Bitcoin, the controversial digital currency, has been hot this year, recently more than $7,000 this month from around $1,000 in January. Is it the next great thing, or will bitcoin run its course?
And what about blockchain, the technology behind bitcoin? Companies are scrambling to find new uses for blockchain technology, which allows participants to record transactions or other information without having to trust a clearinghouse like a central bank. Should investors look for companies developing new uses for blockchain, or will this become the next false “game changer” like the dot-com bubble that burned so many nearly 20 years ago?
Experts have mixed views on both issues — which is understandable because prices would have stabilized if bitcoin and blockchains had predicable futures. For now, all that is certain is that, no matter how sound the technology, these are speculative bets that should be placed only by investors who can afford significant loss.
“The market is certainly volatile and is not for the faint of heart, but the long-term potential for cryptocurrencies is bright,” says Gabriel Dusil, co-founder of Adel Ecosystem Limited, a blockchain technology incubator based in Douglas, Isle Of Man.
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Some worry, however, that bitcoin could tumble if, for instance, the system is hacked or severely regulated.
“There is the risk bitcoin may be a gimmick and not a currency after all,” says Clem Chambers, author of upcoming book “Trading Cryptocurrencies: A Beginner’s Guide — Bitcoin, Ethereum, Litecoin.”
“There is the risk it is banned,” Chambers says. “Bitcoin also has security risks, like any other type of cash, so you have to be careful not to lose it or have it stolen.”
Bitcoin is a computer-based currency that has been around since 2009. The key attraction is the lack of an authority like the Federal Reserve and other central banks that issue dollars, yen and euro, and which raise or lower the money supply to stimulate the economy or curb inflation. Bitcoin believers feel it’s better to leave everything to the free market.
The blockchain technology that underlies this cryptocurrency caps the number of bitcoin that can be produced and leaves the creation of new bitcoin to “miners” who solve mathematical problems so complex that few can do it. In fact, it requires so much computing power that many mining operations are set up near cheap power sources like hydro-electric generators in China. Because the creation of new bitcoin is so slow, the currency’s value rises and falls with demand.
But bitcoin has not become a currency in the usual sense — very few companies accept it for goods and services. The value depends on what speculators think other people will pay for bitcoin in the future. Coins are bought and sold through various companies that have set up exchanges which quote bid and asked prices and accept ordinary currency like dollars to exchange.
“We view crypto-investing as driven by the greater fool theory of investing or speculation, and we genuinely mean that in a bullish way for now,” says Jason R. Escamilla, CEO of ImpactAdvisor, a wealth management firm in San Francisco. The greater fool theory means buying something that may well be overpriced in the belief someone else will pay even more.
“As an investor, you have to ask yourself, if you are getting into bitcoin today: what’s your edge over the person selling to you?” Escamilla says. “Simply looking at a chart showing the price rise is not enough, he says.
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Dusil acknowledges some “market hysteria” that draws new money into bitcoin with every price bump, but says the unstable price is partly due to a chicken-and-egg issue that will be resolved as bitcoin becomes more widely accepted.
Even if bitcoin flops, many established companies and startups are developing other uses for blockchains to secure information from tampering while giving every user access to the entire record of transactions. The pitch is that you can trust blockchain data even if you don’t trust others participating in the chain. It’s like a giant spreadsheet shared by many, but with no one empowered to doctor past records.
International Business Machines Corp. (NYSE: IBM), for instance, has a TV ad touting blockchain for recording every step a food product takes from field to supermarket, so users can be sure products are safe. Blockchains might also be used to store financial or medical records, keep track of shipments and other kinds of supply chains, or to do things so far unimagined.
eChambers, while cautious about bitcoin, thinks blockchain technology is here to stay. “In my opinion blockchain is as big a revolution as the internet,” he says. “It will slingshot efficiency in many areas of record keeping, a long-needed increase in the core driver of prosperity — productivity.”
Michael Wagner CEO of The Tokes Platform, a Las Vegas firm that uses blockchain to record legal marijuana transactions, says the technology is valuable to users who don’t trust others in their market, or find other data recording systems too slow.
“One such area is in financial instrument trade settlement, and chain-of-custody tracking,” he says. “Where equity trades today take upwards of three days to be reflected in a brokerage account, blockchain settlement is permanent and can be completed in minutes. Real estate transactions provide another area true chain of custody can be publicly documented on the blockchain, providing verification of ownership. These are not mere gimmicks, but rather truly innovative technological advancements.”
Blockchains can also be used for “smart contracts” in which the system will know if parties have met required conditions, eliminating the need for intermediaries, Wagner says.
Experts predict that many blockchain ventures will founder.
“It’s not enough to wrap an old app into a new coat and call it a blockchain app,” Dusil says.
And even blockchain enthusiasts acknowledge bugs to be worked out.
“The current blockchain technologies are not fast enough to handle certain transactions,” says Priyanka Murthy, founder of Arya Esha, a luxury jewelry retailer that is experimenting with blockchain to guarantee the provenance of diamonds and other merchandise.
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“For example, the amount of transactions that currently occur in centralized companies like Visa ( V) or Amazon ( AMZN) may not be able to be handled by blockchain technology,” Murthy says. “This is because centralized systems like the ones used by those companies can process and record far more transactions than the current iteration of the decentralized blockchain network. These inefficiencies are being worked on with some promising solutions in the horizon.”
“Blockchain appears to have the potential to be as transformative as the internet,” says Anthony Glomski, founder of Los Angeles-based AG Asset Advisory, a financial advisor to business owners.
“But, it’s important to remember at this stage that this is a speculation rather than an investment. This phenomenon is as old as the tulip bulb bubble. Tulip mania started in approximately 1634, when $100 worth of tulip bulbs turned into $2,000 in a single month.”
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Should I Invest in Bitcoin and Blockchain Technology? originally appeared on usnews.com
