Over the last year blockchain and cryptocurrencies have made the leap from being the domain of geeks and technology early adopters to capturing the public’s imagination.
News about Bitcoin or Ethereum, or any one of the hundreds of Initial Coin Offering (ICOs) that happened last year is hitting our newsfeeds with increasing regularity. Stories of “Bitcoin millionaires” and people making fortunes trading cryptocurrencies are shared with enthusiasm by the cryptobelievers, while the cryptosceptics post articles about Warren Buffett and his belief that “in terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”
No wonder people are confused, asking themselves “Should I buy Bitcoin?” They do not know what is true and what is hype. The one thing they do understand is that Bitcoin started 2017 worth around $1000, climbed to just under $20,000 in mid-December, then dropped around 30% to end the year worth around $14,000 (and continued to drop further this week). Clearly this is the stuff that gold rush legends are made of.
The problem is exacerbated by the fact that the technology terms are confusing and most people do not have the slightest clue what they mean. In fact in some cases people use terms such as blockchain and Bitcoin interchangeably, apparently oblivious to the fact that one is based on the other but they are not the same thing.
Blockchain – The basics
The technology underlying all these innovations that we have been hearing and reading about is called blockchain. The blockchain is a distributed ledger, recording transactions and ownership in a transparent and secure manner. Instead of having a central database retaining this information, transaction data is stored on servers and computers which join the network (called nodes). Each node has a full copy of the entire ledger, and once a new transaction is validated (using complex algorithmic calculations) it is added to the ledger (block) and replicated on all the nodes.
The benefits of the blockchain are related to the resilience, security and transparency of the distributed ledger.
- The resilience comes from the fact that if one node is down the information on the ledger can be accessed from any one of the other nodes in the network.
- The security of the ledger is guaranteed because if anyone tries to change information in one block, the discrepancy with the blocks on other nodes will be immediately apparent and the change will be reversed immediately (there are some caveats to this).
- The transparency is a result of the fact that all the nodes in the network can access the ledger at any time.
These are very powerful characteristics that make the blockchain ideally suited to applications which involve the sharing of information relating to ownership. Think property ownership records, for example.
So yes, blockchain is indeed very powerful and revolutionary, in essence making possible the democratisation of data. However the problem is that somewhere along the way people started to equate the core technology, that is blockchain, with the many applications that are being built around it.
Blockchain and Cryptocurrencies – Is this a bubble?
The best way to explain what is currently happening is to give you an analogy. The internet is a great thing and has changed our lives. There can be no doubt that those people who were lauding the internet in the 1980s as a revolutionary technology were right. The internet did indeed change the way we communicate and do business. However it does not follow that every internet-related business is automatically the best thing since sliced bread. Many internet- based businesses can, and do, fail.
As far as I am concerned what we are seeing at the moment is a repeat of the dot-com boom and subsequent crash we witnessed between 1997 and 2002. As anyone who was around at the time will remember, once the world wide web went mainstream, investors were keen to get in on the action. Internet-based companies started sprouting all over the place and money was thrown at them without any consideration of their business model or earning potential. Low interest rates fueled the speculation, with people keen to find ways to make a better return on their money.
Fast forward to 2017/2018 and the same thing is happening all over again. The blockchain burst on the public’s consciousness as “the next big thing” and suddenly anything that is associated with it started selling like hot cakes. ICOs have replaced the IPOs of the 90s, but the concept is the same. Throwing money at untried and untested applications of a technology, often run by people who might be very gifted software engineers but not necessarily experienced at running a business.
My prediction is that blockchain will indeed revolutionise various aspects of our lives. Having easily-accessible public records about assets, both physical and digital, will lead to major improvements in the way we transact and share information. The financial services sector will be particulary impacted, while society will be transformed by developments in relation to the Internet of Things.
However that does not mean that all the ICOs and the circa 1400 cryptocurrencies that have hit the market will survive. Most of them will end up in the dustbin of history and a lot of money will be lost. A few will survive and will become titans, much as Amazon and Ebay emerged from the dot-com shakeup to become behemoths.
So yes, the blockchain is revolutionary, but most of the ICOs that people have invested millions in are hype. If you are thinking of investing, assess the proposed project in the same way you would analyse a company you are thinking of buying stock in. Do not be blinded by the difficult sounding words and the technology. All that is blockchain is not gold.