It sometimes feels like every generation has its own trend in the market that causes a huge flood of speculation and investment, only for the bottom to fall out and values to come crashing again. These “bubbles,” where the value of certain products in the market rapidly inflate but then, as the name suggests, burst, due to fragility have been occurring for centuries. The most famous bubble was the “tulip mania” of the 17th century, when the fashionability of the flower was so high that fortunes could be made in selling tulips, only for saner heads to prevail eventually, question why tulip bulbs were so expensive and caused that market to crash and burn spectacularly.
Today, bubbles continue to form and burst, and the most recent example of this was the cryptocurrency crash of 2017. Now, however, it looks like some cryptocurrencies, such as Bitcoin, may be poised to make a comeback. But to understand why, you need to look at what cryptocurrency is, what it offers, and why it crashed.
What Is Bitcoin?
Bitcoin is one of the most well-known of the “cryptocurrencies” that now make up a small but dynamic part of our financial world. The allure of cryptocurrencies like Bitcoin is that it is a decentralized form of digital cash. What this means, in effect, is that no one controls Bitcoin. With other forms of currency, such as the American Dollar or British Sterling Pound, the nations from which that currency emanates exert a certain amount of control. They can print more money if they wish to stimulate their economies in certain directions, and the people who use the money have no say.
Bitcoin circumvents this by completely decentralizing its digital cash. Centralized cash systems require the cooperation of certain groups, such as the government that creates currency, and a bank that agrees to handle transactions, to regulate financial transactions in a fair and orderly manner. Bitcoin and other cryptocurrencies do away with needing these central groups to administrate and verify the authenticity of cash and financial transactions. Cryptocurrency does this by relying on encryption, that is, practically unbreakable codes, and complex mathematical problem-solving. All of this is part of a process known as “blockchain,” which is the heart of the cryptocurrency decentralized concept.
When someone makes a transaction with bitcoin, that financial transaction isn’t just recorded in one place, such as when a person makes a bank deposit, and that bank records the activity. A bitcoin transaction is “public,” in the sense that it joins an ever-growing list of every single Bitcoin transaction, and that list is publicly available on the Internet. This way, no one can make any changes to the blockchain, since there are a potential number of copies available everywhere to compare and verify.
However, to make a legitimate new entry on the blockchain, a mathematical puzzle must be solved. People who volunteer their computers to be part of this process of solving these puzzles are rewarded with small amounts of Bitcoin, and their solving of the puzzle then allows new transactions to be legitimately, permanently entered into the blockchain.
The Crash of Bitcoin
Bitcoin originally entered the scene in 2009, and, for many years, was used largely as intended, as a foolproof system of digital cash transactions that couldn’t be forged or counterfeited. However, as with tulips, some investors saw both novelty and value in the blockchain system that made up the foundation of Bitcoin and started buying large amounts of it.
As is often the case in investment trends, once others noticed some people investing, more people hopped on the bandwagon. At its peak in December 2017, one Bitcoin was worth over USD $20,000, and other cryptocurrencies took advantage of this, offering themselves as cheaper investments. Unfortunately, while Bitcoin remained more or less foolproof, investor confidence and instances of fraud in other cryptocurrencies burst the bubble. The price of Bitcoin has yet to return to its 2017 heyday.
The Rise of Bitcoin
Now, however, there is renewed interest in cryptocurrency and Bitcoin. Part of this is because of new developments within the technology giants, such as Facebook, who are putting more focus on the cryptocurrency concept of a currency that countries do not control. However, unlike Bitcoin, which is completely decentralized so that no one can control it, companies like Facebook are experimenting with creating their own cryptocurrency, in effect, creating a new type of money that is under the control of Facebook itself.
Regardless of whether Facebook fulfills its ambitions, the inherent safety of Bitcoin and other high-level cryptocurrencies can’t be denied. Identity verification, fraud prevention, and other safety mechanisms make Bitcoin one of the few currencies where counterfeiting is impossible. It proves the importance of encryption, verification, and fraud prevention in information processing, and if things continue, it may once again rise in value.