Bitcoin has been making headlines globally over the last week. And for good reason. The volatility of the cryptocurrency has seen it reach dizzying heights. Peaking at US$2,791 for one bitcoin last Thursday.
It’s lead to a multitude of stories about lost or wasted coins over the years. As well as people regretting their timidness in not taking the plunge during Bitcoin’s infancy. Honestly, there is no point in dwelling on what could have been. It’s a poor mindset for an investor, as there is no room for emotions in finance.
Move on, and look to the future, not the past. Let’s talk about what Bitcoin’s success can mean for you now.
Bitcoin still has room to grow
Obviously, you can invest in Bitcoin at its current price and hope that it continues to rise. After all, bitcoin is finite. Once 21 million of them are in circulation, that’s it. With 16.35 million bitcoins currently in circulation, however, we aren’t likely to see the final bitcoin mined in our lifetime. 2140 is the current estimate for when we’ll likely see the last newly-mined bitcoin.
This cap on supply consequently makes them deflationary. Which comes with its own problems. But it means the value of the currency should continue to rise over time. However, I cannot stress enough how volatile the price of bitcoin is. Yes, it reached US$2,779, but it also plummeted to US$1,974 just two days later.
Bitcoin alternatives and ICOs
You can of course investigate other cryptocurrencies. However, you always need to stay aware of the risks. Like any market, crashes can occur, with plenty of analysts wary of a bubble.
This is a sector that is steadily growing inundated. Initial Coin Offerings, or ICOs, are the trendy way to fund your idea. It bypasses all the red tape of regular capital raising. You give investors the option to buy your token and then grow the value of it through your venture. And the digital currency or token doesn’t have to be the final product. It can also be the means to fund a bigger idea.
This is a process still very much in its infancy, with cautious optimism from both investors and entrepreneurs. But the opportunity for both parties could be astounding when done right.
Even directly trading cryptocurrencies is still fraught with risk. Most of the time you have to use a centralised exchange. Which involves removing your coins from the blockchain (digital ledger) and giving them to a third party.
As an example, the process would be like you withdrawing cash from an ATM and then giving that cash to me. I then exchange this cash for another currency with another party and give it to you. But if the deal turns sour, or I decide I’m keeping the money, well, there is no way you’re getting it back.
Now, there are people out there trying to remedy this situation. But like everything else, it’s still very new and has limited use. The process is known as atomic cross-chain swaps. Which will allow trade between two different blockchains instantly and without fear of theft. It is currently only used by Litecoin, with testing on other tokens to begin soon.
Is blockchain the real success story?
Blockchain is the technology behind Bitcoin that allows it to function credibly. In its most basic form, it is a public, digital ledger. Information is recorded anonymously through sequenced blocks of data. Information is confirmed by multiple users and, once validated, is added to the chain as a block. This block is always public knowledge and cannot be tampered with.
This secure transparency is how blockchain solved the problem of double-spending — an issue caused by a digital asset being copied or falsified — letting it be spent more than once.
What this means is that blockchain technology is completely decentralised. It has effectively made intermediary service providers, like banks, redundant.
There is far more depth to the blockchain than this very basic summary, but hopefully you get the gist of it. Blockchain is bigger than just Bitcoin alone, or any cryptocurrency.
Blockchain could lead to something far bigger than financial exchange reform. Some experts are calling it the biggest development since the internet. Now, I will concede that a statement like that lends itself to hyperbole. But blockchain is just that big. Which is part of the reason why Bitcoin is seeing so much success.
The banking sector is naturally trying to find ways to use blockchain. Insurance companies are also showing big interest. And Toyota recently announced a partnership with MIT to explore blockchain use for driverless cars. The possibilities could be endless. With the impact on how we use, exchange and store data showing huge dividends.
Corporations are only just starting to catch up though. Blockchain start-ups are essentially the new fad for tech entrepreneurs. Pushing the scope of blockchains in new industries. For example, German-based business Slock.it is utilising smart contracts for their digital locks. A smart contract is enforced and executed digitally in order to reduce costs and simplify delivery. Slock.it uses Ethereum, a cryptocurrency that specialises in smart contracts. Ethereum trades using its token ‘ether’.
Picture a digitally-connected lock on a rental bike that will unlock when my smart phone lets it know I’ve paid enough ether to rent it. The lock would then restrict use once my rental period is up. Perhaps I don’t return the bike on time or leave it in the wrong location. The lock could charge me for this breach of contract.
Which is where blockchains future may be brightest. The internet of things (IoT) is an idea that describes complete interconnectivity. Imagine your fridge purchasing groceries for you because you liked a recipe on Facebook. This seamless automation is what the end goal will look like. IoT allows devices to talk to each other, while blockchain facilitates transactions.
In 2015 it was flippantly defined by American professor Andrew Miller in a tweet. ‘(The) Internet Of Things is when your toaster mines Bitcoins to pay off its gambling debts to the fridge.’ While clearly a cynical jest at how bizarre the IoT landscape could be, the point could hold some merit. We are nearing a digital landscape that only a decade ago would probably have seemed farcical.
Blockchain is only just getting started though. If you’re looking at the Bitcoin boom and wondering how you can get in on this…well, blockchain related ventures might be your answer. Bitcoin may be the flashy money-maker, but it didn’t get there without a solid foundation.
Ryan Clarkson-Ledward ,
For Markets & Money