Bitcoin’s Meteoric Rise and the Future of All IndustriesG20G7.com
By Ana C. Rold
2018 marks nearly ten years since the creation of Bitcoin, the most popular form of cryptocurrency to have emerged from blockchain technologies. While terms like “Bitcoin,” “cryptocurrency” and “blockchain” were once found only in niche cyberpunk communities, the meteoric rise of Bitcoin in the past year—worth less than one thousand dollars at the beginning of 2017 but topping out at nearly $20,000 by the end of December—has led to not only mainstream fervor surrounding the provocative new form of currency, but also legitimate interest from businesses and investors. Worth over $150 billion as of March 2018 (and once worth over $325 billion just a short few months ago), many are convinced the cryptocurrency industry could hold the answer to several of the problems that have plagued financial institutions for decades. But this optimism often leaves out one crucial aspect of Bitcoin: the volatility that comes with the experimental new territory.
Despite its popularity, relatively few people understand how Bitcoin actually works. While Bitcoin and other forms of cryptocurrency didn’t begin to enter mainstream until around 2013, Bitcoin was debuted several years earlier in 2009 by an unknown person or group known simply as Satoshi Nakamoto. Initially gaining popularity amongst technology-focused hobbyists and groups who distrusted centralized governments and banks, Bitcoin began to gain traction as it slowly rose in value, taking off in 2017 before seeing immense fluctuation towards the end of the year. This fluctuation and volatility can be partly attributed to Bitcoin and other cryptocurrencies’ lack of a centralized authority, relying instead on blockchain technology—which is essentially the use of online ledgers written upon by multiple parties (referred to as “miners”) to record each and every transaction ever created—in order to keep track of the who, when, and how of each cryptocurrency transaction. When partnered with cryptography—which can be used to create unique digital keys for each individual Bitcoin to secure its authenticity—blockchain has the ability to create a peer-to-peer system in which authority is decentralized, users can remain anonymous, and the authenticity of each piece of cryptocurrency can be secured.
Despite Bitcoin’s lucrative journey thus far, however, several concerns have arisen surrounding its effectiveness and whether or not Bitcoin and other cryptocurrencies can be viewed as legitimate forms of currency moving forward. For example, because the digital currency industry is so new, issues with efficiency have yet to be addressed, with Bitcoin transaction fees currently costing $19 to process in 10 minutes, or $3 if a trader is willing to wait 24 hours. Even more concerning, the limited computing capacity of Bitcoin’s peer-to-peer network makes it so that even with an immense increase in the volume of hardware being used to record Bitcoin transactions in the blockchain, Bitcoin’s network can still only handle 3.3 transactions per second, and doesn’t appear to be speeding up anytime soon. When compared to mega-currency organizations such as Visa—which can process 3,674 transactions per second—it has become apparent that it is the very peer-to-peer nature that Bitcoin was founded upon that is beginning to create barriers to scaling the currency.
Even if Bitcoin were to increase in efficiency, other more social-centered issues such as the gender inequality found within the Bitcoin industry and amongst those investing in cryptocurrency could aggravate many of the gender-related issues we see today, such as the under-representation of women in business and finance. Similarly, the anonymity associated with Bitcoin and its early dealings with illegal circles such as the Silk Road have also created cause for concern surrounding its potential use for illicit activities. India’s central bank, for example, argues that cryptocurrencies like Bitcoin have a strong likelihood of being used as a channel for money laundering and the financing of terrorists; similarly, countries like South Korea are considering regulating or outright banning cryptocurrency due to its association with cyber crime.
In most western nations, however, countries like the United States and the United Kingdom are showing more concern towards the potential bubble-like nature of Bitcoin that is showing signs of bursting in the near future—and unlike other financial bubbles in the past, Bitcoin doesn’t have a central authority to protect investors. And perhaps one of the biggest concerns countries and investors alike have with Bitcoin is its speculative nature. Not backed by real-world assets such as gold nor protected by any central authority or regulations, Bitcoin’s rising value has been based largely on hype, word of mouth and speculation. Speculative investors, having seen the continuous rise and fall of the currency in a short span of time, have taken this opportunity to buy significant amounts of the volatile currency; meanwhile, early backers have continued to sit on their Bitcoins in hopes of selling it for a higher price later, and the high demand and short supply of the cryptocurrency has not only reinforced the inflation of prices, but also slowed down the miners’ ability to mine new Bitcoins—meaning that while demand continues to rise, the supply of Bitcoin is slowly coming to a halt, and the Bitcoin industry may eventually crash due to pressure.
In the end, while Bitcoin itself is rife with issues surrounding its experimental nature, the blockchain technology and cryptography behind it poses several potential opportunities in both the finance and technology sectors. With cryptography, for example, banks and other financial organizations can look into protecting the authenticity of people’s transactions and bank accounts more securely; and with the blockchain, nearly all industries can use the new technology in innovative ways, from supply chain management to quality assurance to smart contracts and even voting. Therefore, while Bitcoin itself will most likely crash unless major changes to the industry are made, the wide variety of applications that blockchain and cryptography possess are endless and ultimately bode well for not only the financial and technological sectors, but for the future of all industries.
About the author: Ana C. Rold is Founder and CEO of Diplomatic Courier, a Global Affairs Media Network and the Editor-in-Chief of the G7, G20, and B20 Summit magazines. She teaches political science courses at Northeastern University and is the Host of The World in 2050–A Forum About Our Future. To engage with her on this article follow her on Twitter @ACRold.