Get rich with Bitcoin
There’s a digital gold fever going on. Anyone who hasn’t already become wealthy because of the Bitcoin (or other digital coins) is now betting their house on it. But are digital coins really that valuable? Or is this bubble going to burst sometime soon?
How do you make something out of nothing? That’s an easy question to answer in the case of money: banks simply activate the printing presses. Since an unknown computer genius (only known by the pseudonym Satoshi Nakamoto) published a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System in October 2008, we know that everyone can create money. The Bitcoin is a cryptocurrency: a cryptographic encrypted coin. By solving complex mathematical formulas you can pry the coins out of the computer code.
Intriguing, but also vague. Bitcoin promises to be an alternative to traditional currencies. But even when the banking crisis escalates – a few months after the publication of Nakamotos paper – the currency still stays out of the spotlights. In 2009 the network was set up quietly, and shortly after that the Bitcoin was on sale for $0.001. Years later, in the summer of 2017, the currency finally gained world fame. Suddenly, one Bitcoin became equivalent to 5,000 dollars. Out of the blue, anyone who’d bought a thousand Bitcoins for a single dollar in the early days now had a fortune of five million dollars. Since november, the currency was even worth more than $7,000. Totally incomprehensible, and it explains the huge run on digital coins that has now started.
Cryptocurrencies
After the Bitcoin, thousands of other cryptocurrencies have entered the market (the so-called alternative coins or ‘altcoins’). Bitcoin has brought about new technological possibilities and has also shown the world that cryptocurrencies can become invaluable. New companies promising to change the world like Bitcoin did, now turn on the digital printing presses. Bitcoins are estimated to be gradually ‘mined’ from the code until the year 2140, but a company can also choose to mine and issue a big batch of coins at once. For example, issuing one hundred million coins at a unit price of one dollar, of which they’ll pocket 10 million coins for their own benefit. Ordinary people and investment funds buy the remaining 90 million coins, hoping to share in the profits later on.
This way, the company kills several birds with one stone: it cashes an immediate initial capital of 10 million dollars in coins. On top of that, trade has also started to develop, which may further increase that value. And the network is running at full capacity: all these coins are not only traded but also often used for payments. Just as every European country used to have its own currency, every cryptocurrency is the currency of a certain digital network. You’ll pay a taxi ride with the Taxicoin and for sending Bitcoins you’ll pay transactions costs of about 0.001 Bitcoin.
“Will we all buy our coffee with Vertcoin in five years’ time?”
So it’s not all just speculation and great ideas. Thuisbebezorgd.nl and Microsoft already allow you to pay with Bitcoins. Even at McDonalds in Thailand you’ll soon be able to pay with cryptocurrencies. Will we all buy our coffee with Vertcoin in five years’ time? Will we put our retirements up for auction at ‘Auctus’? And will we soon hold Bitcoins as a digital gold backup? Bitcoin specialist and evangelist Lykle de Vries expects so. “Before the euro came, we were accustomed to having different currencies at home. And we also still use loyalty points such as Airmiles.” He predicts the rise of Albert Heijn Coins and coins to pay your energy bills, although the use and storage of coins still needs to become far more user-friendly. Now the use of cryptocurrencies is still a hassle, with all these passwords and secret keys. If you lose a code or if a hacker watches over your shoulder, you lose all your coins.
Associate Professor of Financial Market Infrastructure Ron Berndsen is more skeptical. In the former Europe of 30 different currencies, we stumbled from one currency crisis to the next. “Money works best if accepted widely. What happens if we have hundreds of cryptocurrencies?” None of them will be real money then, Berndsen thinks. Because the coins are not exchangeable. This could be solved with a single digital currency, which can then be used to pay in all currencies. The crypto company Ark is currently working on this. “You can do that, but then you’ll still have only one currency at a higher level.”
Blockchain
The moment you think you finally start to understand, everything becomes even more complicated. All those coins aren’t that interesting after all. It’s not really about Bitcoin itself. It’s all about the technology behind it: the blockchain. This is literally a chain of (information) blocks, a new way to store and manage information. No longer centrally located in a database, but decentralized, spread over a network of many thousands of computers. “A revolutionary invention,” says Ron Berndsen. But what’s so revolutionary about it? Not that much, unless the authority is also disseminated. Until now the bank, the Chamber of Commerce and the notary were the ones to determine how many euros we have, whether we have founded a company or not, and in whose name that beautiful little suburban gazebo is registered. The blockchain makes all of those institutions superfluous. An efficient and reliable algorithm can replace their inefficient and unreliable human work.
It’s the wet dream of every anarchist and possibly an even safer way to arrange things. Berndsen: “If the Land Registry computer is hacked, it will be a problem in the Netherlands to prove ownership. If you put it on the blockchain, no one can change the registry data on his or her own anymore. Even in an environment where you don’t trust anyone, the blockchain works: “We only need to trust the algorithm, which is usually open source.”
“The fact that you can simply trust the network is brilliant”
Berndsen doesn’t think that people will become completely obsolete, but he does foresee an efficiency gain. He refers to the clothing industry: “How does a fashion reseller know that there was no child labor involved in production? Proof of this must be provided at every step in the chain. In the blockchain, you enter the certificate at the beginning of the chain, after which it will be handed over to the next step automatically. In principle, you will no longer need a bank guarantee, a notary or any other authority.”
Blockchain will become important. Professor of Private Law Eric Tjong Tjin Tai thinks so as well: “The fact that you can simply trust the network is brilliant. However, I still don’t see the actual value of it.” The claims may be more than substantial: “The Internet has changed the world, but in a different way than we first thought it would. Now you can order items on the Internet, but of course you were already able to do that by post. Perhaps companies that do not trust each other may now share information on a closed blockchain, without anyone else running off with the data. That’s a considerable step forward, because it can be done worldwide.”
Soap bubble
Maybe the expectations are too high indeed, all of us hyperventilating while blowing up another soap bubble in the meantime. The similarities with the Internet bubble, around the turn of the century, are striking. The booming creation of small businesses, rapidly elevating stock prices, large-scale individual speculations, an overall euphoria in which economic laws are considered outdated and thrown overboard. De Vries thinks it’s not too late to step in, but Tjong Tjin Tai sees the matter differently: “People see the alternative coins as a way to make a lot of money, without really understanding how it works. Only fools do that.”
“The dotcom-bubble was about a thousand times bigger”
Berndsen: “The Bitcoin and other coins are popular because their value has increased massively. Now we’re all waiting for the first big blow where the coin drops back to ten dollars. I’m not predicting it, but it’s possible.”
De Vries fights back on this: “The dotcom-bubble was about a thousand times bigger.” Moreover, that bubble lasted for years and the crypto-bubble has only just started to grow. And even skeptics find the blockchain revolutionary. But he does see the similarities. “This is part of how new technology develops. For a while, expectations are unrealistically high. The real danger lies in the fact that citizens are tempted to invest all their savings in a very risky business.
Efficiency is also an issue: the blockchain can regulate all kinds of things more tightly, but in itself it’s rather inefficient. To add transactions to the network, thousands of computers have to give permission and many server parks all over the world are already running overtime in order to solve the necessary mathematical formulas. For real application and implementation of the system by government institutions and the industry a more (energy) economical solution will probably be necessary.
And what about reliability? Only when the majority of the network approves a transaction, it enters the database. This is of course rock-solid, but ironically it’s also the inherent weakness of the system. If a group of malevolent people controls 51% of the network, it can manipulate data. “They’d spoil their own market,” says Berndsen. The whole world would see that the coin has been torn apart; rates would plummet. De Vries: “We shouldn’t be mistaken: to maintain such a network majority for a long time, you really need to have an almost ridiculous amount of computing power. And in turn, the network also simultaneously adjusts the difficulty of the calculations to the available computing power.”
Debatable transactions
What has once been placed on the blockchain can’t be reversed or withdrawn. And since Ethereum (the second largest currency after Bitcoin) has emerged, a lot can be found on the blockchain. With Ethereum, the so-called smart contract was introduced, which allows you to program all kinds of smart pieces of computer code on the blockchain. It’s also revolutionary (almost all cryptocurrencies are on the Ethereum network), but in his article The reasonable third and the blockchain, published in 2015, Tjong Tjin Tai states that it will be nearly impossible to program transactions on the blockchain in such a way that unfairness and abuse are totally excluded. But people do need this certainty, because otherwise shrewd guys could find loopholes in the system and exploit them with impunity. Currently nothing can be done against such scams, which even occur on the Bitcoin network. “What can you do if a transaction is debatable? Who’s going to solve it? I can imagine that we will still be submitting such cases to a judge,” says De Vries. Would not even the judiciary be an unambiguous authority any longer? Tjong Tjin Tai: “You remain subject to the law, it’s nonsense to think you’re out of the loop.”
“What can you do if a transaction is debatable? Who’s going to solve it?”
But are we really waiting for a world where information is permanently stored in databases that are accessible to all kinds of third parties? De Vries turns that question around: “Are we really waiting for outdated institutions? Isn’t it about time to reshape the world with new technology? If the existing institutions can do that, I’ll be happy to keep using them.”
Wild wild web
The established institutions have not been inactive, says Berndsen, who, in addition to his professorship, also works at the Dutch Central Bank (DNB) as head of the Market Infrastructure Policy Department. In Sweden, a digital form of money is being considered, which citizens would not hold at a commercial bank, but at a central bank. “It’s obvious to build this money system on a new form of technology, which could be a version of the blockchain.” And sometimes the future can do without blockchain. “In Europe, central banks are now building an Instant Payment System. In 2019, Dutch citizens will be able to transfer money in the EU within 10 seconds. It will be built on tried and tested existing technology.” Such a system will suddenly make currencies like Ripple or Stellar, which promise to speed up payment traffic, a lot less interesting.
Blockchain and cryptocurrencies can make existing systems redundant or change them, but stability is needed for them to become a serious factor, Berndsen says. Without it, no one will put his or her salary, pension or business model on the blockchain. It surely could spread out to those lengths, but it’s not there yet. The only thing that currently spreads on the wild wild web in the first place is digital gold fever.Translation by SoGraTex.
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