Unbreakable Chain Protects Virtual Currency
Bitcoins have become legal tender. In 2017, one bitcoin was worth more than 300g of gold. The technology behind Bitcoin and other cryptocurrencies could change the world.
At the age of 12, Erik Finman of the US received US$1,000 from his grandmother, who urged the boy to save the money to pay for a college education, but Erik was tired of school and had other plans. His older brother had told him about a new online virtual currency by the name of bitcoin. Only very few people had heard of the digital coins back in 2011, when one coin was worth US$12, but Erik Finman followed his brother’s advice and bought some bitcoins.
Two years later, Erik Finman’s original US$ 1,000 was worth 100 times more. But he did not sell his bitcoins yet, and that turned out to be a wise decision. In early 2017, the price of the online currency started to rise dramatically, and when Erik Finman turned 18 in June, the value of his bitcoins had just reached US$1 million. He gave up his college education and started his own business in Silicon Valley. However, bitcoins are much more than an investment objects. They are supported by the blockchain technology, which could revolutionise society by rendering banks, authorities, and many companies superfluous.
Record bitcoin year
In 2017, bitcoins became widely accepted. Millions of people throughout the world have used the currency as a means of payment or investment object, and the rising demand for bitcoins meant that the price of one coin exceeded the value of 100 g of gold in the spring. Prices continued to rise in the autumn, and bitcoins ended 2017 at a price of some US$ 14,000 – an annual increase of approximately 1,250 %.
Bitcoins' speedy upward "bull run" was particularly due to increasing interest from the world’s most populous nation, China, where the demand for the digital currency rose, as the nation's own currency, the yuan, fell markedly. Moreover, Japan was the first country to set the stage for bitcoins being considered a currency just like dollars and others.
The interest spread to other parts of the world, which adopted the currency. Housing associations in London and Dubai have begun to accept rent paid in bitcoins, and hundreds of restaurants and bars through-out the world accept the digital coins as a means of payment. The Virgin Atlantic airline, the Expedia online travel agency, the Amazon electronic commerce company, and Microsoft accept payment made in bitcoins. And in many cities – such as Stockholm, Copenhagen, Oslo, and Helsinki – you will even find ATMs, where the digital currency can be purchased or exchanged.
Unhackable technology
The bitcoin phenomenon emerged in 2008, when an unknown programmer by the pen name of Satoshi Nakamoto published a nine page article introducing the idea of a reliable virtual
monetary system. The financial crisis was undermining the faith in banks and financial institutions, but the institutions play an indispensable role in transactions. They verify that the money has actually been transferred. If a third party is not involved, there is a risk that the same money is transferred several times, as the amount never really leaves the sender’s account – a challenge known as the double spending problem.
According to Satoshi Nakamoto, the solution was to create a virtual currency in an encrypted system, in which individuals can transfer money directly to each other without involving any banks. All transfers are saved in a long digital chain known as a blockchain – a type of global spreadsheet. The chain is on all computers of the bitcoin network, where users can keep an eye on the transactions, so hackers are unable to manipulate with the chain, but the data of the chain cannot be traced back to people.
Currency becomes legitimate
In 2009, the idea of a digital currency came true, when the first bitcoins were generated.
During the currency's first year, buyers were primarily computer wizards and soldiers of fortune such as Erik Finman. One of the reasons why interest was limited was that the currency quickly earned a tarnished reputation as the preferred means of payment in connection with shady activities. Drug dealing and arms trade could be anonymous, not leaving any traces.
Now, the scenario is markedly different. Bitcoins have become "public property", and companies specialize in analysing the digital transactions, spotting any crime. The Nordic Chain alysis company has developed a tool that uses the public data in the bitcoin chain to make a risk assessment of whether bitcoin transfers are connected with ransomware payments and dark web transactions. Many consider the currency as a means to solve problems that exist in other common currency systems such as counterfeiting.
However, bitcoin users' major incentive is still to avoid bank charges and administration. bitcoin transfers are a common way of transferring money from people who live and work in the West, but have African or Asian roots and wish to send money back to their families. Bitcoin transfers aren't free, but they are much faster than many bank transfers.
The use of bitcoins is now so widespread that even banks – which the currency was developed to eliminate – are taking it seriously. In 2017, a Swiss bank was the first to let its customers trade in and invest the virtual currency. Several central banks also consider the technology viable.
In spite of its success, the currency’s future is doubtful. Prices are extremely sensitive and marked by considerable volatility. Many consider the currency a financial bubble like the dot.com bubble, which burst in 2000, because websites did not prove as valuable as expected. Others think that the price of a bitcoin will continue to rise, settling at approximately US$ 500,000.
Major price volatility
No matter how bitcoins' future will turn out to be, the digital currency is only a test of the underlying blockchain technology. The technology could also revolutionize other parts of society. In the world of finance and the IT industry, blockchain has been named the most important invention since the Internet, as in principle, the technology could render all third parties such as banks, authorities, and private companies superfluous.
Blockchain can be used to improve the peer-to-peer economy. Airbnb and Uber are among the major market players, but really, the companies do not share anything. They are third parties that connect users and provide access to flats or car rides, guaranteeing that nobody is defrauded. For this they get paid – just like banks. Blockchain could eliminate the intermediate link and produce a more genuine peer-to-peer economy, in which drivers use the system to deal directly with their customers, rendering Uber superfluous.
The blockchain technology has already spread to systems which administrate contracts, verify that elections are carried out in the correct way, and protect personal data. If the trend continues, all third parties might end up being superfluous in the society of the future.