An Introductory Guide to Bitcoin: Part 2

In Part 1, we offered a high-level primer about what cryptocurrencies such as bitcoin were envisioned to be and how they might someday change the global monetary landscape as we know it. Now, we’ll take a closer look at the two opposing sides of the bit-coin, as it were, and try to understand why there is equally so much optimism and excitement, along with rising skepticism and concern about this topic.

Understanding the Hype

Cryptocurrencies like bitcoin were envisioned as an eventual replacement for sovereign currencies such as dollars, pounds and euros. But comparatively few outlets accept bitcoin or any of its lesser-known cousins as payment. So, why is everyone talking about it?

Profit Opportunity: The current surge in Bitcoin’s (and upwards of 1,000 other cryptocurrencies’) valuation has much more to do with its current positioning as a potentially lucrative – albeit highly speculative – investment vehicle than anything else. And that value is impossible to ignore. As of November 17, 2017, Bitcoin investment has netted investors a nearly 650 percent year-to-date return. If someone purchased $100 worth of bitcoin seven years ago, that investment would be worth $20 million today. Therefore, much of the recent growth can be explained by an increasing number of people seeing the potential fortune to be made and not wanting to miss their chance to capitalize.

Blockchain Technology: The underlying technology behind all cryptocurrencies, blockchain provides a highly secure, transparent and unchangeable ledger showing every instance of cryptocurrency going in and out of every user’s digital wallet. All transactions are viewable on the public ledger and multiple independent sources called “miners” are required to verify and approve trades and transfers using bitcoin. As such, it is nearly impossible to defraud, dupe or otherwise manipulate the system to achieve a dishonest or unfair advantage.

Quick, Cheap and Efficient: In many cases, trading in bitcoin is a faster alternative to the traditional currency conversion and wire transfer process currently used to conduct international trade. Because bitcoin and other cryptocurrencies are borderless, a transaction that could take days can now be done in a matter of minutes at a fraction of the cost.

Increasing Use Cases: Especially in countries where bitcoin is more stable than the national currency, a growing number of businesses are looking to bitcoin as a viable payment alternative. However, an increasing cohort of multi-national corporations are also moving to accept it as an alternative form of payment. Companies like Subway, Microsoft and Virgin now accept bitcoin as payment at several of their North American and overseas outlets. It may not yet be mainstream, but with that kind of backing it is only a matter of time before more businesses follow suit.

Courting Controversy

This then begs the question, “if there is so much upside, why are bitcoin and other cryptocurrencies sure to spark the ire of at least a handful of people in the room?”

A Potential Price Bubble: Bitcoin has enjoyed an especially astronomical rise over the past twelve months. Rising from just over $1,000 on January 1, 2017 to over $25,000 CDN in December 2017, it has also experienced dramatic ups and downs along the way. With many people treating the currency as a speculative investment, hoping to make the biggest possible profit – fears abound that cryptocurrencies could be due for a significant price adjustment or correction. In other words, the bubble could pop and take everyone’s money along with it. As with all bubbles, nobody knows just when that might happen – be it at $12,000, $20,000 or $50,000. Or it may never happen at all.

Illicit Dealings: The earliest adopters of cryptocurrencies were black market dealers and organized criminals who noticed the built-in anonymity of the currency lent itself particularly well to trading in drugs, weapons and people. Among the first notable mentions of bitcoin in the mainstream media occurred when the notorious Silk Road website was shut down in the United States. Mentions of the now ubiquitous cryptocurrency were set mere sentences apart from references to criminals peddling in all things nefarious. It has been difficult to divide Bitcoin as a pragmatic and viable currency from the mental imagery of criminals using digital coins in place of traceable transfers from their bank accounts to mask their activities. In many circles, the term bitcoin is still synonymous with illegal activities despite that now accounting for only a fraction of all recent bitcoin transactions.

Vanishing Act: The same technology that protects the integrity of transactions could also result in your losing everything. Blockchain transfers are completely irreversible. Once you have sent bitcoin to an address and the transaction is completed, you cannot be refunded. If your digital wallet gets hacked, you get a computer virus or the server where your wallet is hosted has a catastrophic failure – you could theoretically lose everything and have zero recourse to recover the funds you’ve lost. Understandably, that leaves many people feeling uneasy and reinforces doubt about whether cryptocurrencies will ever present a reasonable alternative to the traditional banking space.

Uncharted Territory

The cryptocurrency space is truly the first new frontier the financial sector has seen since the U.S. abandoned the gold standard over a generation ago. In many ways, it is even more revolutionary. As such, it is difficult to boil the issue down to a simple good or bad dichotomy. There are certain obvious benefits to bitcoin even if it never catches on completely for its original intended purpose. But there are also reasons to be cautious. Now that you know what bitcoin is, along with the good, the bad and the ugly, we’ll conclude Part 3 with an explanation of how to get started with cryptocurrency; should you decide it’s a risk worth taking.

This article and its predecessor Part 1 and subsequent Part 3 of this series are intended as a basic introduction to bitcoin and other cryptocurrency offerings for businesses and individuals new to this space. All explanations are high level and non-technical in nature. A series of more technical articles will soon be available on MNP.ca.

For further information about bitcoin and other cryptocurrencies or to arrange a Lunch and Learn session for your team, contact Brian Beveridge, Partner, Technology Solutions at 204.775.4531 or [email protected].