Bitcoin and Blockchain an Explainer

Bitcoin and Blockchain an Explainer

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. Bitcoin’s wild price ride — soaring up in late 2017 only to fall steadily back down this year — was also pretty exciting, even if the swings made its use as an everyday currency seem less plausible. Another aspect of Bitcoin that’s a bit less scintillating has generated almost as much enthusiasm: 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. Yet five years after Bitcoin’s emergence, blockchain remains more of a tantalizing concept than a tool that’s actually used — kind of like Bitcoin.  

The Situation

The total value of Bitcoin, which neared $300 billion in late 2017, stood at $112 billion in late October. Some in the industry thought the introduction of Bitcoin futures contracts by Cboe Global Markets, CME Group Inc. and Nasdaq in late 2017 would help build legitimacy, but trading on both exchanges was minimal. Bitcoin’s rollercoaster ride was replicated by a raft of new cryptocurrencies that have raised more than $21.5 billion through initial coin offerings. Their explosive growth drew warnings from regulators around the globe even before hackers stole almost $500 million worth of a digital token called NEM from a Japanese cryptocurrency exchange. The vast majority of ICOs lost substantial value in 2018. Blockchain also had a number of setbacks, as several high-profile initiatives were dropped or put on hold, including a plan by Australia’s stock exchange to start using the technology to process equity transactions. But Wal-Mart Stores Inc. announced in September that starting in 2019, it will require suppliers of fresh, leafy greens to track their products using a digital ledger developed by International Business Machines Corp., which has spent heavily on developing blockchain tools for business.

The Background

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. 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 “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. They earn a reward of newly issued Bitcoin. The pace of creation is limited, and no more than 21 million will ever be issued. For all its technical sophistication, Bitcoin’s early reputation was as a tool for selling drugs and laundering money online.

The Argument

Prominent economist Nouriel Roubini has joined investor Warren Buffett and Jamie Dimon, the chief executive officer of JPMorgan Chase & Co., in questioning whether Bitcoin is simply hype. Buffett said the currency was “probably rat poison squared” and Dimon called it a “fraud,” though he later said he regretted making the comment and that blockchain was a real technology. Goldman Sachs Group Inc. and Citigroup Inc. have both expressed openness to working with cryptocurrencies, and Fidelity Investments is offering to manage digital assets for clients. Regulators are paying attention, too. Different branches of the U.S. government have opened investigations into possible criminal manipulation of cryptocurrency trading and possible fraud in other parts of the market. A growing number of entrepreneurs in the field are lobbying for regulation to help Bitcoin shed its lawless image and become an established asset class. In the world of blockchain, a split has opened between those focused on creating specific tools for business and those pursuing the decentralized ideal of Bitcoin’s early days — freeing money from the control of governments and established financial institutions. Some critics say both kinds of blockchain amount to no more than a new kind of database.