We are in the midst of a Bitcoin bubble, and it’s bursting. Fast. The value of Bitcoin skyrocketed in 2017 by a phenomenal 2000% percent, stunning observers and creating a flurry of speculative investment. So far in 2018 its fall has been equally as dramatic, down 60% from the highs of December 2017. Some commentators have gone as far to call Bitcoin the biggest bubble of all time, eclipsing even Dutch tulip bubble of the 1630s. Despite its freefalling value, many Bitcoin enthusiasts maintain that the cryptocurrency could transform financial systems by removing the need for banks to act as gatekeepers on transactions. They may be right. After all, the internet endured the dot-com bubble of 2001 and today occupies an unquestioned presence in our lives. So, what will remain once Bitcoin hysteria has subsided? This current bubble may turn out to be a distraction from the true significance of the technology behind Bitcoin, the blockchain.
Put simply, Bitcoin is a digital global payment network which, like Visa or PayPal, allows money to be transmitted electronically. Bitcoin differs from conventional payment methods in two ways. The first is that Bitcoin is not tied to any ‘hard’ currency, such as the US dollar, which is backed by the US government. Bitcoin derives its value from within the Bitcoin network itself. The more that people use it, and believe in it, the more valuable it becomes.
The second, and most significant difference, is that the Bitcoin network is decentralised, open source, and peer-to-peer, meaning it doesn’t rely on banks to act as gatekeepers on payments. Digital transactions are processed on a public register called the blockchain, which is a secure network shared across participating computers. Blockchain technology uses a complex process of encryption to store data in secure manner, using cryptographic keys. When a purchase is made using MasterCard, Mastercard Incorporated secures the payment, but they also take a commission. The beauty of the blockchain is that no one owns it. No corporation, investment bank, or broker. It’s this decentralised payment network which people are getting so excited about.
What blockchain technology offers then, is perhaps best described as a self-executing contract. One which has the potential to replace banks, stock exchanges, insurance companies, and other data storing organisations that are currently integral to the functioning of society. Writing for The Guardian, Ian Tucker notes that blockchain technology has the potential to revolutionise systems for healthcare, global aid distribution, and music streaming. Blockchain technology might even make it possible to vote safely over the internet.
Many cryptocurrency enthusiasts see the potential for blockchain technology to revolutionise digital payments and financial systems in the same way that the internet revolutionised the communications industry in the 1990s and 2000s. New York Times Economist Paul Krugman eloquently summarises the current mood towards Bitcoin, acknowledging that there is a bubble, but that it is one “wrapped in techno-mysticism inside a cocoon of libertarian ideology”.
But what can you actually use Bitcoin for? Sure, Tesla and Virgin Galactic accept payments in Bitcoin. There are even small numbers of Bitcoin ATMs popping up across the globe. Yet you can’t use Bitcoin for practical daily tasks such as shopping at the supermarket or purchasing a train ticket. Bitcoin payments can be clunky. Transactions that in theory should take seconds, can take up to an hour to process. At the end of the day, what good is a payment system that isn’t…functional?
There are a growing number of investors, economists, and politicians who are speaking out against Bitcoin and other cryptocurrencies. Respected investor Warren Buffet recently spoke with CNBC, telling them that the recent hype in cryptocurrencies will “almost certainly” come “to a bad ending”. Nouriel Roubini, a professor of economics at New York University who predicted the 2008 financial crash, has called Bitcoin “the mother of all bubbles” and claims the value of the digital currency will drop “all the way down to zero”. Former Federal Reserve chair Janet Yellen described Bitcoin as a “highly speculative asset” which “plays a very small role in the payment system” and should not at this stage be considered “a stable source of value”. While Buffet, Yellen, and Roubini have an obvious vested interest in the current financial system, which Bitcoin undercuts. Their scepticism represents a significant roadblock for the future of the digital decentralised payment system.
Surprisingly absent from a majority of mainstream discussions surrounding cryptocurrencies, is the opportunity that they can provide to criminal groups. Speaking at the World Economic Forum in Davos, British Prime Minister Theresa May expressed concern that unregulated digital currencies can be exploited by criminals to transfer funds anonymously. In an alarming report, Former CIA counterterrorism analyst Yaya Fanusie noted that there are terrorist groups attempting to supply fighters with weapons and other resources using Bitcoin addresses. Perhaps most famously of all, in 2015, Ross Ulbricht, the mastermind behind the darknet market Silk Road, was sentenced to life in prison after it was used as a forum for trafficking illegal substances which were paid for via Bitcoin.
A growing number of regulatory crackdowns aimed at protecting investors and consumers are also slowing the expansion of Bitcoin and other cryptocurrencies. Lloyds Bank recently banned customers from buying Bitcoin using credit cards over fears it could be left in debt as Bitcoin’s value continues to plummet. South Korean authorities have also banned anonymous trading of cryptocurrencies in an attempt to curb money laundering. International Monetary Fund chief Christine Lagarde recently stated that regulation of cryptocurrency markets is “inevitable”, an ominous announcement which may well contribute to Bitcoin’s decline.
It remains to be seen if blockchain technology will be successfully integrated into mainstream society once the Bitcoin bubble has burst. Perhaps, as with many new technologies, the problem doesn’t lie with the blockchain technology itself, but with the crowd of opportunists, false profits, and financial hacks who are attracted to it. Only time will tell. For now, it’s all just speculation.
Timothy James Parker