By Alex Puiu
Money makes the world go round and for each currency to work successfully, there is nothing more important than the trust people place in it. So what happens to the world when a new form of money, fully digital and decentralised, is created? What are the main reputational drivers of the digital currency, bitcoin? Is the cryptocurrency, which recently passed a valuation of $4,000 per bitcoin, really worth nearly three times more than gold?
What is a bitcoin?
The simple premise of money is the ability to easily exchange it for products and services. But underlying that transaction is the trust that consumers place in institutions such as the European Central Bank. This intermediary guarantees the public that the Euro is a way of engaging in economic activity. Throughout history and across the globe, governments and institutions usually use political power to guarantee the value of the currencies they issue, hence they act as an intermediary. But what if you could spread that trust to a million actors, each checking every transaction and verifying it, essentially decentralising trust?
That is the idea behind bitcoin. Many people may have first encountered bitcoin in headlines that told stories of the cryptocurrency’s brush with data breaches and its susceptibility to security hacks that it has suffered since its launch.
The blockchain, which is the underlying technology powering bitcoin, Ethereum and many other cryptocurrencies, spread ‘trust’ amongst a network of systems, bypassing the need to have a central authority review and approving all transactions. Instead of placing your trust in a select few people, you share that trust with a network of miners, i.e. people who make the bitcoin network operational, who ensure that it is mathematically unlikely that cheating will happen.
Regulation is Good?
Bitcoin is a highly volatile currency, popular among darknet criminals and with a history of big bitcoin exchanges going bust. If regulated, bitcoin could ironically receive a trust boost from its principal “competitor”, the government. While a regulatory framework will not solve all of the above mentioned problems associated with bitcoin, it may give the nascent currency a much-needed confidence boost.
Some may argue that the downside of regulating the cryptocurrency is that by doing so, you risk stifling innovation. Drawing inspiration from the previous digital revolution, the arrival of the internet, it can take years to get the technology just right. In the short term, regulating it might stabilise the bitcoin, but in the long term, it has the potential to have a greater impact on society.
The New Internet?
One can argue that bitcoin is the new internet. In the early stages, the internet was a technology mostly used by computer connoisseurs and scientists, with limited applicability but incredible potential. In those days, it was a haven for pirated content and alien digital art. Bitcoin, just like the internet, has the potential to disrupt businesses and significantly impact society as we know it. To put it into perspective, bitcoin and other cryptocurrencies are worth, at the time of writing this article, more than $120 billion in market capitalisation. This high valuation might well be a bubble, but again, just like the internet bubble of the early 2000s, investors could be getting too excited too soon. Unlike current high valuation companies built on the internet, bitcoin and other cryptocurrencies could further decentralise the accumulation of wealth, enriching all network participants rather than just the shareholders and employees. Essentially, bitcoin could be envisaged as the next step towards a more democratic creation and sharing of wealth.
Everyone Is Paying Attention
It’s getting increasingly harder for investors to ignore cryptocurrencies. Even the IMF is looking into how they can leverage the blockchain technology to increase efficiency of transactions. Central banks of countries such as the UK, Russia and China are actively analysing how they can reap the benefits of the blockchain. This increased interest in the digital currency in the past year has been a positive reputational driver, especially in lieu of governments giving it a confidence boost by regulating it. Whether or not the blockchain technology will go mainstream or not, the reputation of bitcoin will hinge on it.
In conclusion, while we cannot know for sure if cryptocurrencies such as bitcoin will change society the way the internet did, if it does it could make the world go round faster than anything else before it.