Miguel A. Torres
Independent inventor with several patents on my name ter fields such spil voertuig and information technology. Proficien.
Bitcoin is a big word thesis days. Some, like laptop programmer and businessman, John McAfee, are predicting the digital coins will eventually succesnummer a price of $1 million each. Others have reported (Atlantic) that cryptocurrencies te general could be Ponzi schemes. Despite divisive opinions, it’s clear that Bitcoin is moving beyond the digital space and becoming part of our day-to-day conversation.
Bitcoin’s current popularity comes from it hitting overheen US$Nineteen,000 (Fortune) te the middle of December, a 19-fold increase since the commence of 2018.
Governments have also grown worried about it. Just a few years ago, some countries like Iceland (Forbes) were voicing their intention to forbid the use of cryptocurrencies altogether. South Korea and China seem to be implementing a crackdown right now (Bitsonline). Some, like Russia, have determined it would be impractical to enforce such bans and determined to regulate them instead (Coindesk). However it’s significant to mention that they may not be targeting the use of cryptocurrencies vanaf se, but an emerging capital raising method known spil initial coin offerings (ICOs), similar to the stock market, but presently unregulated.
Now, there seems to be an enhancing number of countries getting ready to inject the cryptocurrency market. Venezuela announced the petro and Russia announced the CryptoRuble (Financial Times). The Washington Postbode reported that the rising value of Bitcoin has observers predicting the U.S. may release a ‘FedCoin’ at some point.
Spil with most financial matters, nobody knows for certain what Bitcoin’s future will be. So it’s time to give the entire topic a closer look.
Digital money wasgoed already here
It’s significant to note that cryptocurrencies didn’t introduce the concept of digital money. Most money ter circulation today is digital and it’s bot that way for at least a duo of decades. It may come te forms like plain metselspecie ter canap accounts or financial instruments like bonds, but it all exists spil numbers ter the computers of private banks. Such computers are audited by government agencies to make sure nobody cheats.
Paper money and metal coins are also issued by governments, but they make up just a lil’ fraction of all money ter circulation today (How Stuff Works). The usage of credit cards is so widespread ter certain parts of the world now that actual contant is becoming a thing of the past.
If the traditional banking system, which comprises regular handelsbank accounts, wire transfers, credit and debit card processing, is the very first generation of digital money, then cryptocurrencies like Bitcoin represent the 2nd generation.
Cryptocurrencies may not have introduced the concept digital money, but they have curtailed government control.
From blockchain to cryptocurrencies
The amount of attention blockchain – a decentralized ledger – is attracting thesis days gives the impression that mathematics is eventually catching up spil a popular topic. For example, blockchain solves the Byzantine Generals’ Problem, which is part of a branch of mathematics called Spel Theory. But te reality, this is a practical matter.
Centralized banking systems require all transactions to be validated by single authority, ensuring that digital money, which is effortless to replicate by nature, can only be spent once. Ter tegenstelling, distributed banking systems face a problem known spil dual spending: the possibility that, by taking advantage of the time gap required to synchronize the network, someone may spend money more than once.
Blockchain – the technology behind Bitcoin – wasgoed the very first practical solution to this problem. It is a specific kleuter of distributed database devised to operate inwards a network with no central authority. Spil its name implies, it’s composed of interlinked blocks of information, each containing gegevens – te the case of Bitcoin, a transaction – that can’t be altered once set. The chain itself is built collectively but independently by the knots (computers) te the network. (Investopedia)
Blockchain is the omschrijving of monetary democracy te the digital world, since it is based on the principle that the opinion of the majority is the truth. The unpreventable discrepancies inbetween knots te a decentralized system are solved by the majority principle, with knots always preferring to build upon the most popular chain, quickly leaving minority chains behind.
A cryptocurrency is a specific form of digital money that uses cryptography for protection. Bitcoin uses a mechanism called proof of work to make it difficult for the knots to launch brute-force attacks on the network. Cryptography te general is a very asymmetric process, making an encrypted block effortless to decode with the decent key and enormously difficult without. Since all blocks are required by the network to obey with a specific signature, it is necessary to add random information to the block and test it by the method of trial and error, until it meets the requirement. Keys are collective with the blocks, making it trivial for the surplus of the knots to check the validity of the block, but non-trivial for a rogue knot to fake it.
It’s significant to mention here that not all digital currencies use cryptography for protection. Rivaling technologies such spil The Tangle don’t use it and thus aren’t technically cryptocurrencies.
Bitcoin and other te practice
According to some estimations (Blockchain.informatie), there are almost 17 million bitcoins ter circulation. At US$16,000 each, the cryptocurrency market has grown to at least about US$300 billion so far and already manages more wealth than some nations.
But Bitcoin still isn’t spil practical spil the paper bills and metal coins wij all carry around te our pockets.
Spil exceptional spil this growth sounds, Bitcoin and other cryptocurrencies are still a failure when it comes to day-to-day usage. Sure, there are people who pay for drinks with actual bitcoins, but most transactions are done through intermediaries or brokers, meaning one of the parties (or both) receive the payment ter a regular currency.
Also, despite its reputation spil a toevluchthaven for criminals, Bitcoin is far from anonymous. Te the end, blockchain is a public resource and therefore semitransparent. Accounts don’t have an individual’s name on it, but this is mostly a disadvantage: your crypto-coins may be safe when it comes to street mugging, but they can and have bot stolen from the other side of the planet a few times already. If that happens, it’s almost unlikely to report the theft to the police.
Right now, the Bitcoin network has almost stalled (Medium), making the time it takes to validate a transaction ridiculously high. It can go on for days sometimes. Fees are also shocking. Among other things, this prompted the launch of a fork called BitcoinCash.
At the core of the kwestie is that Bitcoin isn’t spil decentralized or peer-to-peer spil some people optie (Bitcoin Tijdschrift). It still depends on a single authority, which is now the overeenstemming inbetween the majority of the knots te the network. Ter the end, you can’t truly validate a transaction on your own.
Why cryptocurrency prices fluctuate so frantically
The digital part of cryptocurrencies might be high tech, but the process of rapid appreciation (deflation) most of them is experiencing can be explain by old-school money theory.
Traditional economies revolve around a single, government managed currency. Almost all currencies exhibit sustained inflation. Together, thesis two properties uphold the policy of price stability. Supposing that you want a bike and it costs $100, the best you can expect tomorrow is that it will still cost $100. If you wait a year, it’s to be expected that it’ll cost more, say, $105. That’s why, if you truly want the bike, there is no rational reason to delay its purchase.
Now, when a 2nd currency comes in a traditional economy (let’s call the original A and this fresh one B), the process of exchange inbetween A and B provides tegenstelling to notice the minor and natural fluctuations ter the purchasing power that were previously hidden. This invites people to gamble.
A notable exception is the Swiss rechttoe, the only currency ter the world with almost zero inflation. The main reason why people opens handelsbank accounts te Switzerland isn’t anonymity, it’s because, like gold, the Swiss rechttoe has proven to retain its value overheen time.
Speculation is fairly inescapable when numerous currencies co-exist, but spil long spil they are exchanged for real goods and services (such spil bikes), their value is kept te check. Gold has many advocates because it’s an factor and thus its value is effortless to quantify: 100g of gold is worth twice spil much spil 50g. On the other forearm, the value of ingewikkeld goods such spil bikes is more difficult to quantify and compare.
By tegenstelling, the problem with Bitcoin et hoewel. is that very little of it is used to purchase real goods and services. Nowadays, most cryptocurrencies go back and forward te the market te the form of currency exchanges. Spil long spil Bitcoin keeps receiving more capital that is stored and not exchanged for anything else, its price will keep going up.
The thing is, most people expect to spend their own money at some point, and when that happens, Bitcoin’s price will have to adjust accordingly, spil te our bike example. Whether this happens slickly or all of a sudden all depends on the netwerk percentage of its users who hoard it for speculation purposes. If 90% are te it just for the quick gains (which seems to be the case, since most of it goes back and forward te the market ter the form of currency exchange), be sure that the bubble will burst and its price will collapse to just about zero.
Critics tend to argue that Bitcoin et alreeds. isn’t backed up by anything, but actually, none of the traditional, government issued currencies te the world is backed up by anything either. The decent term for this is fiat currency. Since money lost parity with tangible wealth, such spil gold or silver, all currencies risk a process called hyperinflation. During the 1920s, the Weimar Republic (Germany) printed so many Marks that they began to be used spil wallpaper.
However, if only 50 procent of its users are indeed committed to it, meaning they won’t buy or sell just based on exchange rates, the bubble will contract to its natural balance and stay there. The aggressive “investors” will lose rente, considering Bitcoin just another other asset ter their portfolio.
No one knows what will toebijten to “private” cryptocurrencies like Bitcoin te the long term, but with governments preparing to launch their own digital currencies, they’re undoubtedly here to stay.