As many people have experienced, the world around us is rapidly changing. Technology has evolved drastically over the last century and even over the last decade. While not everyone is keeping up with the ever-changing products and technology, it’s getting harder and harder for people who are not keeping up with the latest technology to understand what is going on. Most of the older generations, such as grandparents, mainly use cash. They do not trust banks or they do not trust using cards because they have heard about the fraud. Then we have the middle generation such as our parents who are used to using credit cards or debit cards and using banks for safe keeping of their money. Nowadays you have the millennials who are tech savvy and not only are they using cards as payment but now you see them using venmo, applepay, samsungpay, or even bitcoin as means of payment. The latest craze in the financial world has been bitcoin, which is a cryptocurrency.
The history of bitcoin started off humble and recently it has crashed from its peak in the beginning of 2018 and came back down to earth late in 2018. Since there is always uncertainty with bitcoin, seeing as it is a virtual currency, there will always be fluctuations with its value. There have been many attempts at other forms of currency online such as cryptographed digital currency but none have seemed to break through and become popular enough to survive in the real world. Even though bitcoin does have that uncertainty that is part of the reason some people invest so much into it because of the possibility of such a high return. Originally there are traces of digital currency being started as early as 1982; it first started off as e-cash by David Chaum. Since the Internet was still relatively new, there were a lot of causes for concern pertaining to privacy. David wrote a paper the tried to put his idea into the world that would ultimately create a blind signature system.
This would mean that third parties would not be able to see payment information to help with the privacy issue and later put his idea into Digicash, like bitcoin, that was founded in Amsterdam. Unfortunately Digicash never caught on for popular demand and quickly went bankrupt but David had opened a lot of other platforms for people to create their own cryptocurrency. Bit Gold became the next alternative currency in 1998 but it did not require a third party that would have to manage it like a central bank but sadly it failed as well. Now it’s August of 2008 and Bitcoin is finally being registered online and then had a published whitepaper two months later: “Bitcoin: A Peer-to-Peer Electronic Cash System.” The idea was similar in that they did not need a third party to manage it, digital signatures would be protected, proof-of-work, as well as combining certain transactions together forming a chain.
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Then by 2009, the Genesis Block of bitcoin, first ever bitcoin block, was created and by the end of the year they were able to release the exchange rate of bitcoin to dollars witch was $1 for 1,309.03 BTC. At this point after they had created an exchange rate, it was a waiting game until the first person actually used bitcoin and it took almost a year until that happened. By May of 2010 a man named Laszlo Hanyecz had sent 10,000 BTC to a man in exchange for 2 pizzas that were totaled at $25. At this time BTC was still valued as a fraction of a penny but the fact that a transaction was made had made more and more people interested in bitcoin, which allowed it to break past the penny value a couple months later. By 2011 1 bitcoin was valued at $1 and started to gain a lot of attention by the press that was both good and bad. After popular articles would be released tarnishing bitcoin, you can see a drop in the value.
There were a decent amount of security breaches that compromised a lot of people’s bitcoins as well as their accounts, which led to a decline in value as well. Despite all of the obstacles they had faced with privacy, security, and uncertainty, bitcoin became the most successful exchange and wallet available as it was valued over $1,000 in 2013. Even though there were a lot of ups and downs in the later years, 2017 was bitcoins best year yet exceeding their $1,000 mark all the way to $3,000 but it didn’t stop there. By the end of December 2017, bitcoin reached its maximum height with a whopping value of $19,783. Unfortunately that has since been its peak moment with 2018 now continuing a steady decline of 67% so far.
Since its genesis block, Bitcoin has continued to grow steadily. While some criticize the volatility of Bitcoin’s value, the growth from 10,000 BTC for 2 pizzas (0.0025 BTC to 1USD) to 1 BTC equaling $3,259.11 is undeniable. Proponents of Bitcoin claim that it can compete with and even outdo banking and physical currency. Meanwhile, critics of Bitcoin and other cryptocurrencies assert that they are nothing more than an economic bubble waiting to burst, with some of crypto’s harshest critics comparing Bitcoin to a pyramid scheme. Will Bitcoin and blockchain technology ever compete or even replace centralized banking and physical money, or is cryptocurrency just a flash in the past?
In “Is Bitcoin a Waste of Resources” by Stephen Williamson (2018), the viability of Bitcoin as both a currency and a safe haven asset is examined. Safe haven assets are investments that are expected to either grow in value or remain the same during times of market turbulence. In his article, Williamson compares Bitcoin to gold as a reference point for its viability as a safe haven asset. Because of Bitcoins high volatility and even day-to-day fluctuation, it will almost certainly never function as a safe haven asset.
This is corroborated by the study “Virtual Currencies-Bitcoin Risk” by Mark T. Williams, which found that Bitcoin has volatility seven times higher than gold, eight times greater than the S&p 500 and 18 times greater than the USD (2014). Williamson also examined if Bitcoin would work as a means of payment, especially in retail spaces. Unfortunately, Bitcoin will probably never operate smoothly as a means of payment in the everyday sense. Because of how blockchain technology works, which powers Bitcoin, any transaction involving Bitcoin will take a minimum of around ten minutes. This means you probably will not be paying for your favorite Starbucks order with Bitcoin anytime soon, if ever. Another concern brought up is the use of Bitcoin for criminal activity.
The anonymity of Bitcoin protects criminals from the prying eyes of the law and can be used for tax avoidance, getting around foreign exchange control and the sale of illegal drugs. Williamson concludes that digital currencies may one day be key to our society or at least enjoy a healthy role within it citing its decentralized nature and secure and private nature. He believes that there are too many technological restraints to make a decentralized blockchain currency feasible at this time. He does mention that banks will probably soon be offering digital currencies of their own and questions whether a future digital currency should be centralized or privately provisioned.
Shin (2018) views cryptocurrency through the lens of our current monetary systems and the economic problems we have facing us today. He reviews the history of money, as a unit of account, a medium of exchange and as a store of value. Then he contrasts this with Bitcoin, which aspires to be a new form of currency that promotes stability and trust through the use of technology. Cryptocurrency combines three key features, according to Shin, firstly is that they are digital, which makes them convenient and they rely on cryptography to prevent fraudulent transactions and counterfeiting. Second, despite their private origins, they cannot be redeemed and their only value comes from the understanding of their shared use. Lastly, they allow for online peer-to-peer exchange. The trait that distinguishes cryptocurrencies from previous digital currencies, and most important one, is the peer-to-peer exchange.
Crypto transactions can take place in a decentralized setting without the need for a central third-party. Bitcoin is the biggest cryptocurrency because its founder, Satoshi Nakamoto, solved the problem of double-spending digital currency. His solution was the distributed ledger technology, which is the sequential record of every Bitcoin transaction made which is shared between and approved by every “miner” and “user.” This ledger ensures that “miners” who are responsible for running the labs that uncover new bitcoins do not try and cheat the system. In order to double-spend bitcoins and thus cheat the system you would need over half the total computing power of all miners. Shin asserts that the cumbersome method of trying to achieve trust between users of cryptocurrency raises two key questions about the efficacy of Bitcoin and other altcoins. Is the roundabout way of securing trust worth the cost of efficiency? And is there any way to truly ever have trust?
In regards to the question of efficiency, you must understand that the total computing power of all Bitcoin miners combined used the same amount of electricity as mid-sized economies, such as Switzerland. Bitcoin’s pursuit of decentralized trust has quickly become a real environmental problem. Totally disregarding energy issues, Bitcoin and other cryptocurrencies still do not answer other economic problems. Bitcoin fails in three areas: “…scalability, stability of value, and trust in finality of payments” (Shin, 2018). Shin gives a perfect example of how Bitcoin has major scalability issues:
A thought experiment illustrates the inadequacy of cryptocurrencies as an everyday means of payment. To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months. But the issue goes well beyond storage capacity, and extends to processing capacity: only supercomputers could keep up with verification of the incoming transactions. The associated communication volumes could bring the Internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte. (Shin 2018)
Because Bitcoin protocol mandates that only 21 million bitcoins may be in circulation, there is no elasticity in regards to its supply, however, this means that fluctuations in the demand for Bitcoin changes the value of Bitcoin rapidly. The higher the demand for Bitcoin, the higher the price. The reason the finality of payment is not secured with cryptocurrencies is because although users can verify that a specific transaction is on the ledger; there can be rival versions of the ledger unbeknownst to them.
For example, if two miners update the ledger simultaneously, only one can survive, which puts the finality of both payments in the air. Another factor that undermines the trust that is put into crypto is a process called “forking.” Shin explains: “This is a process whereby a subset of cryptocurrency holders coordinate on using a new version of the ledger and protocol, while others stick to the original one. In this way, a cryptocurrency can split into two subnetworks of users.” Forking is not a rare occurrence, especially among less established cryptocurrencies, however one forking incident on the 11 March 2013 is significant because it left Bitcoin miners working together in a centralized fashion against their ideology, decentralized currency.
On that day, an erroneous software update created a fork between the legacy Bitcoin chain and the updated chain. When news of Bitcoin’s fork spread, the value dropped a third of its value in hours. Miners went against Bitcoin protocol and worked together to unravel the longer chain, however this voided many payments that users of Bitcoin had believed to be final for hours. This incident underlines how easy it is for cryptocurrencies to fracture and lose value, which undermines the trust in them.
All decentralized cryptocurrencies are plagued by a plethora of shortcomings, some of which are inherent to the decentralized system and others, which are solvable by novel solutions. The main problem arises from the extreme decentralization, creating the trust required to effectively run a system is a wasteful use of computing power, furthermore, the shared ledger and decentralized consensus is inefficient and vulnerable. Many of these issues arise from the innate fragility and scalability of such decentralized systems.
Shin does not believe that decentralized cryptocurrency is the answer to society’s need to digitize at this time, however, he does believe the technology, distributed ledger technology, is promising and could be implemented effectively in other fields. Specifically, Shin points to low-volume cross-border payment services where the benefits of decentralized access exceed the higher operating cost of maintaining multiple copies of the ledger.
Other researches besides Shin have also pointed out that the blockchain technology powering cryptocurrencies could be useful in other fields. One researcher believes that because scientific information is a large, ever-changing body of information that is collaboratively created, altered, used and shared that it would lend itself well to blockchain technology (van Rossum, 2018). Blockchain technology has the capabilities to solve issues surrounding peer-review, metrics, and irreproducibility in scholarly communication. One of the big problems with the current flow of scholarly communication is accessibility. Experiments are conducted, results are collected, articles are written, submitted, reviewed and then published.
Scientists working in the same field cannot see anything about the experiment, results, data and corresponding article until it is published. This lack of transparency is an issue because researchers are not able to replicate experiments in order to validate conclusions, the cornerstone of the scientific method. According to van Rossum (2018): “In a 2016 poll on Nature.com, two-thirds of respondents indicated that current level of reproducibility is a major problem, with 52% saying that there is a “significant crisis” in the ability of researchers to validate prior work.”
Peer review, the process by which scholarly articles are closely examined by researchers working in the same field before the article can be published is under similar duress. The process has no transparency and there is little to no recognition for those doing the peer reviewing, says van Rossum. The decentralized nature of the blockchain would provide an easy way to create a data store in which activities of the entire research ecosystem can be stored. This is technically possible right now, however the need for a central gatekeeper and owner makes the realization of this impossible.
A decentralized datastore, such as the one outlined above would make experiments many times more reproducible because every time a researcher uploads data, performs statistical analysis, writes and submits an article or reviews an article, this would be tracked and stored. The main problem with the adoption of blockchain technology by the scientific community is the legacy of science itself, which has evolved naturally over hundreds of years. Any change to a legacy of science’s magnitude would require a monumental shift in current thinking. A secondary issue is that of implementation. Blockchain technology will only work in science if it is widely implemented. Current publishing giants who run very lucrative businesses would not like to see that happen.
Unless drastic changes occur in our current cultural climate, or new innovations in cryptocurrency occur, Bitcoin is unlikely to replace money or banking anytime in the future, near or far. As Williamson (2018) outlines, we currently do not have the technological capabilities to support a cryptocurrency blockchain on a large-scale. Although digital currency that is private and secure could be a boon to society, we still need to answer would that would look like. Would it be centralized or decentralized? Additionally, we still need to answer if it would use blockchain technology or some other currently undiscovered technology. It is also clear in this point in time that Bitcoin and other cryptocurrencies exist as bubbles, with low scalability and the inability to replace physical currency, there is only so far Bitcoin can go (Shin 2018).
Despite the bleak outlook for Bitcoin, blockchain appears to have a much brighter future, with multiple practical uses being implemented at the current time despite blockchain’s relative infancy as a technology. In monetary terms, blockchain still has potential in low-volume situations where sacrificing time for security and anonymity is worth the tradeoff, such as cross-border transactions that need to take place in two different tax jurisdictions. In addition to this, blockchain technology has the potential to transform how researchers conduct, share, and reproduce their work. The decentralized nature of blockchain could allow researchers to dramatically increase the efficacy of their experiments and how they spend their time.
Despite the hype and high expectations surrounding Bitcoin and blockchain, it appears safe to say that they will not replace physical currency and banking as the central financial institutions of our time.
