When the price of Bitcoin shot up from $8 to $1,300 in 2017, many people started asking whether this was the start of a new bubble. It seemed even more dramatic when it fell by half again in two months. And that was before it had any chance of reaching its goal as a currency: as a unit of account it would have been worth less than a penny, and at today’s exchange rate (which is higher than the peak) it would be worth less than $1 billion.
The question is not whether Bitcoin is doomed. That’s easy to say and hard to believe. We are just starting to see how cryptocurrencies will become integral to our global economy.
Bitcoin succeeded at a time when people were skeptical about cryptocurrencies generally, and especially about the ability of Bitcoin itself to succeed. But now we are on the cusp of finding out whether cryptocurrencies can succeed in ways that we hadn’t anticipated; what economists call “unanticipated consequences.”
Cryptocurrencies are a kind of money: pieces of digital data that you can use to buy stuff or pay for services. They are especially promising because they are decentralized and anonymous. That is, you don’t need the permission of any third party to use them.
But they are not quite ready for prime time yet. For example, there is still no way to protect your investment from theft if you lose or forget your password; and the price volatility makes it hard for you to rely on them for much more than as a store of value.
Cryptocurrencies will become more useful when people start to understand that we no longer need to trust the banks, governments and other institutions that we have always trusted in the past.
Everyone is talking about Bitcoin and cryptocurrencies these days. But so far they are just a sideshow – a digital currency that is fascinating mostly because of its mystique, not because it’s actually useful. But you don’t need to know anything more than that to see how they might fit into the future of our economy.
In a world where the things we need may become digitally scarce and difficult to produce, there is no point in producing things far less efficiently than others. The cheap stuff will win out.
We are still in the early stages of this development. It will be a long time before the market is big enough to sustain a large number of startups. For now, it’s mainly the early adopters who have had success: the sort of people who would have been doing this for fun rather than profit if they’d tried it ten years ago.
But as more applications are built and more people adopt cryptocurrencies, it will become increasingly important to get them right. For one thing, they’re new technology; there’s always a risk that what looks elegant at first can turn out to be broken in practice. A key part of making them successful is ensuring that this doesn’t happen.
There are two kinds of security issues that need to be solved: bugs and scams. (Some people prefer to talk about “scams” when they don’t mean fraud.) The first are easy to find; you just have to look at the code, or talk to someone who has used it. The second are harder, because they require meeting people on the internet and seeing how they act in person. This is hard for both sides: it takes time and effort, and most of us don’t have time or energy for it.
Bitcoin and other cryptocurrencies have only been around for a little while, but they’re already changing our lives.
One reason to get excited about them is that they will make the world’s financial system more efficient. The cost of moving money around the world will become much cheaper and easier. Peer-to-peer transactions won’t require expensive middlemen.
That’s important because there are few things more wasteful than banks. Banks don’t just take your money and give you stuff in return. They also charge you lots of fees for making the transaction, so when you use your credit card to buy something from an online retailer it can cost you more than if you had just paid with cash at the supermarket checkout, or even by cheque at the bank (which is what most people still do). And then they lend out your money and charge interest on it, so when you want to borrow your money back, they charge you interest for lending it out again.
Cryptocurrencies will change this system. Bitcoin has made it possible for people to transfer money across borders almost instantly at very low cost. But there are other cryptocurrencies too—and new ones keep coming onto the scene all the time—and more are being designed all the time. In future we should expect that some of
In the past year, cryptocurrencies have gone from being a fringe phenomenon to being something that most people are talking about.
Cryptocurrencies are digital money, like dollars or euros. But they have no central bank to issue them and no gold standard backing them up; they exist only as a string of digits on a computer.
While there are many cryptocurrencies, Bitcoin is the best known. It was introduced in 2009 by an unknown person or group going by the pseudonym “Satoshi Nakamoto.”
The value of a cryptocurrency is based on the supply of that currency and the demand for it in exchange for real goods and services. As a result, its price will vary with the level of economic activity in the world. If a large number of people are using a cryptocurrency for transactions, its value will go up. If there is little demand for it in those transactions, its value will go down.
Cryptocurrencies have recently experienced wild price swings due to large increases in their money supply. This was caused by an incorrect calculation (or “fork”) of Bitcoin’s software which caused the code to grow too rapidly because it was trying to compensate for lost Bitcoins by creating more of them.
The original Bitcoin software had been designed to increase the money supply at a slow rate so that it would take many years before there were more Bitcoins than gold in circulation. The new software increased the money supply at once, causing some people to lose money when they tried to trade Bitcoins for goods and services.