In a matter of weeks in November 2017, bitcoin surged from a fringe investment to a global sensation. In mid-November, the price was around $3,000 for a single bitcoin; on December 6, 2017, it surpassed $19,000. At the time of publication, the value was hovering around $15,000.
Bitcoin is having a moment — really, it’s had a year. No matter if you think it’s a bubble about to burst, or hope your investments will pay back big in the long run, there is one clear takeaway: Cryptocurrency is changing the future of finance. What’s not yet clear is how the technology behind bitcoin, and cryptocurrencies like it, will alter our national and global financial systems.
Back on the Blockchain
Bitcoin, like all cryptocurrencies, relies on a technology called blockchain that makes its transactions so secure that experts consider them to be virtually unhackable. And because the transactions are assured, the cost of verifying transactions is less than in a central bank though, admittedly, the cost of verifying bitcoin transactions has become fairly expensive.
Cryptocurrency transactions happen directly between individuals instead of through a bank. Every time a person makes a transaction using a cryptocurrency — for example, using funds stored in his or her crypto wallet to send bitcoin to someone else — the transaction is recorded on a digital ledger called a blockchain. Every cryptocurrency has its own blockchain, and computers doing complex math in a large network maintain it.
Once users make a specific number of transactions using a cryptocurrency, the computers group these transactions into a “block.” In order to send a block, adding transactions to the blockchain and winning a monetary reward, a computer has to solve a complex math problem called a cryptographic function.
Everything You Need to Know About Cryptocurrency And Why It's The Future Of Money
bitcoin and computer chip
In a matter of weeks in November 2017, bitcoin surged from a fringe investment to a global sensation. In mid-November, the price was around $3,000 for a single bitcoin; on December 6, 2017, it surpassed $19,000. At the time of publication, the value was hovering around $15,000.
Bitcoin is having a moment — really, it’s had a year. No matter if you think it’s a bubble about to burst, or hope your investments will pay back big in the long run, there is one clear takeaway: Cryptocurrency is changing the future of finance. What’s not yet clear is how the technology behind bitcoin, and cryptocurrencies like it, will alter our national and global financial systems.
Back on the Blockchain
Bitcoin, like all cryptocurrencies, relies on a technology called blockchain that makes its transactions so secure that experts consider them to be virtually unhackable. And because the transactions are assured, the cost of verifying transactions is less than in a central bank though, admittedly, the cost of verifying bitcoin transactions has become fairly expensive.
Cryptocurrency transactions happen directly between individuals instead of through a bank. Every time a person makes a transaction using a cryptocurrency — for example, using funds stored in his or her crypto wallet to send bitcoin to someone else — the transaction is recorded on a digital ledger called a blockchain. Every cryptocurrency has its own blockchain, and computers doing complex math in a large network maintain it.
Once users make a specific number of transactions using a cryptocurrency, the computers group these transactions into a “block.” In order to send a block, adding transactions to the blockchain and winning a monetary reward, a computer has to solve a complex math problem called a cryptographic function.
Basically, the cryptographic equation is throwing a pumpkin (the block) off a building and telling you what the splatter pattern looked like. The only way users can match the splatter pattern — and send the block — is to hurl a bunch of pumpkins off a building themselves. So people who “mine” cryptocurrency are actually just using their computers to smash billions of pumpkins in order to find the winning pumpkin with the right splatter, which validates their block.
In other words, the first computer that can solve a complex math problem gets to add its block of transactions to the blockchain and receive a monetary reward for doing so (this is what people mean by “mining” crypto). Every computer in the network adds the new block to its copy of the digital ledger, and the process continues.
Although bitcoin was created to avoid centralized banking and government money, the technology can be used as a national, centrally banked currency. In fact, the blockchain is so secure that it reduces the cost of verifying transactions, so banks are already looking into it, says David Yermack, chairman of the finance department at New York University’s Stern School of Business. In 50 years, Yermack says, cryptocurrencies could be used as national currencies.
Will Our Future Be In Bitcoin?
Bitcoin was created to work outside national currencies, which is a draw to people who don’t trust central banks, says Yermack.
Those who are hopeful about the rise of bitcoin may have noticed its popularity in countries like Zimbabwe and Venezuela, where it is being used as a major means of exchange when government-issued currencies have failed because of hyperinflation. Bitcoin and other means of exchange have become popular in these countries because transactions can be performed on cell phones, and their value is more stable than the hyper-inflated national currency.
But others believe that bitcoin is too riddled with problems to be the cryptocurrency upon which the future is built. First, it likely can’t be used on a national scale because of how few transactions per minute bitcoin supports. Bitcoin’s framework can only make seven transactions per second, says Ari Juels, computer science professor at Cornell University who studies cryptography and computer security. VISA’s credit card network, for comparison, can handle 65,000 transactions per second.
Issues of privacy also stop it from becoming the future of money, says Phillipa Ryan, commercial equity lawyer and lecturer at the University of Technology Sydney. “Bitcoin is problematic in that it provides too much privacy and not enough privacy,” says Juels. “Too much privacy in that it provides enough to give criminals the opportunity to perpetrate a lot of mischief, from ransomware to the Silk Road. Not enough in that transactions are actually traceable by pseudonym.”
Everything You Need to Know About Cryptocurrency And Why It's The Future Of Money
bitcoin and computer chip
In a matter of weeks in November 2017, bitcoin surged from a fringe investment to a global sensation. In mid-November, the price was around $3,000 for a single bitcoin; on December 6, 2017, it surpassed $19,000. At the time of publication, the value was hovering around $15,000.
Bitcoin is having a moment — really, it’s had a year. No matter if you think it’s a bubble about to burst, or hope your investments will pay back big in the long run, there is one clear takeaway: Cryptocurrency is changing the future of finance. What’s not yet clear is how the technology behind bitcoin, and cryptocurrencies like it, will alter our national and global financial systems.
Back on the Blockchain
Bitcoin, like all cryptocurrencies, relies on a technology called blockchain that makes its transactions so secure that experts consider them to be virtually unhackable. And because the transactions are assured, the cost of verifying transactions is less than in a central bank though, admittedly, the cost of verifying bitcoin transactions has become fairly expensive.
Cryptocurrency transactions happen directly between individuals instead of through a bank. Every time a person makes a transaction using a cryptocurrency — for example, using funds stored in his or her crypto wallet to send bitcoin to someone else — the transaction is recorded on a digital ledger called a blockchain. Every cryptocurrency has its own blockchain, and computers doing complex math in a large network maintain it.
Once users make a specific number of transactions using a cryptocurrency, the computers group these transactions into a “block.” In order to send a block, adding transactions to the blockchain and winning a monetary reward, a computer has to solve a complex math problem called a cryptographic function.
Basically, the cryptographic equation is throwing a pumpkin (the block) off a building and telling you what the splatter pattern looked like. The only way users can match the splatter pattern — and send the block — is to hurl a bunch of pumpkins off a building themselves. So people who “mine” cryptocurrency are actually just using their computers to smash billions of pumpkins in order to find the winning pumpkin with the right splatter, which validates their block.
In other words, the first computer that can solve a complex math problem gets to add its block of transactions to the blockchain and receive a monetary reward for doing so (this is what people mean by “mining” crypto). Every computer in the network adds the new block to its copy of the digital ledger, and the process continues.
Although bitcoin was created to avoid centralized banking and government money, the technology can be used as a national, centrally banked currency. In fact, the blockchain is so secure that it reduces the cost of verifying transactions, so banks are already looking into it, says David Yermack, chairman of the finance department at New York University’s Stern School of Business. In 50 years, Yermack says, cryptocurrencies could be used as national currencies.
Will Our Future Be In Bitcoin?
Bitcoin was created to work outside national currencies, which is a draw to people who don’t trust central banks, says Yermack.
Those who are hopeful about the rise of bitcoin may have noticed its popularity in countries like Zimbabwe and Venezuela, where it is being used as a major means of exchange when government-issued currencies have failed because of hyperinflation. Bitcoin and other means of exchange have become popular in these countries because transactions can be performed on cell phones, and their value is more stable than the hyper-inflated national currency.
But others believe that bitcoin is too riddled with problems to be the cryptocurrency upon which the future is built. First, it likely can’t be used on a national scale because of how few transactions per minute bitcoin supports. Bitcoin’s framework can only make seven transactions per second, says Ari Juels, computer science professor at Cornell University who studies cryptography and computer security. VISA’s credit card network, for comparison, can handle 65,000 transactions per second.
Issues of privacy also stop it from becoming the future of money, says Phillipa Ryan, commercial equity lawyer and lecturer at the University of Technology Sydney. “Bitcoin is problematic in that it provides too much privacy and not enough privacy,” says Juels. “Too much privacy in that it provides enough to give criminals the opportunity to perpetrate a lot of mischief, from ransomware to the Silk Road. Not enough in that transactions are actually traceable by pseudonym.”
Its value also fluctuates too much to provide a stable, functional currency. Unlike traditional currencies, which have a value that is set by the central banking system, the value of bitcoin is driven by speculation about its worth like a stock, says Yermack. So it doesn’t make the cut as a currency. “Traditionally, we think of money as a kind of means of exchange and a store of value,” says Harold James, an economic historian at Princeton. “[Bitcoin] is very good at the means of exchange, but not very good at the store of value.”
The future likely won’t be based on bitcoin. That’s not to say that the future won’t be based on other cryptocurrencies.
If you have a dollar bill, it’s pretty safe to assume it’s worth about a candy bar from day to day. One bitcoin, on the other hand, could be worth a candy bar one day, a car the day after, then next to nothing the day after that. It’s more like a stock than a stable national currency. James says that, based on the historical precedents he studies, bitcoin looks like the highly unstable private currencies created in Eastern Europe after the First World War. When speculation about the value of bitcoin is substantially more than its worth in the real world, bitcoin will burst, like the stock market crashed.
Economists studying cryptocurrency and computer security experts agree: The future likely won’t be based on bitcoin. Of course, that’s not to say that the future won’t be based on other cryptocurrencies.
In the meantime, bitcoin will remain as a grand test of the blockchain technology, says Ryan. Its value will continue to fluctuate, but Ryan is convinced it’s already a bubble. “I think that bubble will burst. It’s fun to watch though, it’s been a great ride,” says Ryan. “When bitcoin finally fails, I think we will look back on it as a really important, valuable experiment in which more lessons will be learned than there will be loss.”
A Shift In The Financial System
Bitcoin offers something groundbreaking, and a growing number of national banks, including the Federal Reserve, are interested in using blockchain technology to power a centralized national currency. Most experts agree that, in the future, countries will turn to cryptocurrency, as money is already moving from the physical to the digital realm. So a method that secures digital transactions is a necessary investment, and the blockchain technology used in cryptocurrencies is a top contender.
“I think the whole idea is probably horrifying to the bitcoin people, but it’s the ultimate harbinger of success when the person you’re trying to defeat co-opts your own plans and turns them against you,” says Yermack. “The ultimate victory is where the central bank co-opts their technology and makes it the basis of their own operation. And I can see it very clearly play out that way,” Yermack says. “Monetary policy and financial stability — I think those problems will be exactly the same in 50 years.” But in 50 years, a nationally backed cryptocurrency could replace the paper dollar, he says.
When it comes to the future of money, cryptocurrency’s influence will be felt in its improved ability to avoid technological problems like hacking, Ryan says. Based on the issues of cybersecurity looming ahead, Ryan thinks that the blockchain will be the technology to transform the money of the future.