I first wrote about Bitcoin on this website five years ago today. (Click here). I decided not to buy any at the time because the price had surged to well over one hundred dollars! Clearly it was a bubble. If only I had known that the price would peak at $18,000 a few years later. (Today, the price is about $6,800).
So what’s happened over the past five years? Let’s look at Bitcoin’s benefits and then investigate some of the ways that it has changed our world.
Bitcoin is based on a blockchain stored in multiple locations. This gives it two major advantages: it can’t be erased and can’t be tampered with. Simply put, it’s like writing checks in ink rather than in pencil, using paper that can’t be destroyed. A blockchain can record transactions and ensure that they will always be available as a matter of public record. Bitcoin uses this feature to buy and sell things. Each transaction is recorded forever, meaning that you can’t spend the same Bitcoin more than once.
Bitcoins can also reduce inflation because they can’t be printed at a government’s whim. Instead, they’re “mined” through complex mathematical calculations. The process gradually grows the supply of coins. The money supply grows in predictable ways. This appeals to anyone who worries that governments will artificially inflate their national currencies.
Bitcoin is also anonymous – just like cash. Unlike cash, however, it’s not physical. It can easily be moved around the world as electronic blips. That makes transactions convenient and inexpensive and could conceivably cut out banks as middlemen. This makes Bitcoin attractive to many groups, especially criminals.
So, what’s happened? First, the idea of the blockchain has spread. There’s no reason to limit the blockchain to currency transactions. We can store anything in blockchain and ensure that it never disappears. In other words, we believe that it is more trustworthy than government or financial entities.
As Tim Wu writes, we are undergoing, “… a monumental transfer of social trust: away from human institutions backed by governments and to systems reliant on well-tested computer code.” Wu notes that we already trust computers to fly airplanes, assist in surgery, and guide us to our destination. Why not financial systems as well? A well-organized cryptocurrency could become the de facto standard global currency and eliminate the need for many banking services.
But we don’t need to limit the blockchain to financial transactions. Any record that must be inviolate can potentially benefit from blockchain technology. Some examples:
Of course, we can also use blockchains for less noble pursuits. The blockchain can store any information, including pornography. That’s a problem but it’s the same problem that was faced by myriad new technologies, including VCRs and the Internet itself. Criminals can also use cryptocurrencies for ransomware attacks, and to traffic in contraband or avoid taxes. We can ameliorate these problems but we probably can’t eliminate them. Still, the advantages of the technology seem much greater than the disadvantages.
So … what happens over the next five years? The New York Times reports that venture capitalists poured more than half a billion dollars into blockchain projects in the first three months of this year. So, I expect we’ll see a shakeout at the platform level over the next five years. Today, there are many ways to implement blockchain. It reminds me of the personal computing market in, say, 1985 – too many vendors selling too many technologies through too many channels. I expect the market will consolidate around two or perhaps three major platforms. Who will win? Perhaps IBM. Perhaps R3. Perhaps Ethereum. Perhaps Multichain. Rather than buying Bitcoin, I’d suggest that you study the platforms and place your bets accordingly.
In the meantime, we need to ask ourselves a simple question: Are we really willing to forego our trust in traditional institutions and put it all into computer code?