When bitcoin broke into public consciousness in 2013, it couldn’t have been sexier: a digital currency being used to buy everything from drugs to cupcakes. Then the excitement shifted to an aspect of bitcoin that is a bit less sexy: public online ledgers. Blockchain — the technology used for verifying and recording transactions that’s at the heart of bitcoin — is seen as having the potential to reshape the global financial system and possibly other industries. Both bitcoin and its blockchain are gaining imitators as well as adherents, along with plenty of critics, including Jamie Dimon, the chief executive officer of JPMorgan Chase & Co.
The price of bitcoin rocketed in 2017 as the debate raged on whether the cryptocurrency — whose total value topped $200 billion — should be considered a legitimate financial asset. It got a huge boost when CME Group Inc., the world’s biggest exchange operator, said it plans to introduce futures contracts tied to the digital currency by the end of the year. That would push bitcoin closer to the mainstream by making it easier to trade without the hassles of owning bitcoin directly. So would a move by Square Inc. to let some users of its Square Cash application use it to buy the cryptocurrency. Bitcoin began to look almost traditional compared with the new cryptocurrencies whose explosive growth has drawn warnings from regulators around the globe. More than $3.5 billion was raised through initial coin offerings through mid-November. The bitcoin community came together (mostly) in November to reject a proposed software change that had threatened a split. Meanwhile, more than 100 banks are working within the R3 consortium, created to find ways to use blockchain as a decentralized ledger to track money transfers and other transactions. Australia’s stock exchange plans to start using blockchain to process equity transactions. Blockchain is also being tested by retailers like Wal-Mart Stores Inc. for ensuring food safety, as industries explore what advantages the technology might hold over traditional databases.
Virtual currencies aren’t new — online fantasy games have long used them — but the development of a secure digital currency without a central issuer rightly turned heads. Mysterious spikes and drops in the price of bitcoin since its birth helped build an early reputation for the currency as a tool for selling drugs and laundering money. Its history also featured arrests for Ponzi schemes. The person or people who created the bitcoin system under the pseudonym Satoshi Nakamoto solved a problem central to any currency —preventing counterfeiting — and did it without relying on a government’s authority. The software also solved one specific hurdle for digital money — how to stop users from spending the same unit of currency twice. The breakthrough idea was blockchain, a publicly visible, anonymous online ledger that records every single bitcoin transaction. It’s maintained by a network of bitcoin “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. The miners earn a reward of newly issued bitcoin. The pace of creation is limited, and no more than 21 million will ever be issued.
Since bitcoin first boomed, there’s been no shortage of critics to call its rise a bubble and to argue that the currency has no intrinsic value. In September, Dimon called bitcoin a “fraud.” But a month later his chief financial officer followed rivals at Goldman Sachs Group Inc. and Citigroup Inc. in expressing openness to working with cryptocurrencies. Entrepreneurs in the field say that focusing on the price of bitcoin is missing the point — its value is as proof of concept for a new kind of payment system not reliant on third parties like governments, big banks or credit-card companies. Others say blockchain advocates are hyping what amounts to no more than a new kind of database. Proponents of ether, the second most commonly used digital currency, respond that the etherium blockchain does far more than let bitcoin users send value from one person to another. Its advocates think it could be a universally accessible machine for running businesses, as the technology allows people to do more complex actions in a shared and decentralized manner.
First published Oct.
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