Blockchain

Bitcoin Might be a Bubble, But Blockchain Isn’t – Here’s Why

Bitcoin is breaking records. A digital currency that traded at $600 just 4 years ago is touching $20,000. That’s unprecedented and reeks of a bubble.

Bitcoin Might be a Bubble, But Blockchain Isn’t – Here’s Why 20.12.2017Leave a comment
Bitcoin Might be a Bubble, But Blockchain Isn’t – Here’s Why

It is not rocket science to understand that any kind of investment that is volatile is dangerous because it’s unpredictable. It can easily fall the way it rises. It is not just the rookies saying it. There may be many powerful people backing the bitcoin, but there are equally powerful skeptics too.

When the most successful wealth manager in the world says that it’s risky, people better believe it. Mark Haefele, the Chief Investment Officer calls BitCoin “too risky”. And that is without taking off the kid gloves.

Most people are calling bitcoin the “very definition of a bubble”. The recent surge in prices is only making their claims stronger. While the debate over the legitimacy of bitcoin goes on, one thing everybody can agree on is that the technology powering bitcoin, blockchain is here to stay. Let’s understand the contrast and the reasons as to why BitCoin is a bubble, while the blockchain technology is a path-breaking innovation.

Blockchain Technology

The Bubble of Bitcoin

No Inherent Value. Bitcoin is not like a company stock or a gold option. There is no inherent value to a bitcoin. For instance, if people buy a stock of Amazon or Facebook, the value of the stock will go up whenever the company posts a profit or enters new collaborations, or sends out a positive signal. It’s not like a derivative of a precious metal or a commodity with real value.

Bitcoin derives its value from the dance of demand and supply. It has a limited supply in the market, because there are a fixed number of bitcoins, and now everybody wants them, so the prices are going higher and higher.

But, the real question is – why is there a demand. It’s all sentiment. People believe that bitcoin is the future and for some reason, the future transactions will take place in bitcoins. Because more people believe this, more people are buying the coin.

Because more people are buying the coin, the higher the prices are going up, and the circle continues. This is the reason why the prices are going up. There is a frenzy in the market, where people are buying as much bitcoins as they can get their hands on.

Those Who Own Want Others to Buy

The rule of the market has always been simple. People who make money always buy when the market is in a slump, because they can get the assets for lower prices and then sell them when the market is doing well. This is the only way people make profits.

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Investors do not want to flaunt the stocks they are going to buy. If everybody knew which stocks hold a better future potential, everyone would want to buy them, driving the prices up. But, in the case of bitcoin, there is a peculiar trend. People who own bitcoins are encouraging other people to buy it. Why? Because, as more people will run behind bitcoin, the higher its price is going to get.

Sounds familiar?

Yeah, it sounds exactly like a pyramid scheme. The people higher up the chain only profit from the people down the chain that are buying more. The product itself may not hold any intrinsic value to them, but it is important that the other people buy it.

Strong Skeptics

If the Bitcoin enthusiasts are making merry, thanks to the meteoric rise of Bitcoin, there were many who are growing weary of Bitcoin. The bitcoin has recorded a spectacular rise in value and many people are drawing comparisons with Dutch Tulip Mania and other bubbles that have plagued the money world in the past. These people are some of the most well-known names in the world of finance, so what they say holds weight. A lot of weight, actually.

Tulip Mania
Tulip Mania

Those who find the Bitcoin trend worrisome include the likes of Ken Griffin, head of the large hedge fund, Citadel. Then there is the President of the Federal Reserve Bank of New York, William Dudley, who called the highs “speculative activity”.

The Nobel Prize winning economist, Joseph Stiglitz has stated that Bitcoin should be made illegal altogether because no social utility can be derived out of it. The strong opinions of such powerful people do not just make for good drawing room discussions, but they can move the markets.

It will Burst and Here’s How

Bitcoin certainly has all the makings of a bubble. With such strong skeptics being vocal against it, it is only a matter of time that the bullish trend will subside. As it does, bitcoin prices will start dropping. Now, there are billionaires who own bitcoins, but there are a ton of regular people who have put their life’s savings in this coin.

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When the panic of the dropping prices sets in, people are going to sell. And they will sell in hordes. As the trend continues and the market is flooded with bitcoins, the value will come down. Remember that bitcoin does not come with any inherent value. There is nothing stopping the downward slide, so the prices will crash.

But, BlockChain Will Prevail

The Bitcoin bubble may burst sometime soon, but the Blockchain technology that is powering all the cryptocurrencies will prevail. To understand this, it is important to understand what blockchain is.

What is blockchain technology?

In the simplest of words, blockchain technology uses a distributed ledger, where all the members in the network have a record of the ownership and transfer of the asset. All of this information is cryptographically protected. This ledger is automatically updated as and when the asset changes hands.

The ledger is not owned by any one person or body, but shared between all the members of the community. This way, the network does not have to find one trusted person or organization to take care of all the transactions. It also does not have to depend on the skills and trustworthiness of that one entity.

It also means that no one entity can decide when the transactions should or should not occur. In today’s times, that one entity is usually a bank. So, it is possible that blockchain will eliminate the need for banks.

How is it useful?

Since the ledger that reflects all the transactions is distributed, it comes with a whole lot of benefits.

  • Frauds can be contained. Since a whole network is monitoring the transactions, it becomes almost impossible for anyone to perform fraudulent transactions.
  • Decentralized. Even when a member of the network is not active, the transactions do not stop. The ledger is not lost, because it is shared among all the members. Moreover, new transactions can be validated by the remainder of the network.
  • Anonymity. The identity of each of the members of the blockchain network is protected cryptographically. So, each of the participants are only known by their unique code number, and there is no way to ID this person in real life. So, complete anonymity is guaranteed.
  • Security. Since all the ledgers are absolutely identical and cryptographically protected, it is impossible to tamper with them. If someone tampers with one ledger, they have to tamper with the thousands or millions of other ledgers on those many computers. This is, in practical terms, impossible.
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Blockchain Can Transform Other Industries

People may have heard about the blockchain technology only in terms of the uber-popular cryptocurrency – bitcoin. However, it can be used in any industry. It just needs innovators and disruptors to apply the technology to different industries.

With the world fast becoming 100% digital, the fear of unethical hacking is growing more and more. Doctors believe that it is possible to hack the pacemakers inside patients and stop them from working. With automated cars ready to hit the roads, hackers can cause collisions on the road.

With software to give out financial advice, and robots to take care of our health, it is becoming increasingly important to create secure channels. The cost of a lapse in security is higher than ever today and it is only going to go up. Experts believe that the blockchain technology can come to rescue here.

Blockchain from Bosch
Blockchain from Bosch

Let’s take the example of cars. With blockchain technology, each car will have a unique cryptographic code. Each time before taking the car out, they can compare the software code in their car with the rest of the cars in the network. Let’s say a 1000.

Now, if their car has not been hacked, then their software data will be the same as all the other cars. The hacker could have hacked into one car, but they cannot change the data on the other 999 of them that are part of a network. This way, the owner can always know whether their car is safe or not.

Conclusion

Blockchain technology is here to stay for sure. It can transform our world. Bitcoin is the one that may have to face an existential crisis.

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