Cryptocurrencies On The Rise? Understanding Bitcoin’s Journey

Nathan Walker 12/12/17


Bitcoin has once again been making headlines due to massive spikes in the price of the digital currency. With it recently peaking at over $19,000 per coin, many people are rushing to invest and learn all they can about the technology. But the fast pace of the rise, and the volatility of the price have economists and financial experts warning that there is a bubble forming. There are also several competitors that are trying to make a name for themselves and take market share from Bitcoin, which is also certainly influencing the price. Are cryptocurrencies like Bitcoin on the rise?

         Bitcoin is a digital currency, but what does that mean? The history of Bitcoin goes back to the 90s when the internet was still a brand new technology and people were imagining the possibilities of how it could shape the world. There were people who were fascinated by the concepts of encryption and privacy in a world controlled by nation-states and central authority. Cryptocurrencies have origins in groups that were referred to as cypherpunks, a movement that was dedicated to personal liberty and anonymity online. The concept of an anonymous, online currency was formed, stemming from the need to make purchases safely and securely. There were several types of digital currencies even then. Digicash came closest to making it mainstream at the time, but the concept didn’t take hold. But after the financial crisis of 2008, people started revisiting these concepts and looking for new ways to put these technologies together.

         And seemingly out of nowhere, a person identifying themselves as Satoshi Nakamoto released the whitepaper for a new open source protocol called Bitcoin, which combined public key encryption with a ledger called the blockchain, allowing for anonymous, private transactions to occur. It does this through a system of consensus-building where multiple computers all participate in the management of the blockchain ledger which keeps track of all of the transactions. Every transaction is recorded in the blockchain, and once it is logged there, it cannot be altered, but the users in the transaction are encrypted to protect their identities. So you don’t know who is spending the money, but every coin has a history and you know how it has moved. Miners are the lynchpin of this process. Miners are private computers connected to the internet running a program that confirms transactions and updates the blockchain. These systems are incentivized to do so by a system of rewards. Essentially, every miner competes to attempt to solve a very difficult computing problem, and if they solve it, they are rewarded with a Bitcoin. There are a set amount of Bitcoins, and there will never be more than 21 million once they are all discovered. This is secondary though to their primary responsibility, which is confirming transactions and maintaining the ledger, and they are rewarded for this via transaction fees. The end result is a system that transfers trust from a central authority maintaining this ledger of transactions to a decentralized body of independent computers that are incentivized to maintain the ledger by a system of rewards.

         The implications of this system are far-reaching. With it being open source, anyone can review the code and verify the integrity. Since there are only a certain number of coins, it is deflationary by nature, meaning that supply will be limited, and as demand increases, so will Bitcoin’s price. While the system is decentralized, it is also accountable, because everyone can see every transaction that has ever occurred by reviewing the blockchain. It is censorship resistant as well, meaning no one can prevent you from interacting with the bitcoin network and no one can centrally alter or block transactions that they disagree with, including governments. It’s borderless, meaning no country can stop it from going in/out, even in areas currently underserved by traditional banking as the ledger is globally distributed. It’s also portable, since it is digital, so it is easier to move than cash or gold. They can even be transported by simply remembering a string of words for wallet recovery. And finally, it’s scalable, being divisible down to 8 decimal points, meaning it can grow in value but still be useful for microtransactions.

         This system has proved promising. In the early days, interest was held only by computers scientists and encryption enthusiasts, but adoption grew rapidly. By 2013, adoption was growing at an unexpected pace, with giants like Paypal accepting the currency. Soon marketplaces like TigerDirect and Newegg were accepting it, and even Microsoft soon began accepting it for payments on their Xbox Live system. Darknet markets like the Silk Road were making headlines, and Bitcoin was central to its success, but this contributed to the stigma against the technology, as fears rose that the anonymous nature of the system would provide a means for drug dealers and money launderers a way to operate more securely. But despite this news, more and more merchants were adopting the digital currency, which in turn forced governments to take an interest. Some governments recognize it as a bonafide currency, while others treat it as a commodity, subject to capital gains taxes. Other governments, like China, outlaw buying real life goods with any form of digital currency at all. News of merchants accepting Bitcoin and how governments reacted to it forced prices to be volatile. The price peaked at $1200 by early 2014, but news that popular exchange Mt. Gox had lost several thousand Bitcoins and was forced into bankruptcy caused the price to crash back down to $600 almost overnight, and it continued to drop throughout the year.

         The popularity of Bitcoin, and the fact that the code is open source meant that several other projects started to rise and work to compete against Bitcoin. Ethereum is a popular so-called “altcoin” that uses blockchain technology and can be used to transfer value similarly to Bitcoin but the technology behind it is primarily used to validate software and contracts. Others such as Litecoin, Dash and Monero are also in circulation. The popularity of Bitcoin also began attracting a more humorous audience, with Dogecoin, based on a meme about a dog, becoming somewhat popular briefly. The most current, and effective competitor to spring up has been Bitcoin Cash, which seeks to solve a problem that Bitcoin has with the speed of its network and the growing transaction fees.

         As of late 2017, Bitcoin’s price has spiked again, this time exceeding expectations and clearing $10,000, with its current price as of this writing sitting at $16,500. This recent price increase has been partially driven by the announcement that Bitcoin Futures would be available through the Chicago Board Options Exchange (CBOE). This announcement has caused a rush of investment, forcing the price up. Fears of pump and dump tactics abound, and critics of Bitcoin point to these tactics to decry the value of Bitcoin as a bubble. But proponents argue that the price of Bitcoin can only continue to go up as adoption increases, and will do so exponentially as it follows Metcalfe’s law of growth: "The value of a telecommunications network is proportional to the square of the number of connected users of the system (n2)". Logarithmic charts have projected the growth of Bitcoin and continue to be accurate, and project Bitcoin being worth $100,000 by the end of 2018. John McAfee, the founder of McAfee software, projects that by 2020 Bitcoin’s value will exceed $1,000,000. These types of projections are purely speculative; however, the math appears to be sound.

         From a political perspective, Bitcoin is the answer to central banking that Libertarian types have been looking for. Keep in mind, several of the founding fathers were adamantly opposed to central banking. Thomas Jefferson said in a letter to John Taylor in 1816, “And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Central banking in the US is relatively new. President Woodrow Wilson signed the Federal Reserve Act into law only on December 23, 1913. This central bank is not directly controlled by the US government, and politicians such as Rand Paul have called on numerous occasions for it to be audited. Freeing individuals from these central banks and giving them a means of transferring wealth without the scrutiny of the Federal government is definitely one of the appealing aspects of using Bitcoin. It’s also important to note that over 75% of the world’s population does not even have access to banking, yet mobile phone technology, the most popular means of using Bitcoin wallets, has penetrated to even the poorest countries in Africa, meaning that banking is now within the grasp of even the poorest in the world.

         Could Bitcoin’s price go to the moon? Only time will tell, but this author certainly has Bitcoin sitting in cold storage waiting to see what happens.

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