When Bitcoin broke into public consciousness in 2013, it couldn’t have been sexier: a digital currency being used to buy everything from drugs to cupcakes. Then the excitement shifted to an aspect of Bitcoin that is a bit less sexy: public online ledgers. Blockchain — the technology used for verifying and recording transactions that’s at the heart of Bitcoin — is seen as having the potential to reshape the global financial system and possibly other industries. Both Bitcoin and its blockchain are gaining imitators as well as adherents, along with plenty of critics, including Jamie Dimon, the chief executive officer of JPMorgan Chase & Co. Its recent wild price surge and fall has given ammunition to both.
The price of Bitcoin rocketed in 2017 before giving up much of those gains, as the debate raged on whether the cryptocurrency — whose total value neared $300 billion in early December — should be considered a legitimate financial asset. It got a huge boost when Cboe Global Markets Inc., started futures trading tied to the digital currency and CME Group Inc. and Nasdaq Inc., said they would follow suit. Futures trading will push Bitcoin closer to the mainstream by making it easier to trade without the hassles of owning it directly. Bitcoin began to look almost traditional compared with the new cryptocurrencies that raised more than $3.5 billion through initial coin offerings. Their explosive growth drew warnings from regulators around the globe even before hackers stole almost $500 million worth of a digital token called NEM from a Japanese cryptocurrency exchange. The Bitcoin community came together (mostly) in November to reject a proposed software change that had threatened a split. Meanwhile, more than 100 banks are working within the R3 consortium, created to find ways to use blockchain as a decentralized ledger to track money transfers and other transactions. Australia's stock exchange plans to start using blockchain to process equity transactions. Blockchain is also being tested by retailers like Wal-Mart Stores Inc. for ensuring food safety, as industries explore what advantages the technology might hold over traditional databases.
Virtual currencies aren’t new — online fantasy games have long used them — but the development of a secure digital currency without a central issuer rightly turned heads. Mysterious spikes and drops in the price of Bitcoin since its birth helped build an early reputation for the currency as a tool for selling drugs and laundering money. Its history also featured arrests for Ponzi schemes. The person or people who created the Bitcoin system under the pseudonym Satoshi Nakamoto solved a problem central to any currency —preventing counterfeiting — and did it without relying on a government’s authority. The software also solved one specific hurdle for digital money — how to stop users from spending the same unit of currency twice. The breakthrough idea was blockchain, a publicly visible, anonymous online ledger that records every single Bitcoin transaction. It’s maintained by a network of “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. They earn a reward of newly issued Bitcoin. The pace of creation is limited, and no more than 21 million will ever be issued.
Since Bitcoin first boomed, there’s been no shortage of critics to call its rise a bubble and to argue that the currency has no intrinsic value. In September, Dimon called Bitcoin a “fraud.” But a month later his chief financial officer followed rivals at Goldman Sachs Group Inc. and Citigroup Inc. in expressing openness to working with cryptocurrencies. Entrepreneurs in the field say that focusing on the price of Bitcoin is missing the point — its value is as proof of concept for a new kind of payment system not reliant on third parties like governments, big banks or credit-card companies. Others say blockchain advocates are hyping what amounts to no more than a new kind of database. Proponents of ether, the second most commonly used digital currency, respond that the etherium blockchain does far more than let Bitcoin users send value from one person to another. Its advocates think it could be a universally accessible machine for running businesses, as the technology allows people to do more complex actions in a shared and decentralized manner.
The Reference Shelf
- A Bloomberg Businessweek article looking at how interest in blockchain is surpassing that in Bitcoin.
- Bloomberg Markets traced the interest of Silicon Valley investors in Bitcoin.
- CoinDesk has a Bitcoin price index; Bitcoincharts.com has a range of data.
- Two explainers, one aimed at kindergarteners and the other a you-too-can-mine-Bitcoin project, plus an exploration of the double-spending problem.
- The New Yorker looks at Dark Wallet, a project meant to speed the spread of Bitcoin, from the law student who invented the printable gun.
First published Oct. 3, 2013
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John O'Neil at email@example.com