Unless you’ve been living under a rock for the past few years, it’s likely that you’ve heard of cryptocurrency and its associated technology, blockchain. Beginning as an academic concept, cryptocurrency became reality (well, virtual reality) with the launch of Bitcoin in 2009.
But cryptocurrency really exploded into the public eye when Bitcoin’s value hit a record high of $266 per bitcoin in April of 2013. This peak followed a two-month massive surge that saw the value of the currency increasing ten-fold. People really did become millionaires overnight. But after the following 50 percent plunge in value, the future of cryptocurrency, and of Bitcoin in particular, began to come into question.
Would these alternative currencies really come to be just as readily accepted as dollars and cents some day? Or are they just a fad that will wink out of existence as surely as they appeared? We’ll explore the future of cryptocurrency and what changes might be just around the corner.
What Is Cryptocurreny?
To begin, let’s define cryptocurrency. What is it and how does it work? In the most basic terms, cryptocurrency is just a form of currency which exists in its entirety in the digital sphere, managed and created using cryptography (advanced encryption techniques).
The most important features of cryptocurrencies are its decentralization (meaning there is no regulatory third party), transparency, and immutability (the records absolutely cannot be changed). Cryptocurrency accomplishes these features by using blockchain technology, a technology that creates a public database (or chain) containing important information about transactions (stored on blocks).
It is almost impossible to change the content of the blocks, as each block automatically creates a unique “hash” or code. Changing any block on the chain would change the hash, but the next block would still store the old hash. In order to cover their tracks, hackers would need to update every single block following that block on the chain. This is a virtually impossible task requiring an incredible amount of computing power.
The result of this technology is basically that cryptocurrency is incredibly secure and less vulnerable to hacker attacks, since there is no centralized location storing your financial transactions information. Since all of that information is stored on every single copy of the blockchain in existence, changing it becomes practically impossible.
How Bitcoin Works
Bitcoin is probably the most well-known of the current cryptocurrencies on the market. It works by using the blockchain technology discussed above. The decentralization helps keep Bitcoin free from any third-party interference.
However, it also means that Bitcoin lacks a central authority backing the value of the currency or ensuring smooth operations. Unlike traditional currency, the lack of a central authority backing the currency means that its inherent value rests solely in how much investors are willing to pay.
Bitcoins are created by a mining process which uses extremely powerful computers to crunch numbers and solve very complex algorithms. The current rate of creation is 25 Bitcoins every 10 minutes, with a maximum number of 21 million, expected to be reached around 2140.
Upcoming Changes to Cryptocurrency
Some economic analysts who predict big changes for Bitcoin and other cryptocurrencies in the coming decade. Cryptocurrency may soon make it on the Nasdaq, which will add needed credibility to the system. Some others suggest that what cryptocurrency really needs is a verified exchange traded fund (ETF), which would make investing in Bitcoin or other cryptocurrencies much easier.
So-called “crypto-evangelists” often sing the praises of cryptocurrency, sometimes even calling it “digital gold.” Many experts agree with the idea that cryptocurrency will experience growth (a market capitalization of nearly $5-10 trillion dollars in the next five years). However, they caution that a long-term value of Bitcoin or other cryptocurrencies is more likely to be $100 than $100,000.
Unlike physical gold, which has other uses, Bitcoin’s value is limited to its use in transactions. This makes the cryptocurrency more vulnerable to extreme collapses. The verification process used by Bitcoin is also energy-intensive and significantly less efficient than a centralized system.
Many other types of cryptocurrencies are moving into the public eye as well, such as Litecoin, Ripple, and MintChip. There are many others now drawing investments, and Bitcoin is no longer the lone player on the cryptocurrency stage.
The perceived limitations of cryptocurrency could potentially be resolved by technological advancements and innovations. However, its main problems are a bit more difficult to solve.
Cryptocurrency was really developed in order to avoid government and other forms of regulation and interference. Ironically, the more popular they become, the more regulation they begin to attract, defeating their own purpose. It remains to be seen how these cryptocurrencies may change.
Possibly, we could end up with something in between the way cryptocurrencies currently work and the highly regulated nature of traditional (fiat) currencies. Investors would do well to approach cryptocurrency with caution and take the tales of their virtues with a healthy grain of salt. Who knows what the future will hold?