Banking & Finance and Technology

Bitcoin still the ‘Wild West’?

Techies talk cryptocurrency advances in 2018 as economists fear bubble.

January 5, 2018
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Bitcoin
Unlike cash currency, a single bitcoin has no set value like a quarter or a dollar; the valuation can fluctuate daily and even hourly. Courtesy Thinkstockphotos.com

If you ask techies, they will tell you bitcoin is emerging for many reasons beyond its function as a universal currency and investable asset.

This comes as economists are predicting a bubble similar to the dot-com crash of 2001 and the real estate market collapse that triggered the Great Recession in 2007.

According to a report by the Associated Press last month, the recent craze over bitcoin leading to its soaring valuation “smells a lot like an irrational investor mania.” As of press time, the bitcoin cryptocurrency was worth $14,547.06 on the dollar — but its price fluctuates daily, even hourly.

“We saw this in the 1990s,” Barry Ritholtz, chair and chief investment officer of New York-based Ritholtz Wealth Management, told the AP. “Any of those things sound familiar? ‘This is unique, this will change everything?’”

He expects the bitcoin bubble to pop but can’t say when.

“Some people think it’s early days, some people think it’s late,” he said. “We’ll find out in the not-too-distant-future who is right.”

The Business Journal reached out to Edward Jones analysts and other local finance professionals to comment on bitcoin’s volatility but did not receive a response as of press time.

In order to understand bitcoin or any other cryptocurrency — of which there are several legitimate types, including ethereum, litecoin and dogecoin — one has to consider the technology that underpins it.

Chris Boden, founder of Grand Rapids-based The Geek Group, teaches classes in how to buy, sell and spend cryptocurrencies.

He said bitcoin operates without a central bank or administrator, and transactions are conducted and verified over secure networks and recorded in a digital ledger called blockchain.

“The blockchain technology makes it possible to keep a large amount of anonymous data secure in a way where it’s impossible to lie or counterfeit a bitcoin,” he said.

“It’s very open. You can very easily go on the internet and see the life of every bitcoin from the moment of its existence. You can’t see who owns them. You can see where it is coming from and where it’s spent, but there are no names attached.”

Each user owns a unique address they can keep secret or share with individuals in order to receive bitcoin from them. But a user cannot take money out of another user’s account; they can only deposit it.

The founders of bitcoin in 2009 — a group of entrepreneurs operating under the pseudonym Satoshi Nakamoto — determined that like gold, the digital currency would have a finite amount, and set that limit at 21 million bitcoins. As of Jan. 1, about 16.78 million of the 21 million bitcoins had been “mined.”

Unlike cash currency, a single bitcoin has no set value like a quarter or a dollar; the valuation can fluctuate, which is what is happening now.

Miners have to have a certain level of coding “mojo,” Boden said, because it’s a complicated process wherein miners keep the blockchain running by verifying individual transactions using cryptography and adding them to the chain. The process takes special hardware, and many of the companies making the equipment are unable to keep up with the demand.

Not everyone needs to mine; anyone can buy and sell bitcoin, relying on others to do the mining. Boden said those who mine benefit themselves and others.

“The more people who mine, the better and faster the technology will work. The advantage to mining is you can make money,” he said.

Bitcoins cannot be duplicated.

“There’s only one copy of it,” Boden said. “There will never be another copy of it. To have something digital and scarce, that’s a difficult needle to thread.”

Jeff Wheeler, director of technology at ArtPrize, has been using bitcoin for about three years. He said it is safe from data breaches that have plagued the digital world in recent years.

“If you look at the data breaches, data breaches occur en masse because they are centralized systems. If I want to hack 100 million people, I just need to hack you. I need to find one flaw and find information about you, then I can get into the whole system,” he said.

“What’s really interesting about bitcoin is that it’s brought up this underlying technology to light, the blockchain,” he said. “It’s been around for a while, but it was bitcoin, the network and this idea of proofing work and having miners that validate that, in order to signify that that transaction is valid.”

He said the technology brings math, science and community together to skirt digital risks and create value.

The bitcoin network functions because it’s not the quantity of miners that matters; it’s the ability of the network to process transactions quickly.

“If you were to take the world’s 500 most powerful supercomputers, the power of those would be worth 247 (petaflops) a second, which is a way of measuring computing power,” Wheeler said. “If you were to get on the bitcoin network, it’s over 2 million pflops a second.”

Boden is particularly passionate about bitcoin in currency transactions.

“If you have $1 million in bitcoin right now, you can spend it anywhere you have a VISA. I could walk into a gas station, pay for gas and buy a pop with bitcoin,” he said. “I have a regular VISA debit card, and there’s a company where you put the bitcoin into the credit account. … My bitcoin works the same way your magic internet money works. Once you get into bitcoin and realize how different it can be, you’re like, ‘Wow, this is neat.’”

Boden and Wheeler agree that while the monetary rewards of bitcoin are attractive, the blockchain technology has far more potential beyond its use in powering currency.

“At this point, everyone feels it has the ability to disrupt industries, but we don’t know how yet,” Wheeler said.

He cited possibilities — including eliminating credit card and banking fees, using the chain for real estate transactions instead of securing loans, holding and verifying the authenticity of art, or verifying age and other aspects of identification without paperwork.

Boden added it could be applied to medical record-keeping systems to make them more secure.

“If you take that technology and apply it to medical records, every time you go to the doctor, you have to fill out the same five forms. The blockchain technology makes it possible for your records from every doctor, your entire medical history, to be in a global database that cannot be counterfeited, cannot be wrong, cannot lie, and any doctor — and even you — can access it,” he said.

Wheeler said he tries not to get into speculation about the economics of bitcoin, but he believes the market will correct itself as it goes along, similar to how the dollar righted itself after the gold standard was removed in 1971.

“For 2018, if I were to predict, I would think we’re going to gain an understanding of bitcoin,” he said. “In terms of, ‘Is it really a bubble?’ Everyone’s saying the stock market is a bubble, the Trump bubble. (With) the doomsday theorists, the world has ended 100 times already. I don’t think there’s a model that will show any amount of certainty of what will happen. Is it going down to a dollar tomorrow? We don’t know. But with blockchain, in 2018, I believe we will start to see organizations heavily investing in it.”

Boden echoed that corrections will be inevitable.

“It works just like the stock market. It’s publicly traded,” he said.

“It’s not like the internet — the dot-com bubble — or the real estate bubble because both of those things were investing in things that had no track record and couldn’t be tested. In 1992, people thought, ‘Oh, it’s a website, let’s give you money to make it.’ Nobody knew anything. A lot of people made millions and a lot lost millions. But in the end, it worked out.”

He said it’s important that as the tech and finance worlds progress in knowledge of cryptocurrency, individual users should practice caution.

“Bitcoin is very young tech and new technology and we’re still figuring things out, and because of that, be very careful,” he said. “There are cryptocurrencies out there that are scams. This is dangerous, the Wild West of finance.”

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