of Bitcoin [Timeline].
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Davis, J. (2014, February 01). What are the Advantages and Disadvantages of Bitcoin? Retrieved
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https://coinreport.net/coin-101/advantages-and-disadvantages-of-bitcoin/

Fung, B. (2017, November 20). Shut up and take my bitcoins! Retrieved January 23, 2017, from
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bitcoins-a-map-of-bitcoin-friendly-businesses/?utm_term=.cb9a9d87d35c

Holmes, T. E. (2016, February 02). Credit card fraud and ID theft statistics. Retrieved January
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Kroeger, A. (2014, August 11). Essays on Bitcoin. Retrieved January 23, 2017, from
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McCallum, B. (2015, April 7). The Bitcoin Revolution. Retrieved January 23, 2017, from
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Nakamoto, S. (2009, October 10). How does Bitcoin work? Retrieved January 23, 2017, from
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Appendix A
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Appendix B
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Appendix C