Popularity and speculation today in cryptocurrencies are at an all-time high. Bitcoin, which was the first cryptocurrency created back in 2009, is worth over $2300 today. This is a far cry from $250, which was the worth of one Bitcoin in 2016. Due to investor behavior and the attention Bitcoin is getting today, we thought it was worthy of a deeper dive.
Wikipedia defines a cryptocurrency as a digital asset designed to work as a medium of exchange using cryptography to secure the transaction and to control the creation of additional units of the currency. Although the technology’s infrastructure and mathematical coding equations are complex and extensive, the idea is simple. Cryptocurrencies are a decentralized, virtual currency. Decentralized means it is not issued by any single authority and is not subject to manipulation or interference by a government. The virtual marketplace doesn’t have a single physical location. This can be both beneficial and problematic. There is no customer service number to call if you lose your private key (Bitcoin identity) or have any other problems. When entering into a Bitcoin transaction, you are completely reliant on the technology. On the other hand, because it is a decentralized network, you are eliminating the intermediary or middle man which leads to lower costs, open sourced information and the potential for a greater level of security. The anonymous nature of transactions, lack of regulation and decentralized network has also led to a rise in the use of Bitcoin for illegitimate business and crime.
Part of the technology that is getting a lot of attention is block chain. Bitcoin’s block chain is a large digital file or transaction ledger that stores all Bitcoin transactions. These transactions are updated or verified universally through the entire network approximately five times an hour. Once these transaction blocks are verified, they are then added to the entire block chain dating back to the first Bitcoin transaction. This creates a compounding effect of encryption and security. This process is complex; listed here is a link that presents the process in greater detail if you are interested – (https://www.youtube.com/watch?v=Lx9zgZCMqXE). The block chain technology within Bitcoin helps solve the problem of double counting or spending, which has been a major hurdle for virtual currencies. Block chain technology and the creation of decentralized networks are also being used in other applications beyond currencies and many people see this technology as transformative.
Yes, the core technology that has helped construct these networks may be paramount in the future of financial technology, but the sustainability of each individual network remains to be seen. Bitcoin and cryptocurrencies are still in their infancy. Bitcoin remains a speculative asset, in part because it lacks utility. Albeit growing, there are limited places to transact and exchange Bitcoin. In today’s market we are seeing excessive risk taking in various asset classes and Bitcoin is simply another example of excessive speculation.