Before you start reading, I want you to keep the number 7354 in your mind. I will discuss this number in more detail later in this article.
On September 15, 2008, Lehman Brothers, the fourth-largest investment bank in America, filed for bankruptcy. The week before, the market value of Lehman brothers plummeted by 93 percent losing $46 billion of its market value. This event is considered as the starting point of the 2008 financial crisis by many economists. While the world economy was on a downslope, new milestones were being achieved in the world of Cryptography. Research papers were published which advocated the use of a decentralized, digital currency. The paper also described the system of blockchain and how these data structures can be used to protect and store the legitimate transactions of this digital currency. The author of the paper was Satoshi Nakamoto and he called this currency Bitcoin.
Though his proposed method was deemed authentic and practical by many experts, the mystery remains to date as to who this person was. Some believe that it’s a clever amalgamation of four leading tech giants, Samsung, Toshiba, Nakamichi and Motorola and it is also rumored that Satoshi Nakamoto is not an individual, but a group. The proposed digital currency, known as bitcoin, would be a peer to peer electronic cash system which is not regulated by any external institutions or government. One of the major problems of crypto-currencies is the double spending problem. Since the currency is stored in digital format, it has to be ensured that no individual can spend or use a bitcoin that he already used. This is achieved by the so-called blockchain data structure. It is basically a database or a ledger containing all the transactions ever made. The authenticity of this ledger is maintained as this information is stored in all the computers connected to the blockchain. High-speed processors are used to continuously check for discrepancies in the blockchain to make sure that the data is not being altered by a third party. This makes the system foolproof from phishing as the hacker would have to hack millions of computers connected to the blockchain simultaneously and alter the exact piece of information. In simpler terms, millions of copies of the exact same ledger are made and distributed to each individual, while the administration is constantly checking for discrepancies in all the ledgers simultaneously.
This system is being considered as the future of the monetary system as it is decentralized and the system allows peer to peer transactions. If one wants to send 100 dollars to Japan, first the dollars are deposited in a bank or foreign exchange institution, which then issues Japanese Yen with a conversion rate higher than the market value, accounting for taxes and service charges. The bank or the institution then verifies the transaction and it takes weeks to complete the whole process. With bitcoin, transactions can be made in any part of the world without any third party. This would greatly benefit international transactions as the transfer can be made over the Internet and on smartphones in seconds using bitcoin. All it needs is two parties who are willing to exchange and Wi-Fi. It has the capability to become the reserve currency for international trade and has the capability to make transactions an easier and faster process.
Bitcoin is not controlled by any government or any central bank. This decentralized form makes the currency stable and its value only depends on the demand for bitcoins in the market. The supply is also constant as bitcoin generation depends on the number of blockchains created. As the number of users increase, the need for more number of connected blockchains increase. These blockchains are created by a process called Bitcoin mining. Miners use high-speed processors to solve cryptographic math puzzles. In reality, they are creating new data in the ledger for new transactions and verifying the data with connected blockchains. This requires huge computational power and fast processors. In return for the processing power provided, bitcoin miners are paid in bitcoins and hence the term bitcoin mining. To maintain a constant supply of bitcoins, the difficulty of the math problems increase, increasing the time for the miners to generate bitcoins. Presently 12.5 bitcoins are mined every 10 minutes, but as the number of miners increase, the difficulty increases and the number of bitcoins mined will decrease. This system ensures a constant supply of the bitcoin and hence the value of the bitcoin depends on the demand for the bitcoin.
Due to its decentralized nature, many investors and companies are investing in bitcoins as they believe that bitcoins will be the future of the monetary system. Due to this, the demand for bitcoin is constantly increasing. The acceptance of bitcoin is rising steadily as awareness increases. There have been tests where researchers have survived a week in California only by spending bitcoins. Recently two Swiss banks started offering bitcoin-related services, which increased the demand and created a huge surge in its value. The bitcoin was trading at about $1200 in March 2017. In a period of seven months, the bitcoin value increased by 6.25 times.
To provide some perspective, let’s get back to the number I mentioned at the start of the article. The cost of one bitcoin was $7354 when I started writing. Presently the bitcoin is trading at $7482. The value increased by $128 in just two hours. This has been the trend of the bitcoin price over the past one month where the value is increasing by $100-$120 every single day. Experts predict that the bitcoin can go up to $11000 by the end of this year. As of today there is no investment with such huge returns at this rate.
Presently there is no single government or financial institution administering or regulating the trade of bitcoins. The Federal Reserve System is actively investigating the use of digital currency and its authenticity. It cannot be implemented on a nationwide basis until all its bugs are resolved. Until then bitcoin or any digital currency will remain a private currency in which the government or the Federal Reserve will not be liable in any case of fraud or default. The bitcoin is still in a stage of infancy and can be fool proofed only by testing and increasing its user base and acceptance.
Technology has always made our life easier and now it has become an integral part of our lives. Computers have changed the way we work and have given us a different perspective towards problem-solving. The Internet has made the world a smaller place and changed how we connect with people. With the advent of newer technologies, people are always skeptical about its practicality and application in daily lives. But eventually technology triumphs with increasing popularity and application. The bitcoin is in a similar stage and eventually has the ability to revolutionize the global monetary system. We are probably in the middle of a revolutionary period where digital currency takes over as a global currency making paper currency obsolete in the long run.
