It seems you can’t read a news website without seeing some sort of headline for how Bitcoin is taking over the stock market. In the past three months, Bitcoin has taken over the financial world by becoming the hottest new market investment of 2017. In most of the articles, the takeaway is that the value of Bitcoin is skyrocketing. This might be the case in today’s headlines, however, very soon, you will be reading a headline very similar to “The Bitcoin Crash”.
Bitcoin is just like every other promising new investment. The trend is the exact same every time. The value of the investment rises so fast investors try to jump on board quickly to maximize their value when they sell. This influx of investment activity causes the demand of the investment to rise, in turn, also causes the value to rise. This goes on until the actual value in the investment is realized. At this point, many of the investors try to get out before the investment is completely worthless. In financial terms, the investment bubble bursts. So what is it that will cause Bitcoin’s actual value to be realized, causing the start of the Bitcoin Crash of 2018? That’s simple, the technology behind Bitcoin.
The Technology That Caused The Bitcoin Crash
Bitcoin was originally conceptualized in a 9 page paper written by a mysterious author, “Satoshi Nakamoto” (https://bitcoin.org/bitcoin.pdf). The goal of Satoshi was to develop a peer-to-peer electronic cash system that could be maintained without a third party authority, like a bank. In the paper, Satoshi laid out exactly what it would take to build such a system. The system Satoshi laid out is comprised of multiple layers of fraud prevention designed to guarantee transactions without the need for any type of authority intervention.
The first layer is designed in a way that each transaction needs the digital signature of the previous transaction to guarantee its digital signature. This is known as transaction chaining. It helps to prevent fraud because you can’t introduce a fraudulent transaction without corrupting an entire block of transactions. The second layer of fraud prevention is a bit more complicated to explain. To simplify it, imagine a network of Bitcoin servers all racing to validate blocks of transactions. Each node in the network independently works to validate blocks of transactions. The first node to solve the transaction block, will broadcast its findings to the rest of the network. In which, each other node will replace their transaction blocks with the block that has been guaranteed by the winning node. Transaction blocks are guaranteed through a complicated algorithm detailed in the “Calculations” section of the original paper (https://bitcoin.org/bitcoin.pdf). Having each node competing against each other to validate blocks of transactions ensures that no attacker could introduce its own block of transactions as verified. In other words, each block of transactions is secured by the fact that there are multiple nodes in the network working on the same problem. A fraudulent block could never be introduced because each other node in the network would have to agree with its output. All of this together describes what we call the Blockchain.
The Organization That Caused the Bitcoin Crash
The Blockchain is what makes it possible for a system of transactions to exist without having to be validated by third party. It is also where the true value of Bitcoin lies. However, it will also be the reason why Bitcoin crashes. There are several reasons behind this assertion. The number one reason being that no one person or organization is behind Bitcoin. So if it falls apart, there is no one person that will take the blame. This is due to the fact that Bitcoin is an open source project. Its code can be found at https://github.com/bitcoin/bitcoin/. This project currently has 491 contributors (https://github.com/bitcoin/bitcoin/graphs/contributors). Meaning that 491 people have actively been developing code for it since its conception. If something goes wrong, there is no one to take action against. In fact, on their own “About Us” page (https://bitcoin.org/en/about-us) the organization describes the ownership of Bitcoin software as being “… controlled by all Bitcoin users around the world.” It is pretty clear that there is no one person in control of Bitcoin. In fact, as a developer if I wanted to fork Bitcoin software and create my own cryptocurrency, there is nothing stopping me. That is because the software is licensed as MIT, which provides free use and distribution of the software for whatever purpose. Another reason that suggests that Bitcoin will ultimately crash is the fact that it is solely funded by its own foundation which is fueled by donations. Whoever controls the funding also controls the direction of Bitcoin. Which could ultimately cause some really interesting monopoly situations in the near future. So let’s say, for example, I am Amazon, and I decide to fund Bitcoin to the point where they can’t say no to any of my suggestions. Well, I think you get the point.
Bitcoin is a really interesting study because as much as the system is designed to block fraudulent activities it has been organized to be completely monopolized by the donations of a company with the deepest pockets. Not only that, but because of the MIT licensing on their software, they practically don’t own that either. With all of this, I leave you with one question…Would it ever be a smart investment to buy into a company whose product is neither owned by the company nor controls the future of the product?
Now I know that a Bitcoin company isn’t being traded here, it’s more like a currency we are trading. However, look at it this way. With trading currency, we aren’t looking at the actual currency itself. Instead we are looking at the parties backing the currency. A country that has a civil war happening within its borders is more likely to trade at a lower value than one that doesn’t currently have a civil war going on. A major piece of the investment is looking at how stable that country is. The same should be happening for Bitcoin. We are relying on the Bitcoin Foundation as the entity behind the technology. And unlike countries that can claim ownership over the money and financial systems that back it, the Bitcoin Foundation can’t even do that.