Bitcoin Technology Makes It A Practical Global Currency
With all the hype and media coverage, most people by now understand Bitcoin is becoming an acceptable form of global currency — money. What a lot of people may not realize is that there is a distinction between Bitcoin and its underlying technology called blockchain.
Blockchain is the technology that enables Bitcoin to function as a currency. There is little argument that the technology (or something like it) that underpins Bitcoin is here to stay whether Bitcoin maintains its status as a currency or not.
Bitcoin currently meets every standardized economic criteria to qualify as money — it is a medium of exchange, a unit of account, a store of value, and most importantly, people have confidence in it. What is in question is the sustainability of faith in Bitcoin over the long-term and therein lies the risk.
The blockchain technology, otherwise known as distributed ledger protocol, is a game changer. It is a set of protocols used to power money; it provides a way to store and exchange value between two parties with no centralized ownership or control of the data.
Traditionally, banks, government payment systems, and credit card networks performed this function with our confidence in these institutions established through years of interaction. Governments issue money. Banks store and distribute. And credit cards facilitate transactions.
However, risk in the current system is present, and there are no real guarantees these institutions won’t falter. Consider:
- Money fails. The entire global financial system was redesigned and reset in the 1970’s. Then, look at the currency failures of; Argentina in the 1980s, Peru in the 1990s, Zimbabwe in the 2000s, Greece in the 2010s.
- Banks go belly up. The Great Recession of 2008 triggered a near collapse of banks “too big to fail.” The 1980’s and 1990’s experienced long-term capital management insolvency and the failures of savings and loans.
- Card data is hacked or stolen. Many Americans have experienced the trauma of identity, financial, and data theft. My financial data has been hacked three times in the last five years.
A famous white paper by Satoshi Nakamoto, says that there is a problem of trust in our existing system and the new “peer-to-peer electronic cash system” underpinning Blockchain is a way to protect and ensure the fragility of our trust.
Simply put; it will. Before Blockchain, sensitive financial data was owned and controlled by the major institutions. Blockchain removes the central point of control and through cryptology, the vulnerability of sensitive data. It is revolutionary in a big way. It is every bit as big as the great disruptions we’ve seen on the internet with communication, the automobile on transportation, and Netflix in entertainment.
The technology is here to stay, but it will evolve. For Bitcoin to prevail, it will have to face a refiners fire, and many flames are waiting to test its mettle. The fire will come in the form of government intervention, scalability, and competition.
Like it or not, the government has a keen interest in bitcoin with the seeds of regulation already taking shape. Branding campaigns that position Bitcoin as the “tool of terrorism,” its users as “tax cheats,” and “the currency of criminals,” will play out over and over again in our civic discourse. It is not a question of will it become subject to regulation, but how and when.
Will bitcoin survive in its current form? The answer will play out slowly over the course of years, and government influence will be measured in inches, not miles. Regulation is in Bitcoin’s future, and very few Rev. 1 prototypes survive adopting without adapting. To compete, bitcoin will have to adjust to government oversight.
Scalability is another area of concern for bitcoin. At first glance, bitcoin’s distributed storage mechanism is genius. On its face, it makes a lot of sense. You break up the data into tiny blocks, encrypt it, put them in a distributed ledger, and back it up in multiple locations. It’s secure, and you can track everything that has happened with the data.
However, as the adoption of bitcoin as currency continues to grow so does the computing power and energy, it consumes. The processing structure of bitcoins technology is staggering. It takes almost six minutes to process a transaction in bitcoin fully. Comparatively, it only takes a fraction of a second for Visa or Mastercard to accomplish the same task, and they consume much less computing power and energy to do it. To compete, bitcoin will have to adapt to scalability.
Bitcoin faces fierce competition with newer and better technology who have a clearer vision of how to maintain autonomy in a world of government oversight. The Prodigy’s and AOL’s of the internet were replaced with Internet Explorer and other internet search browsers. The internet today looks very different than it did in the 1990s. In fact none of the market leaders in technology today were first movers — they were fast followers. The competition for bitcoin in the form of cryptocurrencies is already afoot — Etherium, Ripple, and Litecoin have already encroached on Bitcoins space. And there are many more in the periphery. And even more yet to be conceived. To compete long term, bitcoin will have to adapt to competition.
The trillion dollar question is whether or not bitcoin will be able to adapt enough to prevail against this triad of threats. Being first to market does give bitcoin a competitive edge. It has already successfully conquered the battle of confidence in the money market. Will that success propel it further? Significant bets are being wagered that it can. But being first does not always earn you victory or superiority. In fact quite the opposite.
According to the academic studies presented by Harvard Business Review, “First mover status can confer advantages, but it does not do so categorically. Much depends on the circumstances.” For example, for every story of Sony’s success with Walkman, there is another story about Xerox failures with fax machines.
But even if bitcoin fails, (which is NOT a foregone conclusion) the evolution of its underpinning technology will survive and continue to evolve and touch every aspect of our life for years to come.
Shawn Lucas is founder and CEO of Apiary Fund. Through technology and education, Apiary Fund develops traders and gives people the opportunity to seek the freedom of flexible income by trading with Apiary’s money.
