This is a short detour from the normal flow of our blockchain discussions. This used to be part of Part 2 of the series, but I thought we should address Bitcoin separately without spending too much time on its workings.
What is Bitcoin?
One major factor for the buzz and excitement around blockchain is Bitcoin, a digital currency built on blockchain technology as its underlying platform.
Bitcoins actually are digital “units” which get transferred from one person to another, very similar to cash. The amount of bitcoin that each person has (balance) and any transfer of bitcoins from one person to another (transaction) is encrypted and stored on the bitcoin blockchain, a digital copy of which is maintained at every member of this blockchain, in an application file called a bitcoin wallet.
How do you print a digital currency?
Bitcoins are generated by computers continuously and collectively solving complex calculations. These computers are usually owned and operated by the members of the bitcoin network. Very simply, an application on your computer continuously solves mathematical problems and you are given bitcoins in return. This is called bitcoin mining.
As the bitcoin network has grown, the mathematical calculations have become more complex and need longer times to solve, as a way to control the number of bitcoins in circulation.
What is its value?
Now because Bitcoin is a digital currency (or cryptocurrency, a term used to emphasize the encryption used in the system), it is naturally compared to existing currencies like the US Dollar, GB Pound, Euro etc. And this has exposed bitcoin to speculation and trading, much like stocks or commodities.
Another aspect of bitcoin is that it does not have an inherent value by itself. It is not pegged to the value of a commodity like gold, so it also does not have a relative value. The only thing that would set its relative value is its demand.
The demand for bitcoin
The smart part about the bitcoin blockchain is that, while everyone has a complete copy of the bitcoin ledger, one can only read the transactions in which one is involved. If you need to see the transactions of another, they have to permit you to see them. This permission is unbreakable and immutable, hence law enforcement authorities, governments, banks etc. Cannot override this permission. This makes the bitcoin blockchain a really confidential and secure storage of financial value.
While this confidentiality is great for a financial instrument, this level of secrecy is now making bitcoin really lucrative for people who want to hide their money and financial transactions. Some of these are:
- People with unaccounted money (black money)
- People who want to avoid paying tax
- People engaged in illegal or antisocial activities
- People engaged in terrorist activities
All of the people on the list above have huge sums of physical money that they need to hide or transfer secretly. One well-publicized example was the WannaCry Ransomware attack, which demanded its ransom in bitcoin.
As a result, they end up buying large amounts of bitcoin, creating a demand for bitcoin which cannot be matched by the rate at which bitcoin is mined. This drives up the relative value of bitcoin (the value of bitcoin in terms of other currencies). As a result, the trading of bitcoin like any other commodity like gold or crude oil has taken precedence over using bitcoin as a means of exchange.
The future for bitcoin
As stated earlier, there are two schools of thought about bitcoin. On the one hand, there is a lot of excitement about the cryptocurrency and its potential to be independent of any controlling authority.
In a perfect world, a bitcoin will become the standard means of exchange and will determine the true price of everything.
So a loaf of bread in New York would cost 1 bitcoin and in Delhi and in Tokyo and in Capetown. This will be the end of inflation as we know (and hate) it. And because every transaction is recorded by default, no one will be able to hoard or steal bitcoin because what is yours will be yours, verified by everybody else’s ledger.
However, this is not liked by the traditional controllers of currency, viz. Governments, central banks and financial institutions. The fact that they lose control over the supply of currency and the complete inability to impose transaction fees and taxes turns out to be a massive loss for these entities. As a result, all these agencies will not favour bitcoin and other cryptocurrencies without having a measure of control over it. And that fundamentally goes against the very nature of a cryptocurrency.
Moreover, the volatility in bitcoin trading (buying and selling bitcoin like a commodity) and the huge spurt in its relative price is also troubling for many smaller and developing economies, which are worried about their own value will be severely eroded with a new global currency taking over. At the time of this writing, the price of one bitcoin had moved from $1808 in May 2017 to hit its record high of $19213 in December 2017 only to fall to $6100 in Jan 2018. Given this kind of volatility, the bitcoin has become a very expensive speculative commodity.
So it is my personal opinion that cryptocurrency, in its current form, will be strongly opposed by the governments and central banks, with greed and ignorance driving their opposition. Cryptocurrency across the world will be subjected to heavy regulation, varying from mandatory declarations of bitcoin holdings at the least, to absolute bans at its worst. Add to that, the reduction of bitcoin to a mere commodity will result in its real value as an economic equalizer being completely overlooked.
As of today, bitcoin is probably a very risky investment as its future is very uncertain. Unless there is some consensus about the validity and acceptability of bitcoin across the world, this uncertainty will continue to play out.
#bitcoin #cryptocurrency #blockchain