Cryptocurrencies have moved into the mainstream more each year, as interest surrounding this sometimes mysterious kind of money grows. This year has been a particularly good one for cryptocurrencies, with Bitcoin competitor Ethereum making big news as it grew over 2400 percent from the beginning of the year, and Bitcoin reaching its highest valuation ever this month.
But cryptocurrencies can seem confusing and complex if you’re just beginning to learn about them. If you’re interested in investment or just want to learn more about Bitcoin, it’s important to know why they’re worth anything in the first place. It’s not as difficult to understand cryptocurrencies as it seems when we think about them in terms of the tools we currently use for exchange.
The Real Value of Bitcoin
Bitcoins, along with all other digital currencies, are based on a piece of technology called blockchain.
You can think of blockchain as a distributed public ledger that automatically records any trade using Bitcoins. Blockchain means that Bitcoin is kind of like a currency with a built-in accountant — blockchain automatically records anything done with any bitcoin and makes that information publically available. This has a couple of implications.
First, it means that it’s not possible to counterfeit bitcoins.
When we trade in real life, it’s easy: I can give you a dollar, and unless you give it back, it’s yours, and there’s nothing else I can do with it. When we trade online, it gets tougher because there are ways for me to cheat: I could make a copy of the dollar, then give you the copy and keep the real one for myself, and it might be pretty difficult to tell which is the real dollar. This is called the “double-spend” problem.
Because of this, we use banks — a third-party that we both trust to make sure our transactions are safe. Bitcoin and other cryptocurrencies use the blockchain ledger to make it possible to trade digital money just like we trade physical money, without the need for a third party. This is usually referred to as decentralization.
Second, it has bigger implications for trade, security, and trust.
If we can trade money using the blockchain, we can trade other things too: deeds, titles, art, votes. Blockchain helps break down barriers to trade by making it easier to do things like execute contracts, account for transactions, and exchange money and information. Because of this transformative power, blockchain is referred to as a disruptive innovation, just like the printing press before it. In the same way that the printing press revolutionized the exchange of information, Bitcoin transforms trade at large.
Bitcoin makes trade more efficient as well by eliminating those third-parties.
Business can reduce many overhead costs of exchange, like data security costs and banking fees. Blockchain could save investment banks alone $12 billion per year in back-office costs. This explains why as of August 2016, $1.55 billion in venture funding had been invested in blockchain ventures in finance, insurance, information, communication, and professional services. Cash flow issues that present major barriers to small business owners could be virtually eliminated. Blockchain could make financing and credit insurance, which currently backs up 80 percent of global trade, a thing of the past.
From these examples, it becomes easier to see why investors see value in Bitcoin. It’s not just a digital currency, it’s based on a transformative piece of technology that aims to change business and exchange at large.
Before You Buy
Even though Bitcoin and blockchain are capable of so much, it is true that not all of the news surrounding the cryptocurrency is positive.
Many people got their introduction to cryptocurrencies from news surrounding their use on the Dark Web and on The Silk Road, a now-defunct black market. Users saw the decentralized and anonymous nature of Bitcoin as an opportunity to purchase illegal goods, which became the most widespread initial use of the cryptocurrency and clouded its reputation. Since then, it’s been difficult for many people to view Bitcoin as a currency that could enter widespread mainstream use.
The currency is also not a good option for investors interested in avoiding risks. The cryptocurrency market is highly volatile, meaning there is a chance for big returns, but also big losses. For those that are willing to take the risk, there may be the opportunity to make a lot of money investing in cryptocurrencies.
And while blockchain has many potential applications across a wide range of industries, real-world implementation has been slow. The challenges in making this technology accessible to everyday people, including its complexity and transformative nature, make widespread adoption difficult. Yet, many major businesses including PayPal, Microsoft, and Intuit see the value of the digital currency and the blockchain it’s built on and continue to look for ways to utilize it and increase its usability for the average person.
Ultimately, the value of Bitcoin really lies in its capability to change the nature of the exchange. Blockchain’s versatility makes it appealing to both investors and developers alike. Having an understanding of the value of Bitcoin and blockchain can help guide your investment decisions, and can help you stay ahead of the pack when it comes to the latest innovations in trade and exchange, security, and business. Only jump into this market if you’re ready for a wild ride.