Bitcoin climbed in value from less than $1,000 at the beginning of 2017 to $14,000 by the end of the year. A coin of Ethereum was worth $8 on Jan. 1, 2017, and $843 one year later. Who would not be intrigued with the idea of owning something that appreciated thirteenfold, or even a hundredfold, in one year? Even the least sophisticated investors are wondering if cryptocurrency is a real thing or just a bubble of speculation. The real revolution is not the currency but the system that supports it.
In the late 1990s, many were sucked into the dotcom bubble as the internet revolution brought unimaginable valuations to businesses with a technology bent. But the companies themselves were not as valuable as the platform they were all being built on: the internet.
Cryptocurrencies like bitcoin and Ethereum are no different; they are the shiny objects capturing everyone's attention. But the real industry changer is blockchain, the technology they are built on. Why? Because just as the internet digitized geography and made the world smaller, blockchain does something unimaginably valuable: it is the digitization of trust. It makes transactions trustworthy and safe. Here are some questions to consider in the emerging world of digital logs:
1. Will digital currencies dominate the future? Digital currencies are absolutely the future of money. However it's unlikely that bitcoin is the ultimate winner. Regardless of the coding oddities that make it an inefficient vehicle (the mining code used makes it a colossal waster of electricity and processing power), the idea is simply too big for one platform to own. According to Erik Townsend of the MacroVoices podcast, the demise of bitcoin will result from the privacy and anonymity it guarantees. Sovereign nations will not allow transactions to occur without ensuring taxes are paid and the flow of funds is monitored.
Whether it's in the name of security or for some other reason, you can bet that as cryptocurrencies evolve, so too will government regulation and involvement. China has already started working on a digital renminbi. If the U.S. intends to keep its status as the world's reserve currency, it will need to digitize. By making all non-agency-sponsored currency illegitimate, the world's governments can rapidly marginalize currencies like bitcoin as the domain of bad actors on the fringes of society.
2. How does blockchain work? The system that all cryptocurrencies are built on is a distributed ledger protocol (DLP). Think of it as the ultimate digital log. Imagine a digital version of the library book log many of us grew up with. It tracks who borrowed the book and for how long, and ensures its eventual return (or the appropriate fine). Now imagine if that book was digital and the log tracked who could borrow it, amend it and share it, and there was a complete digital footprint of every person's interaction with it. Now imagine that log not being monitored by a library, but instead being regulated and protected by the users. Think what it would mean if this technology was used for every product, transaction and payment throughout the world with secured access for approved participants.
3. What are the implications of mass adoption of DLP technology? If the buyer and seller do not know each other, many transactions currently require an intermediary to reduce counterparty risk and ensure payment and the safe delivery of products and services. Ultimately, blockchain will completely change how the world interacts because it allows for the safe transfer of a product from one person to another if a set of programmed conditions is met. In the log, you can set the rules for who has access, for how long, and ensure safe payment. With blockchain, we aren't just logging the transaction, we are also guiding the transaction and all of the streams of payments along the way. Blockchain instills instant confidence in the transaction.
What happens when we really don't need to have a trusted middle man like a bank or an escrow agent to confirm delivery and payment? Or a title company to track the history of property? Over time, transaction costs will decline and many of the world's multifaceted intermediaries will have to evolve to survive.
DLP technology today is like the internet in 1992, with immense potential but a messy learning curve. Investing in dotcom stocks in the late 1990s was a frenzy, and many of the pioneers ultimately failed. The real impact of the internet has taken decades to unfold, but the future of commerce and society has been forever changed. DLP technology has the potential to be just as impactful over time.
Should people buy bitcoin or other digital currencies today?
Just like the dotcom bubble, backing any one "winner" in the crypto craze is like placing a bet on a specific number in a game of roulette. It's so early and the outcomes are so uncertain that nobody knows who the eventual winners will be. You only win if you pick right and are fortunate enough to leave the table at the right time.
Joe Duran is founder and CEO of United Capital. Follow him @DuranMoney.