Bitcoin: The Only Thing Less Predictable Than Donald Trump’s Tweets by Jason Cohen W'20

The value of Bitcoin has risen more than twice as much as the best performing publicly traded stock in 2017. Its market cap is approaching that of gold, and the volume of Bitcoins traded reaches several billion daily. Bitcoin has become more and more well-known — since April, Google searches for the cryptocurrency have gone up more than 450% — and yet, if you ask people familiar with Bitcoin, you will generally get a divided response regarding its tremendously unclear future and volatile past.

Bitcoin started in 2009 as a decentralized cryptocurrency using blockchain technology. What that means is that Bitcoin is unique in several ways: First, the currency is virtual, meaning that there are no actual “coins.” Secondly, transactions do not require any personal information, making them completely anonymous. Finally, transactions are verified by the Bitcoin community, making them more secure, free, and impossible to regulate. Bitcoins can be bought on an exchange, sent on a computer, and “mined” by computers solving complex math problems.

Anyone who has been following Bitcoin for the past few years will agree on one thing: they wish they bought more of it earlier. Beyond that, however, there is a lot of skepticism when it comes to the future of Bitcoin. On one end, there are people who believe Bitcoin is the biggest technological innovation since the Internet. Let’s call these people the optimists. The optimists (and there are many of them) believe that Bitcoin will absolutely revolutionize the way money works. They believe that banks and governments will begin doing more and more business in Bitcoin, or otherwise create their own cryptocurrencies, until society reaches a point where the very definition of money is changed altogether.

On the other side of the spectrum are the pessimists. The pessimists are not particularly happy that they missed out on this Bitcoin boom, as no one would be. However, for pessimists, Bitcoin is a bubble that is all-too-ready to burst. The argument here is that Bitcoin is not backed by anything but the public’s trust. Indeed, for the U.S. dollar, the U.S. government is backing the currency. Same with the Euro. However, when it comes to Bitcoin, the exchange rate is in other currencies, and there is no backing beyond the public’s trust. If the public believes Bitcoins are worthless, they will become worthless and there is nothing anyone can do. This leads to the belief that Bitcoin’s value is derived from its underlying technology, which, while revolutionary, can be replicated and is not perfect. Bitcoin is only more valuable than cryptocurrencies like Ethereum because people say it is. Because of these vulnerabilities, pessimists believe that Bitcoin is a bubble that will burst faster and more viciously than the dot-com bubble or the housing bubble.

In order to understand who is “right” when it comes to the future of Bitcoin, it is important to look into Bitcoin’s past. The idea for Bitcoin was conceived in 2008 and later officially launched in 2009. By May of the next year, 10,000 Bitcoins were used to purchase a cheese pizza, the first ever commercial transaction using Bitcoin. Soon after, a vulnerability in the code was exploited and billions of Bitcoins were stolen. After a year or so of negative press, Silk Road, a deep web site for anonymous and illicit dealings in drugs and trafficking, was established using Bitcoin. Bitcoin then gained value. Bitcoin received praise from those in the U.S., but China banned its usage. By this point, it is 2014, and Bitcoin’s value has gone up and down drastically multiple times. By now, the price is around $700.

Over the next 2-3 years, Bitcoin’s dropped to under $200 and rose to over $2000 repeatedly. Mt. Gox, the largest Bitcoin exchange, was shut down, and yet Bitcoin recovered. More and more major companies began recognizing and accepting Bitcoin. Banks and hedge funds began doing research into the technology. Finally, in 2017, with the advent of Initial Coin Offerings, or ICO’s (to raise money for a cryptocurrency), Bitcoin took off. Currently, the value is nearing $10,000.

Based on this history, Bitcoin can, at the very least, be viewed as a risky asset. With no real value and many obstacles in its way, Bitcoin has an uphill climb ahead of itself. That being said, people have bet their life savings on Bitcoin’s success, and for many, its rise is a verification of their optimism. Bitcoin has a chance to become the currency of the world, and if that happens, people who got in early will stand to make a lot of money. However, if Bitcoin crashes, thousands of people’s life savings will go down the drain and the ripple effect may be enormous. For now, it is too soon to tell what may happen, but expect to see many ups and downs before any clear future reveals itself.