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.”