Week 6- Bitcoin, Cryptocurrencies and blockchains

 

Written 14th September 2017,

At the time of writing, China has announced that they will be making bitcoin transactions illegal and as of a few hours ago announced the Chinese bitcoin market will close on 30th September.

This seems to be the first time that bitcoin traders seem concerned and everybody that I know who has been buying has since sold all their holdings. Uncertainty isn’t uncommon with bitcoin and other cryptocurrencies as they are incredibly volatile, however, the fall in price has been something that can’t be ignored, especially that there is a double-digit percentage decrease.

Looking at the most drastic impact of cryptos, they can remove all the external influence of politics and banking away from purchasing, currencies and transactions. The growth of bitcoin has made some in these institutions nervous: JPMorgan CEO Jamie Dimon came out against it, calling it a fraud and now China is banning its use. As bitcoin has grown, the challenges against it has risen too. The system of transactions is safer than that of a bank, faster than the banks and more transparent than the banks, because of this, the intermediaries of transactions are facing competition for the first time and obviously don’t know how to respond.

Instead of challenging the cryptocurrencies, the tactic seems to be to refuse to acknowledge it and starve the currency out, labelling it as heretical and a crazy idea that will never take off. As digital currencies have been growing, articles have only been arguing about when the bubble will pop and the technology will collapse – only to see it continue to grow. Until now anyway.

At the time of writing, BTC/GBP trade price has dropped by 17% in the last 24 hours and is continuing to fall, the scenario for all other cryptos are just as bleak. A predicted 90% of all bitcoin transactions occur in China and the price of bitcoin determines almost all other digital currencies, despite over 900 cryptocurrencies existing, bitcoin is the brand and can act as a projection of the direction of future trends for all other cryptos. The attack on the usability of bitcoin is attacking cryptos as a whole by damaging the keystone that the technology rests.

As much as this crash is damaging cryptos and is making them face their first real collapse since their introduction and growth into the public eye, I have full confidence that when the dust settles, many cryptos will survive and will begin to grow again.

This isn’t just because of the growth of the brand and the excitement this technology carries with it, but the technology behind it is astounding, I can’t help but agree with Don Tapscott in his TedTalk when he says blockchains can hold the keys to the second age of the internet.

Companies and institutions apart from those at the very top have always been behind those willing to attack them digitally. Even those who are based online like social media sites have fallen to attacks on many occasions—and these are sites we’d expect to have strong safety precautions. Beyond trivial things like social media, it was only last year the NHS, one of the largest healthcare services in the world was brought to halt from the RansomWare attack WannaCry.

Blockchains stop this by making all data completely available to all systems operating the network and each block is protected by a private key. In the bitcoin system, a block is mined approximately every 10 minutes with a digital signature being attached to the end of each block from the miner which includes the details of the mine. This signature becomes the first line of the following block, making a digital chain between the blocks. Any attacker would need to have at least half of the processing power of the whole network to only have a 50% chance to crack the first block, they would then need to crack all the subsequent blocks first otherwise the network would find the false information and remove it from the chain. Even with 50% of the processing power in the system, theres only a 50/50 chance of cracking a block and 25% chance of cracking 2 in a row, 12.5% for 3 etc. . The sheer processing power that is needed for that is greater than all of Google’s servers.

I’ve only been following cryptocurrencies for a few months and was trading in them for a short period of time. My view of these currencies is that they will grow for a number of reasons. One of which is that  it is a superior method of exchange than current intermediaries; banks can take in excess of 10% in fees in international exchange, considerably more than what cryptos have to offer. Also, with events such as the financial crash of 2008, a crash completely preventable by the banks, there is a lot of distrust in them. In cryptos, as everybody is anonymous, there is no trust involved in the process—only validation. For every block added onto a chain, you can be more certain that your block is secure and won’t be removed from the chain; with the 10 minutes it takes to mine a block, you can be near certain your block is secure within half an hour.

The only thing stopping cryptos propelling to incredible heights is that those who buy, sell and mine are still early adopters of the technology. The average person on the street has either never heard of bitcoin, like most of my housemates, or has heard of it but only through its association with criminals, the dark web and ransomware. But the same people who make that link tend to be the same people who don’t actually know what the dark web or ransomware is. Like all new technologies, cryptocurrencies can be used for good or bad, it’s a shame that it is linked more to the negative rather than as an investment opportunity.

The potential for a blockchains extends much further than just that of a digital currency as by removing an administrator or intermediary, the control of a transaction can be held between the parties involved. The public ledger means that the ultimate transparency exists of spending and transactions. The effect this can have includes being able to hold organisations such as charities and governments more to their spending—allowing much greater trust in organisations that their uses of our money are to the causes we agree to. With greater transparency, it would not be absurd to assume the direction of business is one of more clarity and with greater ethics, as their purchasing history becomes easier to find. On top of this, it will be easier to complete tasks by cutting out the middle men, this may range from buying a house to getting married.

The reason I believe bitcoin will survive and come back just as strong is that the blockchain technology is defined by bitcoin. As blockchain grows as a method of cryptography, the bitcoin brand will grow with it. As cryptocurrency grows and becomes more of a household name, the blockchain will be tested more and more. I trust the technology is secure enough that it will be able to function despite attacks on it. With this in mind and with the growing us of a blockchain beyond monetary transaction, the brand of bitcoin will continue to be attached the blockchain. Because of this, bitcoin will grow as the blockchains uses do: propelling its prices higher into the future.

UPDATE- 4th October 2017

Because of the delays and wait between my last post and this one, I’ve been able to watch the market and so how it has responded to the crash. Writing this on the 4th October, the price of Bitcoin has returned back to the price it was at before the crash of approximately £3300. But most interestingly, during the crash it was announced that JPMorgan bought Bitcoin. This proves the capabilities of bitcoin and how it is recognised by investors of the highest level now.

A few weeks after the crash, conspiracy theories started to come out too. The most interesting I’ve heard is that banks and investors likehad decided to invest into bitcoin after recognising the potential returns of it. In order to drop the price, China announced the closure of the markets which will allow the banks to buy at a reduced price. Arguably, you can see the exact point the purchases were made by firms like JPMorgan as a huge spike in the price occurs before a gradual increase back to its original price.

Since then China has delayed the closure of the market by a month and it wouldn’t surprise me if it was delayed again.

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