If you’ve found yourself completely at sea amid all these new terms being bandied about all over the news, you’re not alone—Bitcoin arrived in the mainstream suddenly and to many, without warning. So what’s the deal? Just what exactly is it, how does it work, and is it a fad or is it really going to revolutionize everything?
To start at the very beginning, Bitcoin was invented in 2008, by a pseudonymous entity called Satoshi Nakamoto. This person, or group, also invented the blockchain which, in the simplest of terms, is a shared record of, in this case, transactions made with cryptocurrency, but can be used to store other information as well. The benefit of blockchain technology is that the record is decentralized and shared, so it can be accessed by anyone who wants to see it, which also makes it invulnerable to hackers wishing to corrupt it. So far, A+ for transparency and security.
Digital currency was developed as an alternative to traditional banking, its advantage lying first and foremost in the directness of its transactions—all transactions are peer to peer, meaning there’s no intermediary, which allows for significantly lower fees and exponentially greater access. When a transaction is initiated, the information is transmitted to a peer-to-peer network and validated, after which it’s added to the blockchain to be completed. Bitcoin was the first cryptocurrency and casts a shadow over all the newer types that followed, so the term “Bitcoin” is now being used to discuss a variety of different cryptocurrencies, much like we say “kleenex” no matter what brand of tissue we’re using. We won’t get into it now, but it’s useful to remember that there are now a variety of cryptocurrencies (and more are expected) and many of them were developed for very specific functions and have their own advantages and disadvantages depending on what they’re being used for.
Over the last few weeks, Bitcoin exploded into the news because of an enormous surge in price, so much so that CNN and late night comedy shows have worked it into their programming. For our purposes, Bitcoin works pretty much like the stock market, except that it never closes, and is susceptible to the same kinds of fluctuations. It’s vulnerable to external events in much the same way—particularly because of the newness of the technology and the sheer numbers involved, values are liable to yoyo under the influence of a variety of factors. Arguably, one of Bitcoin’s strengths is also the source of its weakness: because it’s a young technology and particularly because it doesn’t have a regulatory body or even a class of professional mediators, it’s at the mercy of events that don’t affect traditional finance.
On the face of it, Bitcoin may shake up the financial world in a way that’s sorely needed. According to proponents of the new technology, Bitcoin will democratize finance and set it free, giving greater access to people all over the world, who will finally be in full control of their own banking. There’s also no real argument to be made against the notion that the way finance works now is due for an overhaul—it’s top heavy and mismanaged and is clearly unsustainable. That said, regardless of the desperate need for change, there is considerable controversy over whether cryptocurrency offers a solution. There are concerns that the anonymity guaranteed by cryptocurrency could make it a useful tool for criminals and terrorists; “wallets” can be lost or hacked and there’s no safety net in place for those affected; the amount of energy required to mine and process cryptocurrency is huge and will take its toll on the environment. To all these concerns, one might say that all technology is susceptible to misuse and Bitcoin is not to blame for human error. But even if that were so, the technology is still vulnerable to disruption from hostile parties: governments with totalitarian leanings could throttle the internet in their countries (as they have done before), which would effectively destroy the egalitarianism that Bitcoin espouses; and the FCC’s repeal of net neutrality could have a repressive effect even in the United States.
Regardless, Bitcoin also possesses the potential to explode how we think about money and it’s impossible to definitively state how things will go. At the time of writing, Bitcoin is valued at just over $13,500, which is being taken as a hopeful sign. The steady rise of ecommerce has already changed millennials’ relationship with consumption and conceivably cryptocurrency is better equipped to function in new, digital markets.
2018 promises to be an interesting year—come back with all the cryptocurrency questions you’re absolutely sure to have.