There was no telling the future of bitcoin when it was introduced as a novelty concept back in 2008. Interest piqued – particularly amongst the more tech-savvy communities, but few could have predicted the lasting impact it would have upon the world’s economy and the nature of international finance transactions. Back in 2009, a Norwegian by the name of Kristoffer Koch was intrigued by the potential of this new digitalized currency and bought $27 worth of bitcoins – that translated to 5,000 bitcoins, to be precise. Interest in bitcoin faded somewhat after its initial introduction, and Koch soon forget about the virtual coins he had locked away in an encrypted online wallet.
In 2013, the media’s widespread coverage of bitcoin reminded Koch of the purchase he had made a few years ago. With the hype rising around this peer-to-peer, anonymous and intermediary-free currency, he checked his encrypted wallet to discover that his 5,000 bitcoins in his possession was now valued at $886,000. Not a bad investment. But there’s no denying bitcoin has endured some dramatically unpredictable fluctuations in value ever since, with few clear indications as to how the currency will stand up against contenders going forward. Some believe that its relevance will only grow in the coming decades, whilst others claim its glory days are over. What can the story of bitcoins so far tell us about its future?
Bitcoin and other digital currencies are founded upon the principles that a globalized world needs a more efficient means of making global connections – financial connections, specifically. Advocates of the digital currency will argue that intermediaries (banks, in this case) are no longer necessary in this day and age. On the contrary, it is argued that banks are counter-productive toward the advancement of the global market. Operating based on peer-to-peer technology, the bitcoin network regulates itself and its transactions with no central authority other than the developers who built and tend to the system. Of course, bitcoin is not the only system that allows for peer-to-peer transactions. The UK website Zopa, for example, offers users the opportunity to lend money to others for a greater return than they ever would get with a conventional bank. Understandably, the incentive to avail of traditional banks diminishes with the emergence of the alternative options offered by the likes of Zopa.
Except banks are established, heavily regulated and accountable to their respective states. Digital currencies are not, and subsequently lack the degree of assurance traditional banks can offer their customers. Well – not always. One notable example that stands out as an exception is the situation that unfolded in Kenya following the country’s 2007 elections. As violence broke out, Kenya’s banking system crumbled. From its ashes came M-Pesa, a form of direct transfer of credits from one mobile phone to another. A few years later, and M-Pesa handles half of Kenya’s GDP. Globally, people are twice as likely to have a mobile phone than they are to have access to a bank account, and it is to these people that M-Pesa gives financial control. As Kenya’s digital currency took off its legitimacy was recognised by major financial institutions. That is unlikely and game-changing development illustrates the immense potential digital currencies such as Bitcoin have in transforming lives and the larger financial landscape.
Bitcoin itself can be said to have spurred from similar circumstances – the global financial crisis, and one of its defining features was always intended to lie in cryptography. Whenever you conduct a transaction with bitcoin, a record of your transaction is added to the blockchain. This is a register of all bitcoin transactions ever conducted, all authenticated by a network of computers. The cryptographic methods involved mean that it is impossible to fake a new addition, but it is relatively easy to verify an authentic transaction. Those transferring the money are entirely anonymous, but their activity is utterly transparent – the Bitcoin addresses involved are available to be viewed by anyone, but no one necessarily knows to which users they belong. Anonymous and automated – together, these features revolutionise finance. Users trust the blockchain to conduct transactions but know nothing about other users. No authority underwrites the blockchain – it governs itself.
Though anonymity in the age of digital transactions is no doubt an attractive concept, it doesn’t come without its pitfalls. By offering an anonymous and untraceable means of transferring money, Bitcoin has attracted criminals. Take Ross William Ulbricht, aka Dread Pirate Roberts. He was the founder of Silk Road, an online marketplace which dealt in drugs and guns. Bitcoin was instrumental to his ability to make a fortune on illegal sales. You might have thought this would generate bad publicity and damage the image of Bitcoin as a legitimate currency, but on the contrary – the Bitcoins that the FBI confiscated in Ulbricht’s arrest were auctioned. In doing so, the FBI showed clear recognition of Bitcoin as a legal and even valuable currency.
Perhaps one of the more unexpected issues relating to bitcoins is the amount of energy needed to mine the currency. Mining simply means legitimising transactions added to the blockchain. Whoever legitimises the winning transaction is rewarded with Bitcoins. Mining in other words, drives the Bitcoin economy. As the currency has grown more popular, the mining process requires more and more computer power thrown at it. By the middle of 2014, the bitcoin network was producing 88,000 trillion encryptions every second. Just two and a half months later, it had almost trebled to 252,000 trillion hashes. This kind of computational expansion is unheard of, and some predict that the amount of energy required to run all of these mining computers is simply unsustainable.
The next peculiar aspects which makes bitcoin so unique and arguably endurable is the ability for users to ‘fork’ the currency – in other words, alter it for improvements. Bitcoin is open source, meaning that the community can download, tinker with, and publish a new version of the currency. If this version is regarded as an improvement and accepted by the community, it will be downloaded by users. Previously, any divided opinions over what constituted as an ‘improvement’ was settled when the core developers made a final decision – but even they have now come to disagree of some integral matters. The main source of disagreement is on the issue of block size – basically, the amount of data in transactions. One group argued that, without an increase in size, the currency would grind to a halt as the number of transactions queued to be processed by the blockchain would grow too large. To remedy this, some developers ‘forked’ bitcoin and created Bitcoin XT – a version intended to increase the blockchain capacity.
But this modification did not go down well amongst much of the bitcoin-using community. They believed that Bitcoin XT would ideologically undermine Bitcoin and bring it too far into corporate territory. The dispute was bitter, and saw a huge hacking attack launched against XT in which all mentions of it were censored from official forums. “Bitcoin is facing civil war,” wrote The Guardian. In 2016, the divide is larger than ever. Is this the end of Bitcoin?
Civil war or not, we can still buy plane tickets, electronics and even groceries with bitcoin. Brands as big as Amazon and Apple readily accept the currency. In fact, some businesses, such as online poker rooms, thrive on bitcoin transactions. It is unlikely that a currency, so interwoven with the nature of modern-day transactions, should disappear because of a mere challenge it faces in the timeline of its development. As we have seen above – bitcoin is democratic and flexible; indicative of world in which people value privacy and convenience. Its future may be uncertain – all we know is that it will, most definitely, have a future.