by
Apr 02, 2018
Widely regarded
as the greatest investment vehicle of the last decade, Bitcoin has seen a
rollercoaster ride in 2017 alone, going from $777 to $17,000.
Some experts predicted
that cryptocurrency such as Bitcoin would replace paper money in the next ten
years. Others believe this prediction is unrealistic due to the slow adoption
of Bitcoin among mainstream consumers. But, both sides agree that digital
currency will influence the flat currency systems of the world in the
future.
Will Bitcoin
become the cash of the future? To find out, first, we need to understand how
Bitcoin works.
What makes
Bitcoin so valuable is that there is a limited amount in existence. There will
only ever be a 21 million Bitcoins in the world, and unlike normal fiat
currencies, you can't just print more of them if there is a shortage.
Bitcoin runs
on a proof-of-work protocol, commonly known as block chain. To create Bitcoin,
you have to ‘mine’ it using computer processing power, solving complex algorithms
on the Bitcoin network. Once solved, you are rewarded with Bitcoin as payment
for the ‘mining’ you have done. Unfortunately, the reward you get for mining
has decreased dramatically every quarter since Bitcoin's inception, due to
various reasons such as transaction volumes and mining competition. This means
that for most people the only viable way to obtain Bitcoin is to buy it on an
exchange. At the current price levels, is that a risk worth taking?
Many naysayers
believe that Bitcoin is simply a bubble waiting to implode. Some
cryptocurrency experts like Duke Randal thinks the asset is overvalued, "I
would compare this to many supply and demand bubbles in history such as Dutch
Tulip Mania and the dot-com bubble of the late 90s. Prices are purely
speculation based, and when you look at Bitcoin's functionality as an actual
currency, it is almost embarrassing".
Bitcoin was
originally created to take power away from our financial systems and put people
in control of their own money, enabling fast peer-to-peer transactions, cutting
out the middleman and their exorbitant fees. However, it is currently one of
the slowest cryptocurrencies on the market; its transaction speed is four times
slower than the fifth biggest cryptocurrency and its nearest competitor for
payment solutions Litecoin.
Other similar
cryptocurrencies such as Monero makes transactions even quicker, boasting an
average block time of just two minutes, a fifth of the time Bitcoin can do it
in, and that's without anonymity. The world's second-biggest cryptocurrency, Ethereum,
already has a higher transaction volume than Bitcoin despite being valued at
only $676 per Ether compared to Bitcoin's $16,726 per Bitcoin.
So why is
Bitcoin's value so high?
“It all goes
back to the same supply and demand economics", says Randall. “Due to Bitcoin’s
limited availability, and its recent surge in price, it has attracted a lot of
media attention, this combined with the launch of Bitcoin futures which many
see as the first sign Bitcoin is being accepted by the mass market, has
resulted in a lot of people jumping on the bandwagon for financial gain. Like
any asset, when there is a higher demand to buy than to sell, the price goes
up. This is bad because these new investors are entering the market without
understanding block chain and the underlying principles of these currencies
meaning they are likely to get burnt".
One thing to
consider about Bitcoin is its extreme volatility. Just in past year alone, it
has been known to swing up or down thousands of dollars within hours, which if
you are not used to nor expecting it, causes less experienced investors to
panic sell, resulting in a loss.
This is yet
another reason Bitcoin will struggle to be adopted as a form of payment. The
Bitcoin price can move substantially between the time vendors accept Bitcoin
from customers and sell it on to exchanges for their local currency. This
erratic movement can wipe out their entire profitability. Will this instability
go away anytime soon? It is unlikely, because Bitcoin is a relatively new
asset class. While the awareness is increasing, only a very small percentage of
the world's population are currently hold Bitcoin. Until it becomes a more
widely distributed asset, and its liquidity improves significantly, the
volatility is not going to change.
So, if Bitcoin
is useless as a currency, what are its practical applications?
Many believe
Bitcoin has moved on from being a viable form of payment to become a vehicle
for storing value. Bitcoin is akin to ‘digital gold’ and will simply be used as
a benchmark for other cryptocurrencies and block chain projects to be measured
against and traded for. In recent months, there have been stories of people
in developing countries such as Zimbabwe buying Bitcoin in order to hold on to
what wealth they have, rather than see their wealth decline under the
recklessness of its own central banking system.
Regardless, predictions
that digital currency will completely replace printed money within the decade looks
to be a bit too ambitious. Despite digital currency slowly growing in
popularity, there still remains a certain psychological security in a currency
held in one's hand. Moreover, fears of hacking, viruses, and other attacks on
the entire financial foundation of a nation via purely digital means will
likely make most nations slow to adopt such a form of currency.
Who knows what
the price of these cryptocurrencies will be ten or even twenty years from now?
One thing is certain though, we better strap ourselves in as the future is
going to be changing dramatically with Bitcoin.
Advertisement
Advertisement
Advertisement