Directions: In the following text, some sentences have been removed. For Questions 41-45, choose the most suitable one from the list A-F to fit into each of the numbered blanks. There is one extra choice, which does not fit in any of the blanks. Mark your answers on the ANSWER SHEET. (10 points)
It’s a big moment for Bitcoin. (41) Senior economist Francois R. Velde wrote an elegant critique of the four-year-old currency, explaining its mechanics, limitations, and prospects for success, ultimately deeming it a “remarkable conceptual and technical achievement, which may well be used by existing financial institutions.” (42)
(43) Producing a bitcoin “at current levels of difficulty requires a machine worth about $3,000 and about a dollar’s worth of electricity per day,” meaning the cost of producing one bitcoin, taking into account the machine’s depreciation over five years, is about $2.50. While the estimate seems to discount the steadily rising cost to higher-powered machines that are necessary for more complex hashing and the pools of machines necessary for mining—with Bitcoins currently valued at 100 times that, you can see why companies offering ‘mining’ equipment are doing such good business.
Velde points out that there is $1,200 billion circulating in U.S. currency compared to $1 billion in Bitcoin (when he authored the December 2013 paper). (44) But even given that, Bitcoin is a “relatively small phenomenon,” as Velde puts it. “But it has been growing,” he writes. “The value of a bitcoin has increased tenfold since early 2013.”
To further put it into the context of the larger economy, he writes that “there are on average about 30 bitcoin transactions per minute” vs. 200,000 Visa transactions per minute, and that the average bitcoin transaction size is “about 16, i.e., on the order of $2, 000” while “the average Visa transaction is about $80.” (45) (Of course, every once in a while someone might drop a cool mil on mining gear.)
“So far, the uses of bitcoin as a medium of exchange appear limited, particularly if one excludes illegal activities,” notes Velde. “It has been used as a means to transfer funds outside of traditional and regulated channels and, presumably, as a speculative investment opportunity.”
A. Velde starts out by laying out the numbers.
B. For those who have pondered what bitcoin actually is—currency vs. stock vs. money—Velde has an answer.
C. If this were Economic Mean Girls, this is the part of the movie where Lindsay “Bitcoin” Lohan gets friended by the powerful, popular crowd.
D. At that level of spending, it’s fairly obvious that most of the activity happening in Bitcoin is not actually buying things (as I did in May), but rather trading.
E. Thanks to a recent price surge to over $250, the market cap for the nearly 12 million Bitcoin in existence is now well over $3 billion.
F. The digital currency has gotten an official nod from the overseer of U.S. currency in the form of a primer out of the Federal Reserve Bank of Chicago.
