Imagine that it’s the dawn of the Internet. You know it’s going to be huge and world-changing. Now imagine you can buy into the technologies that are going to drive the Internet’s incredible growth over the next several decades. Would you buy in? We didn’t get the chance with Web 1.0, but we are now. Bitcoin, cryptocurrencies, and blockchains are the vehicles driving the future of the web. These technologies are one of the greatest opportunities ever for anybody who wants to be where the Internet is going to be in the next 20 years. In this post, I’m going to talk about bitcoin why I’m so optimistic about its application in the future. And you’ll gain an understanding of why it’s all so important.
When I’ve talked with friends and relatives about cryptocurrencies, there’s still plenty of confusion about it all. There are a lot of intermixing ideas in cryptocurrencies: a lot of theory and abstractions that aren’t necessarily complementary to each other. Bitcoin is an intersection of technology, finance, economics, cryptography and even politics, and that contributes to the confusion as well. So before we look to where the web is going, let’s take a look at where things are now and clear up some of that confusion.
What Cryptocurrencies Are
Cryptocurrencies are electronic forms of payment. Bitcoin is the best-known cryptocurrency, and it was also the first. There are plenty of others right now, such Etherium and Litecoin, but for the rest of this post, I’m going to be talking about mainly bitcoin. The terms bitcoin and cryptocurrency aren’t really interchangeable (right now), but when I use the word cryptocurrency assume I mean bitcoin. Now, cryptocurrency is built on the idea of decentralized networking and a ledger called the blockchain. The blockchain concept is the underlying technology that makes it all work, and it was first introduced with bitcoin. I’ll come back to the blockchain and why it’s so crucial in a moment. Bitcoin itself is a technology, a protocol, and a currency.
Now you have an idea of what cryptocurrency is and what bitcoin is, let me talk a bit about what bitcoin is not. The term itself “cryptocurrency” might sound scary, but it’s not. It reflects that it’s built on the field of cryptography, or secure communication. Still, there’s a lot of fear around bitcoin, so I’m going to address that next.
The Fears About Cryptocurrency
Since cryptocurrency is so new and is a radical idea, there’s a lot of FUD out there. To make matters worse, it isn’t exactly user-friendly right now. So it’s hard for normal users to get into cryptocurrency and see what it’s all about for themselves. And as I already mentioned, bitcoin sits at the intersection of four or five domains of knowledge. It’s a tall order to find somebody who’s an expert in all of those areas to explain bitcoin adequately. But I want to briefly address a few of the common negative things that detractors say about bitcoin.
Bitcoin is a scam
Satoshi Nakamoto devised bitcoin as a solution to a difficult problem in distributed computing, and to make a viable digital currency. The idea of digital currencies has been around for a long time, and don’t be surprised if you’re using digital currencies exclusively in 20 years or so. Anyway, we’re still in the very early days of this new technology. And it’s unfortunately true that some people – criminals – run scams with bitcoin programs, trying to deceive and rob people. But that doesn’t make bitcoin a scam, any more than Ponzi schemes make fiat currency a scam. Someone running a phishing scheme on the internet doesn’t make the entire internet a scam.
Bitcoin is only for criminals and black markets
You might have heard the negative comments that a powerful bank CEO recently made about bitcoin. That bitcoin is only used by criminals, drug dealers, and terrorists. Others have voiced concerns that there is no way to combat criminal activities like money laundering effectively. But this ignores the fact that criminals already use existing currencies for their illegal activities. People said the same thing about the Internet, by the way. That it was just a network for criminals to organize and distribute their stolen goods, or where unscrupulous people went to trade horrible content. Clearly, the Web has functionality beyond the illicit acts of a few.
Bitcoin is “hacker money”
There’s this nebulous idea that “bitcoin is easy to hack,” like installing a crypto wallet on your PC or your phone opens you up to hackers. First, a bit of common sense: anything that has value – and bitcoin has a lot of value these days – will make you an attractive target for thieves. But there’s nothing about bitcoin itself that makes you especially vulnerable to hacking. It can be hard to use it securely if you don’t know what you’re doing when it comes to securing your devices. There have also been news stories in recent years about crypto indexes or funds getting hacked and millions of dollars’ worth of coins being stolen. Again, bitcoin itself, a technology that’s built on a decentralized, peer to peer networking and cryptography, is not particularly vulnerable to this. But centralized organizations – like traditional banks – certainly are.
Bitcoin is a bubble or a “tulip” craze
I’ve talked about some of the things that are driving the value of bitcoin. But its price has always been volatile, and it’s going very high lately in a very short amount of time (from about $6000 per coin when I made my video, to about $7100 when I wrote this post). So some well-known investors have criticized bitcoin, saying that it’s the very definition of a bubble. Or worse, that bitcoin superficially is like the so-called “tulip bulb” craze. If you’ve haven’t heard of the tulip mania, it’s a supposed incident from a few hundred years ago in Holland when the price of tulip bulbs – yes, the flower – went for absurd amounts of money. Like thousands of dollars per bulb. The implication is that bitcoin is some relatively worthless thing that people are rampantly speculating in with huge amounts of cash, and it’s going to end badly for them. In these cases, the person making the criticism is probably not seeing the big picture. It’s true that we don’t know what the future holds for bitcoin. Nobody does. Bitcoin could crash tomorrow, or it could go even higher. It may not even be a thing in 10 years. But that’s all beside the point. The invention of bitcoin and where it will enable the internet to go from here is so valuable that you can’t really put a price on it.
Still, there is a price on cryptocurrencies. Next, I’m going to look at a few of the reasons that are driving that right now, in particular, bitcoin. This isn’t an exhaustive list, but it should give you a few clues as to why the price of bitcoin is so high, and why people are excited about it.
What Drives the Value of Bitcoin
Bitcoin is a digital asset that you can trade in, and it has monetary value. There are a few reasons for that, and one key reason is the network effect. The network effect is a business phenomenon when a product or service gains value as more people use it. It’s a term that comes from computer networking. The numbers continue to climb up until it reaches a point called the critical mass point, where its value exceeds its cost. Bitcoin is at that point where enough people use it now, and enough people want to use it, that it’s going to accelerate as more people find use for it. More companies are beginning to accept bitcoin as payment, including Microsoft, Overstock, and Newegg. You can even shop on Amazon with bitcoin via a third party processor Purse.
Some people have identified as many as seven strong network effects that bitcoin alone has, including the market demand that I just described. In fact, more so than many other currencies today, bitcoin’s price is determined by the market.
Unlike the US dollar and other fiat currencies in the world, there is a limited supply of bitcoin available. The number is pegged at 21 million total bitcoins that will be released periodically into the 22nd century. I’m not going to get into the specifics of this aspect of bitcoin. Just remember that there’s only so much that will go around, and like precious metals such as gold, this is a factor that drives the value of the currency.
Although the official classification of bitcoin varies depending on what country you’re in, and in the case of the US, what government agency you ask, many people are starting to view cryptocurrency, bitcoin in particular, as an alternative way to store their wealth. You might be familiar with collectibles like paintings and classic cars and other non-registered assets that appreciate in value but aren’t viewed as traditional assets such as stocks.
No central authority controls bitcoin. This means that no government or financial institution has anything to do with bitcoin, especially regarding its value. Bitcoin is an alternative currency that exists outside the current money system that governments and banks share a monopoly over.
It’s attractive to some people to have the option to move to a currency that is outside the current controls of governments and banks. And it’s especially appealing to the billions of people who don’t have any access to the world’s capital markets.
That last part should give you an idea of where the internet is going, and why it’s going to be huge.
Cryptocurrency and Web 3.0
If you think about the technology behind money, you’ll realize it hasn’t really changed all that much since its conception. It’s a tool that we invented to transfer value and trust to one another. Cryptocurrency scales this ancient tool to the Internet, which is something that hasn’t been done before. Sure, some applications allow some people access to their existing banking, but that’s not really Web scale.
When the web first came about – Web 1.0 – email and the first websites accelerated written communication and publishing to where they are now. With email, in a matter of seconds, you can send a message to anybody in the world, for virtually no cost, instantaneously. Anybody with an email address can do this. With web publishing, you can publish anything on your own website for a very low cost, and anybody in the world with a web browser can see it. About 10 to 15 years after that revolution, Web 2.0 came about. This brought us social media, making communication happen in real time, and brought the same kind of easy publishing of the written word to photos and videos. It also gave us all easy access to various kinds of digital media. Today, it’s not a stretch to say that most people have the equivalent of a post office, a printing press, and a television studio on their computer or phone. This same level of capability is being extended to money for the first time.
Can you guess what Web 1.0 and its later innovation Web 2.0 did to various gatekeepers and the industries that existed around them? As a hint, try to remember the last time you carried on a snail mail correspondence with somebody. Or how about the last time you bought a roll of film and later dropped it off at a corner store to get developed. Bonus hint: try to remember when doing those things in that fashion was not only considered every day, but it was the only way to do them. With cryptocurrency, there’s the potential that a vast amount of people won’t just have access to their bank accounts via the Internet. Instead, they’ll have the ability to have a bank of their own, complete with the ability to create currency, conduct transfers, and perform all of the functions that central banks do today. Now you might understand why bankers, financiers, and governments are a little nervous about the advent of cryptocurrency.
I told you at the start that this technology represents the next wave of internet, Web 3.0. It’s easy to imagine transactions of cryptocurrency being conducted in a virtual space or using augmented reality applications to do some version of the same (such as pricing physical goods, for instance). It’s also easy to see this happening within the next decade or two, as smart devices and the Internet of Things become even more embedded in our daily lives. But the real innovation lies in the idea of a decentralized network where value can be exchanged between individuals without the permission of a central authority, and is not subject to institutional control. Cryptocurrency is merely the first application of this idea. Already, the concept of smart contracts is taking flight, which negates the need for specialist lawyers and other arbitrators since these contracts are self-enforcing, thanks to the nature of the blockchain. I’m sure there will be technologies that haven’t been invented yet that will be built on the blockchain and will change the way we currently do things. Web 3.0 started with bitcoin, but it’s not going to end with it. An invention can’t be uninvented, and the changes that cryptocurrency are going to bring are going to happen very fast. As fast as the Internet changed the world.