The new wild west: cryptocurrency and blockchain
Opinion and understanding surrounding Bitcoin (BTC) is varied, but the revolutionary initial intention behind its creation remains its central telos. Bitcoin was introduced as a decentralized digital currency which bypassed formal financial institutions by allowing users to be their own holder of their funds. Despite generations of devastating bank runs, where masses of people attempt to withdraw their bank deposits and there is nothing in the vaults, many folks hear of Bitcoin and only think of nefarious dark web usage.
High demand for Bitcoin has perpetuated a relatively tall value for the beorgening cryptocurrency, which recently peaked around $6,000 a coin. There is currently about $167 billion invested in the whole cryptocurrency market, and Bitcoin represents about 55 percent of that total, according to coinmarketcap.com.
Computer Science Professor John Doucette talked to the Catalyst through email about this relatively new phenomenon.
“Blockchains are a particular technology for implementing a public ledger. A public ledger is just a place where people can read and write things, but never erase what has been written. This lets people who don’t trust each other agree on what has happened in the past,” Doucette wrote. “Solving that trust problem solves all sorts of other problems indirectly. For example, if you watch me write in a public ledger that I owe you $5, then you can later prove that I still owe it to you by consulting the ledger.”
“Blockchains, as a data structure, are capable of holding arbitrary data and can be applied to most anything,” third-year Eric Brigham recalled, who worked on a project involving blockchain technology last summer with computer science professors Matthew Lepinski and John Doucette. Brigham studied how blockchain could be used to make internet censorship harder for authorities to attempt.
“Competition between miners (those who compete with each other to write transactions into the blockchain) ensures decentralized control,” Brigham stated.
Doucette continued by explaining the faults in conventonal banking.
“In the past, most ledgers were private. A bank might maintain a ledger, but if two people don’t trust the bank to keep the ledger correct–or the bank won’t let them write in it–there wasn’t a good way to help them trust each other about what had happened in the past,” Doucette wrote. “Blockchains provide a way to create public ledgers online, that anyone can write to or read from.
“Bitcoin is implemented on top of a blockchain. The idea is that to spend some coins, you just write in the ledger that you’re giving your coins to someone else, and sign it with your pseudonym. The ledger is designed so that you can only write this if your pseudonym was given some coins by someone else in the past. To get your first coins, you can sell something else [like dollars, or goods or services] to someone who already has coins,” Doucette continued.
Decentralizing the management of currency with nifty computer code is supposed to curb corruption and manipulation which centrally-managed currencies, like the infamous German Mark, have historically suffered from. The hyperinflation of the Mark was followed by Hitler’s Third Reich, a reminder of the direct correlation between social, political and currency stability. Additionally, the enlightenment writer Voltaire once observed, “all paper money eventually returns to its intrinsic value, zero,” and The Federal Reserve Bank of Philadelphia conceded in 1975 that, “Without the confidence factor, many believe a paper money system is liable to collapse eventually.”
“Bitcoin is a limited supply asset, only a certain amount will ever exist, unlike the fiat currency system we currently use, which allows new money to be printed and thus decreases the value of existing currency. The fiat system is also fundamentally based on debt held by banks. Each U.S. Dollar (USD) solely represents a unit of debt, it is no longer backed by anything other than what other countries are willing to pay for it on the international market. It is also the reserve currency of the world, which incentivizes foreign governments to take large sums of USD out of circulation to store in order to hedge against risk,” New College alum, Steven Lubka shared to Catalyst through email. They host a free Facebook group called ‘Blockchain Visions.’
Even sovereign nations store the USD like it’s a solid reserve of value, like gold, but the dollar is not backed by anything but the confidence in the dollar.
“I have met many people who live entirely off Bitcoin mining,” Lubka continued. “In Venezuela, the entire country essentially runs on Bitcoin which was the only hope for a failed central banking system and a hyperinflating currency.”
The Venezuelan government’s subsidized electricity is cheaper than most goods and folks have used that electricity to earn bitcoin via mining out of pure necessity.
“Governments fear Bitcoin and cryptocurrency because they lose control of the money supply. However, they are also being surprisingly open and receptive to it in many cases,” Lubka said. “Some countries are trying to regulate them in restrictive ways, others are facilitating their growth. Ultimately it is a fundamental challenge to the very way all of our systems operate, and it will be a bumpy road, but one that the entire world is gradually embracing. Within the crypto-community, the largest issue right now are the various Bitcoin forks. This type of project has never existed before–and because Bitcoin lacks a centralized authority, all upgrades to its code must be done through consensus by the miners–the individuals who participate in running the blockchain, not creating new Bitcoin. New Bitcoin are never created.
“The process of mass consensus is inherently challenging as it’s only possible through people all over the world coordinating on developing a project, that no one entity is running. Miners are compensated with Bitcoin–or whatever coin is being mined–for their work, however these coins are not created from thin air. In most cases they are taken from a network transaction fee that is charged on each transaction. These fees sustain the network and allow the miners to make a profit in order to create a reason for someone to be a miner,” Lubka explained.
Investing in cryptocurrency comes with risk, but has potential to give back significant returns. As the dominant coin in the crypto-market, Bitcoin has always suppressed other alternative coins values by taking most of the demand. However, the crypto markets are volatile, and it is anybody’s guess as to what the top performing coins will be even in the near future. Nonetheless, the most significant question for an potential investor, is whether they see better long run opportunity with their wealth in crypto or their respective sovereign fiat currencies.
Information gathered from CNBC and coinmarketcapitalization