Bitcoin, and cryptocurrencies in general, are slowly but surely encroaching into mainstream public recognition. There are around 2000 currently in existence, and who knows what number this will get to be in the next few years. This year marks 10 years since the creation of Bitcoin, so let’s have a look at the history of Bitcoin and cryptocurrencies, the current state of affairs, and see what the next 10 years may have in store.
The idea of a digital currency wasn’t new when Bitcoin was created. It could actually be traced back to 1982 when a computer scientist first proposed such a concept. By 2010, as Bitcoin started to grow in recognition and popularity, many digital currencies were actually already in existence, such as Facebook Credit, which could be used to buy games and applications on the platform, and many had already been and gone.
One such example is the cautionary tale of Beenz, which was established in the late 1990s as one of the first online payment platforms. Initially it was very successful, and was praised by the American philanthropist Larry Ellison, who said “beenz.com is clearly an innovator by developing a true global Internet currency,” and he was so excited by its potential that he invested $20million into the venture. However, as creator Charles Cohen explained, once companies such as Amazon and Visa developed their own payment systems, the game was up. “quite literally, our customers disappeared. It wasn’t that they started buying less; they just disappeared”, he said.
There are definite similarities that can be made between Bitcoin and the failed project of Beenz. Both were established with the vision of being a digital alternative to cash, causing excitement as a result. However, Bitcoin, and the now thousands of other cryptocurrencies that are now in existence, possess some things that Amazon and Visa can’t easily replicate: animosity, and the lack of a third-party intermediary because of its decentralized nature. Beforehand there were digital currencies, but not cryptocurrency. The concept of a decentralized peer-to-peer currency had been attempted, such as with Bit Gold in the late 1990s, but the technology wasn’t in existence for the vision to be successfully realized. It would take another decade for this technology to exist.
2009 was not a year that was looked back on fondly by the financial industry. It was the year that the credit crunch, the global economic downturn of the late 2000s, was finally starting to lose its bite after a turbulent couple of years. Despite things starting to finally pick up, it was still very much doom and gloom. The reasons for the credit crunch were numerous, but without delving into what they actually were, it’s safe to say the whole saga resulted in a crisis of confidence in the traditional banking systems. The Times ran a headline on 3rd January, referring to the UK Chancellor of the Exchequer, Alistair Darling as being on the “brink of (a) second bailout for banks.”
Looking back at this headline now, over a decade later, it will look inconspicuous to the casual observer, just another headline highlighting the ungodly mess that the financial industry was in at the time. The 3rd January 2009 was a Saturday, and as was the norm, the Times was on sale in the UK that day for £1.50, or around $2. However, in recent years, copies of this newspaper have been sold, and are still on sale, for astronomical amounts. The website thetimes03jan2009.com lists all known copies of the newspaper still in existence from that date, with one copy on sale for a crazy $1.3 million. This to any rational person probably seems like insanity, and it’s all because of that headline. So, what makes the headline so significant in history, exactly?
The genesis block
It was on this date that illusive Bitcoin creator Satoshi Nakamoto, who it is assumed goes under a pseudonym, mined the first 50 Bitcoins. On the very first coin that was mined, embedded on the ‘genesis block,’ was this very headline, “chancellor on brink of second bailout for banks.” This was a direct reference to why Bitcoin was created in the first place. At a time of great uncertainty, amidst growing distrust in the major banks in control of the centralized financial systems which had caused so much turmoil, here was the perfect antidote.
Here was something built on decentralization. The banks no longer held the power and authority with this new form of currency. An open, distributed ledger, using blockchain technology where every transaction is verified by the consensus of every member on the blockchain. A great idea in theory, but would it catch on? As Hal Finney, the first recipient of Bitcoin from Nakamoto noted soon after this transaction: “One immediate problem of any new currency is how to value it. Even ignoring the practical problem that virtually no one will accept it at first, there is still a difficulty in coming up with a reasonable argument in favor of a particular non-zero value for the coins”. Of course, there was also the problem of how it could be used in real-life.
Adoption and rise in value
As explored in the previous Crypto Thoughts article, another big turning point for Bitcoin was the first transaction using the currency for a real-world item, 10,000 for $41 worth of pizza by Laszlo Hanyecz in 2010. This signaled to the world that Bitcoin could actually be used in real life, and subsequently its popularity, and value, rocketed. From being worth virtually nothing until early 2010, it had hit parity with the US dollar by early 2011. And we all know how the price has skyrocketed since then! Indeed, much is often made of its price. But what about its usage throughout its history and to the present day, for actual real-world transactions?
This article from the BBC, essentially a ‘Bitcoin for dummies’ piece, contains this very simple but true sentence: “Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.” Of course, its price has been extremely volatile at times, such as the spike to nearly $20,000 in late 2017 and its subsequent crash, but it has generally become more valuable as confidence has grown in the currency, and its usage has grown.
In its early days, its usage was still quite limited, as skeptics expressed doubt over its long-term viability as a currency. But gradually, as it grew in legitimacy, more and merchants started to accept it as payment. Bitpay, a payment service provider enabling merchants to accept Bitcoin, was established in 2011. There is no escaping the fact however that in these early years, Bitcoin was largely known for illicit activities, such as for transactions on the dark-web marketplace, The Silk Road. This in turn undeniably skewed its reputation and public perception. Fortunately in more recent years, as Bitcoin has continued its meteoric rise, it has managed to shake off this association in favor of more widespread acceptance by legitimate merchants.
Some companies that currently accept Bitcoin as payment include Microsoft, who accept it on their Xbox store, and thanks to a browser extension, online shoppers can now use the Lightning Network to make purchases on Amazon. This is one example of where advancing technology has made Bitcoin increasingly easier to use as a conventional method of payment. Interestingly, although the number of transactions was generally correlated with the price previously, more recently this hasn’t been the case. In these graphs showing the market price of Bitcoin and the number of daily transactions over the last two years (up to 3rd June 2019), the correlation between the market price (graph 1) of Bitcoin and the number of daily transactions (graph 2) is clearly evident up to the point of the the record highs in price in late 2017 and the subsequent crash. However, while Bitcoin remained largely in a bear market from until early 2018 to April 2019, the number of daily transactions has largely seen a steady increase since early 2018. This suggests then that the usage of Bitcoin is finally starting to become more and more widespread, increasingly because of its convenience and not just because of the piques in interest in relation to its price.
Nobody is disputing the fact that Bitcoin is the king of cryptocurrencies, at least for now, but it wouldn’t be fair not to look at some of the others on the market, collectively known as Altcoins. Ether is leading the pack. Announced in 2014, it possesses some similarities, but also distinct differences from its older brother. Both are decentralized can be used as a payment for digital currency, and use Proof of Work for mining. However, Ether was not created for the primary purpose of it being a virtual currency, it was created as a currency for the platform Ethereum, which facilitates smart contracts. Some say that this is a marked advantage of Ether, as Bitcoin does essentially facilitate smart contracts, but only for the purposes of currency transactions. Ether, on the other hand, on its platform Ethereum, can be used to facilitate smart contracts for many different purposes, such as for storing information about an application, and information for domain registrations. Therefore, the main usage of Ether differs from Bitcoin. It is mostly used to date by, for example, P2P marketplaces and micro-payment platforms, who take advantage of the multiple uses that the smart contracts on the Ethereum platform allows.
Other notable ones include Litecoin and Ripple (XRP). Litecoin was one of the first Altcoins, having been created in 2011. It has a faster block generation rate and so its transactions can be done quicker than with Bitcoin. It looks like it's in it for the long haul and has been described as “silver to Bitcoin’s gold”, and is being accepted by an increasing amount of merchants. XRP is another Altcoin gaining significant attention. It is somewhat different in that isn’t actually designed to be mined, 100 billion have been pre-mined with 38 billion on the market, and the rest will be periodically released by its parent company, Ripple. It has a big advantage over Bitcoin in that transactions can be done almost instantly, and its main usage is as a type of digital token for the transfer of other currencies or commodities such as oil or gold over the Ripple network.
The future of cryptocurrencies
As with any competitive marketplace, there will be winners and losers. Although Bitcoin no longer seems to have a direct correlation between the number of transactions and price, at least for the moment, there is no doubting that if a currency continues to have little or no value, then that means there is no confidence in the currency actually succeeding. Additionally, pump and dump scams in cryptocurrencies is a very real thing, and it is something potential investors should be aware of. This is when fraudsters dupe investors to buy an asset to artificially inflate its price, before selling and making financial gains themselves. A study published by the Social Science Research Network in December 2018 found over 4000 pump and dump attempts between January and July of that year, having analyzed data from Telegram and Discord. The fact of the matter is, sadly, that as long as people are investing in cryptocurrency, there are going to be bad people around manipulating others for their own financial benefit. Don’t worry though, on the Bybit platform, the Dual Price Mechanism ensures your funds are safe in the event of any market manipulation.
On a happier note, the cryptocurrency market is currently looking rather bullish. At the time of writing, Bitcoin is on course for its longest bull run since the famous bull run of late 2017. Altcoins such as Ether are also looking bullish. Confidence is growing again after a bearish 2018. It’s certain that the top cryptocurrencies aren’t going anywhere anytime soon but how well they perform in the long-term will ultimately come down to how widely adopted they become. As technology advances, such as with the emergence of the Lightning Network, and 5G, so will the adaptability of cryptocurrencies and the possibility of them finally going mainstream will increase. There is also however the possibility that the advancement of technology will leave some cryptocurrencies behind and ultimately obsolete, as this article from Crypto Globe speculates in the case of Litecoin.
As Cryptocurrencies become more and more popular, as is the case with virtually anything in life, more come along and try and get a piece of the action. Facebook is the latest to try and get a bite of the crypto cookie, with their recent announcement that they are to launch their own cryptocurrency in early 2020. When released, the GlobalCoin will enable Facebook’s 2.4 billion users to change fiat currency into digital coins, which could then be used to make online purchases or transfer between users. With such a massive user-base, there is no denying its potential. However, some say that the aging demographic of Facebook users, with users aged 65+ doubling since 2012, will be a big problem for the currency. Will people of retirement age really be interested in using, sending and receiving cryptocurrency, after being used to using cash all their lives? For a large proportion, no they won’t. However, if they re-engage with the younger demographic that has been lost in recent years, then it has definitely has a chance of succeeding, especially considering the convenience it will bring and the fact that there’s a clear gap in the market in the West for mobile payments, as they haven’t caught on like in China for example, where WeChat Pay and Alipay rule supreme.
If GlobalCoin does succeed, will it be a Bitcoin killer? This is seen as being very unlikely. Firstly, those in the world of crypto trading will almost certainly not lend their support to it because of its centralized nature as a result of it being controlled by Facebook. This goes against the very essence of why Bitcoin and cryptocurrencies were created in the first place. Also, from an investor point of view, it will not be their cup of tea either as it will be pegged to the value of one US dollar, it will be a stablecoin, thus removing the market for speculators.
So, my prediction of what the state of affairs will be with cryptocurrencies in another 10 years? Well, no-one has a crystal ball but let’s stop sitting on the fence here! The advancements in technology are making it easier and easier for merchants to accept them as currency, and there’s no reason to doubt at this moment in time, that as more and more people realize their convenience, that cryptocurrencies will not still be alive and kicking in 10 years time. To what extent will they be integrated into mainstream society, and what cryptocurrencies will be the major players? I’m going to have to sit on the fence as far as that is concerned!
Written by Rick O'Neill