The bitcoin is getting a lot of attention these days, mainly due to its surging value. It has attracted many speculators as a way to make a fast buck, but few people understand what this “crypto currency” represents and how it functions. Let’s take a quick look at crypto currencies overall, the technology, the bitcoin, and how similar technology may be used in a very different way.
The bitcoin was the world’s first crypto currency, meaning it only exists in the digital realm. It was created by an unknown person or group of people, and its biggest feature is called a blockchain. This is a security feature that creates an encrypted public ledger with multiple copies across the web. All of these ledgers are synchronized to match, and they track all of the transactions for a given coin, so the entire history is available to ensure security and validity. Thus the name blockchain, all of these bitcoins are always dragging around the history of where they have been and who has owned them, and that history is in multiple places that must match.
How bitcoins are created and how these ledgers are managed is highly technical, but the important thing is that it does work. The more interesting aspect, and what will be more useful in the future is this concept of the blockchain and distributed ledger.
The technology can be used for a variety of purposes outside of creating currencies. One example is validating ownership and provenance of digital texts, art, and images. Another example is the Smart Contract where a blockchain is used to release funds as terms of a contract are met, eliminating certain trust issues when two parties don’t know each other – the new escrow of the digital age. This will be a game changer as we plow forward into an evolving shared economy. Uber, Airbnb, and eBay are just the tip of the iceberg. In practice, this technology will happen behind the scenes, but it opens up many new possibilities with an answer that is less complex than what would be needed today.
The bitcoin itself may ultimately not be as important as the doors the technology is opening, but what about the bitcoin? People are buying them because the price has been increasing, and the price has been increasing because people are buying them. At the moment, we are looking at a huge speculative surge. What is the basis for the value of the bitcoin? I was hoping you’d know, and if you do, please let me know.
If we are buying anything for speculative purposes the underlying assumption is that the current price is wrong, and we think that thing is worth some higher price. The problem is we don’t know enough to know how the bitcoin should be priced, and to make matters worse, people aren’t just trading in their dollars for bitcoins, they are also trading yen, euros, pounds, francs, etc. This means you would also be engaging in complex foreign currency trading at the same time (even if it doesn’t seem like it) when simply “investing” in bitcoin.
If you want to buy something, and the only payment accepted is bitcoin, then you would have to buy bitcoins, but hopefully you would only own the bitcoin itself for a short time, which isn’t very risky. Then again, if you are buying things only sold in bitcoin, you lead a much more interesting life than most of us.
While the bitcoin is fascinating, and is made out to be very sexy and sophisticated in the media, it is just about as risky as it gets in the world of investing. That said, as we have seen here, the technology making it possible could lead to very cool things in the future.