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Crypto-currency: Boom or Bust?

In 1971 President Richard Nixon drastically altered the future of financial exchanges by separating the US dollar from gold and thus creating the free-floating fiat currency market we are familiar with today. But, there was no way for him to know how monumental that change would be come 2017 when currency is now shifting from the tangible fiat or paper money to the digital.  Many people who watch the news may be familiar with the most famous crypto-currency Bitcoin. However, there are hundreds more of these types of currencies out on the market today. In this article we will first define what is crypto-currency and how it’s used, then look at the brief history of crypto-currency, how it is set up through secure block chains, and what its future looks like.

Crypto-Currency:

There is no central regulated authority (such as the Federal Reserve for the US dollar) that governs crypto-currencies, which you’ll see is a main attraction for buyers. Crypto-currencies use very technical mathematics to selectively release their coins over a specific period so as not to over saturate the market and create inflation. They also often have a cap on the total number allowed. For instance, Bitcoin is currently capped at 21 million through the year 2040. Because of this sophisticated coding, it makes the currency exceptionally hard to forge and without formal regulation, crypto-currencies are essentially immune to political swings that might affect their value.

History:

Modern day crypto-currency started in 2009 with the creation of Bitcoin by mysterious founder Satoshi Nakamoto. It is widely speculated that Mr. Nakamoto is not actually an individual but rather a group, but since he is so allusive, no one has been able to confirm that theory. By October of that year the first official exchange rate of US dollars to Bitcoin was established based on the standard of the electricity cost to generate one Bitcoin. In May of 2010 the first real world transaction between Bitcoin was to purchase a pizza in Jacksonville Florida for 10,000 Bitcoin ($25 USD). Over the course of the next year Bitcoin continued to grow in valuation and was valued at 1 to 1 with the US dollar by February of 2011. However, its growth was often hard to maintain, as it constantly would have huge up and down swings sometimes falling as much as 50% within a couple weeks. However, Bitcoin has grown so much that it recently reached over $3000. This meteoric rise in value has inspired many other developers across the world to create their own crypto-currency. Another popular currency currently seeing a similar rise as Bitcoin is Ethereum, which has risen 2000% just this year. These numbers might seem insane for for a currency that isn’t safely secured by a government, but that is a misconception for one reason – block chains.

Block chains:

Block chains are a revolutionary decentralized system, which helps with the storage of information and is the backbone of crypto currencies. This means that all of the data stored across the network isn’t consolidated to one central location, which is how the Internet historically operates. By storing information in one location, you make an easy target for hackers to come and try and steal it. However, blockchains are a network of nodes that continually update and save all of the information across the entire system. Therefore, while theoretically possible to still hack, it is almost impossible to gain access to all of the nodes of the system at the same time to truly take it over. This type of technology has proven to be very popular and useful. For instance, Google Docs, a system many people are familiar with that allows users to continuously update a document remotely while also saving all the changes, uses blockchain technology. It has even shown great promise for governmental use with Estonia becoming the first country to store their property records using a blockchain. Blockchains are integral to crypto-currencies though because they provide its security. By continually saving and distributing all of its data across the entire network it keeps track of who owns the currency and how much. So for instance, when a new buyer of Bitcoin records his/her transaction, they add another node to the blockchain network that is saved across the entire network. Now that we understand the history and mechanics of crypto-currencies, what does the future lie for this new form of money?

Boom or Bust?

With anything that rises as fast in valuation as Bitcoin and other crypto currencies have the word “bubble” allows follows it. A valuation bubble happens when something is overvalued so much that it suddenly bursts and crashes in valuation. The most recent and damaging bubble in recent memory is the 2008 mortgage crisis where homes across the United States were so overvalued that when the bubble burst it sent the entire economy into a spiral. Bitcoin has seen its fair share of bursting bubbles as it has often fallen in valuation quickly throughout its short history, but it has never seen an increase as drastic as it has recently. In fact, just this week as I am writing this Bitcoin has fallen from nearly $3000 to $2100 just further showing how volatile it can be. Because of its history, buyers of Bitcoin are often very aware of the risks they take in buying it. However, more and more markets are starting to take Bitcoin and crypto currencies more seriously as regulators have been trying to control them. As more and more users use crypto currencies to buy every day items such as pizzas or clothing, they further legitimize it as a real currency. Despite this though the blockchains that crypto currencies are built on are proving to be amazing tools for private citizens and governments alike to safely store data. Only time will tell if crypto currencies are here to stay or if they will fall into the abyss that is internet trends.