If one person embodies the unbridled audacity and optimism of bitcoin investors, it’s Didi Taihuttu. In the midst of bitcoin’s 2017 explosion, the Dutch businessman and father of three sold virtually all his possessions, including his home, to bet on the continued ascent of the cryptocurrency and its digital record-keeping system, blockchain.
“The internet was a revolution for information,” he said at the time. “I think that blockchain and cryptocurrency are revolutionizing the monetary system.”
For a while, Taihuttu—who even pulled his children out of school—looked like a mad genius as he traveled the world as a crypto evangelist. As bitcoin’s price climbed steadily, others joined the fun.
In Japan, Mutsuko Higo, a 55-year-old consultant, bought bitcoin for her retirement. In South Korea, millennials poured their savings into the crypto boom in search of prosperity. In India, bitcoin traded at a 20% premium due to the intensity of demand, and after the People’s Bank of China (the country’s central bank) suspended cryptocurrency exchanges, over-the-counter trade still persisted.
It was a frenzy, full of hope and fear, jubilation and confusion. In this environment of unhinged excess and irrational exuberance, bitcoin cracked $20,000 that December, a sure sign, to crypto enthusiasts, that government-backed currencies were on the brink of extinction.
But then, without warning, the bottom fell out of the market.
In one horrifying month, bitcoin shed almost $9,000.
As quickly as it redistributed riches, bitcoin snatched them away. In the carnage, Taihuttu lost more than half a million dollars of digital wealth. As of Nov. 2018, he and his family were officially registered as homeless in the Netherlands.
While bitcoin offered true believers an easy path to wealth—or even the promises of a new, egalitarian financial system—the vast majority living outside the crypto world experienced it as a comet streaking across the financial skies. For most, the spread of bitcoin and blockchain (the cryptocurrency’s record keeping system) didn’t seem inevitable; it barely seems comprehensible.
Now, after the crypto crash, the brief rise of bitcoin appears to be little more than a curiosity, an investment fad closer to the Beanie Baby boom than the reordering of capitalism.
But cryptocurrencies, while down, are not out, and seeds sown during their brief moment in the spotlight have taken root across financial landscape.
Bitcoin—and its thousands of descendants—have made economists, bankers, and politicians rethink their assumptions about the financial system. In some cases, cryptocurrencies have become important tools for international payments, capital formation, and uncensorable trade. And on the dark web, they remain the currency of choice for the buying and selling of illicit goods.
Bitcoin may be dormant today, and its future remains unknown, but its promise to transform the way the world conducts business remains very much alive.
To its creator, bitcoin was “peer-to-peer electronic cash.” Satoshi Nakamoto—a pseudonym of its developer, or developers—created the cryptocurrency in the wake of the 2008 financial crisis, and many of the coin’s earliest adopters praised it for removing—or, in crypto parlance, “disintermediating”—banks from the global monetary system. Cryptoanarchy was reactionary and fiercely libertarian, an ideological element still present in the bitcoin community today.
For many people speculating on bitcoin, the financial crisis was the most influential financial event in their lives. In the vacuum of trust left by the crisis, bitcoin became an antidote to the malice of bankers and greedy lenders. Bitcoin was a way for them to control their own wealth, and that remains a seductive part of its appeal.
Every time a US Securities & Exchange Commission official mentions a bitcoin-tied ETF, crypto enthusiasts go wild.
An ETF—an exchange traded fund—is a bundle of assets that trades like a stock. A bitcoin ETF, the thinking goes, would allow retail investors wary of cryptocurrency and its less savory associations to buy and sell bitcoin without having to open a wallet or dip into the murky waters of crypto exchanges. The flood of potential new investors could help buoy the sagging price of the token.
The most recent buzz began after SEC commissioner Robert Jackson Jr. said he thinks somebody will “eventually” address the agency’s concerns and receive its approval. This was hardly a hearty endorsement, but it elicited a supportive tweet from Hester Peirce, the only commissioner who voted in favor of a previously proposed bitcoin ETF.
Due to the US government shutdown—and with another looming—bitcoin ETFs look to be on the SEC’s back burner. In fact, as the agency operated with a skeleton staff during the last shutdown, the Chicago Board Options Exchange withdrew its bitcoin ETF proposal, preferring to postpone its plans rather than risk a meritless rejection.
Because of bureaucratic squabbling and the unwieldy bitcoin spot market, the SEC seems unlikely to give any bitcoin ETFs the green light this year.
In its purest form, bitcoin has—arguably—succeeded as electronic cash. While it isn’t as user-friendly as PayPal or Venmo, bitcoin is a viable means of payment because its price is recognized by a sufficient number of people. And that’s the bare minimum that you need for a currency: A community with mutual recognition of a medium of exchange. Bitcoin is a slow, radically public digital money that puts the entire risk of security and storage in the hands of the end user—that is, if they’re willing to accept the responsibility.
So how did a nerdy, niche pursuit lead to an investment stampede?
In its early years, most bitcoin buyers were sensible enough to risk small amounts as they studied the crypto ecosystem. But some wannabe millionaires took the plunge, without an inkling of the dangers. While a fraction of people unexpectedly and improbably hit it big with bitcoin and alternative cryptocurrencies (“altcoins”), for many, crypto mania became the tulip craze of the 21st century.
One of the key drivers was a phenomenon known as “initial coin offerings,” or ICOs. An ICO is like a Kickstarter campaign for a blockchain company. In exchange for pledging crypto funds (usually bitcoin or ether) a buyer is given digital tokens, which might be useful in a yet-to-be-created application.
For two reasons, ethereum—a crypto network launched in 2015 —kicked off the ICO craze. First, the price of ether, the network’s tokens, took off spectacularly about 18 months after its launch. Ether, which once traded for less than a dollar, soon rose to $10 and then, very rapidly to $100 and beyond. (There’s been speculation, led by NYU professor Nouriel Roubini, that ethereum’s origins and rise were criminal.)
Second, the ethereum network became a launch pad for other ICOs, because the platform allowed anybody to easily create a token for whatever idea they could imagine, however harebrained. It’s as simple and as versatile as creating a website. The only limit is your imagination. (Comparisons to the dotcom boom are apt.)
PREDICTION #2: If developers upgrade ethereum’s consensus algorithm, the ETH community will protest.
Ethereum currently utilizes a system called “Proof-of-Work” to process transactions, wherein anybody is able to join the network and mine for new coins. Proof-of-Work is open and fair, but horribly inefficient. The system is environmentally damaging and it’s not even fast.
As such, ethereum’s developers plan to switch to a more efficient system called “Proof-of-Stake.” But unlike Proof-of-Work, Proof-of-Stake is not open for anybody to mine. Instead, it will raise the bar by requiring participants to “stake”—or put up ether as collateral—to mine. (This is sort of like the buy-in at a poker game.)
While Proof-of-Stake could make the network faster, it may grant large ether holders an unfair advantage to acquire newly-created ether. For now, resistance to Proof-of-Stake is limited to developer conversations, but dissent may grow as the consequences become clearer. While ethereum’s leaders pride themselves on its decentralization, the network risks becoming as imbalanced and contentious as the systems they strive to replace.
Through ICOs, many people raised money for legitimate, if highly ambitious, ventures. For instance, in June 2017, the former CEO of Mozilla raised $35 million in 30 seconds to build “Brave,” a browser with a crypto-incentivized advertising system.
The list of ICOs goes on and on, and while there have been many launched by well-intentioned, starry-eyed entrepreneurs, regulation has been playing catch-up on an international scale. As a result, the crypto ecosystem also attracted thousands of half-baked business ideas as well as fraudsters and scam artists.
Since nobody wanted to miss out on “the next Google,” thousands of people across the globe poured money into ICOs. Because they needed bitcoin and ether to invest, the prices of those cryptocurrencies exploded. And the higher they went, the more people saw promise in blockchain and the more entrepreneurs there were who sought fundraising. The cycle continued, and hundreds of thousands, perhaps millions, of people bought into bitcoin and its ilk… until suddenly the music stopped.
Bitcoin works as currency, but if you want to pay a friend or local businesses with it, they’ll probably ask you to use another payment service instead. Few people and businesses actually want to accept it, with the major exception of the gambling industry. Although bitcoin incurs lower transaction fees than credit card networks—at least when the bitcoin network isn’t clogged—there are good reasons for corporations to avoid crypto payments.
- Security issues: Setting up a cryptocurrency wallet is easy, requiring just moderate computer skills, but ensuring that funds are kept safe is far more challenging. Billions upon billions of dollars of bitcoin and other cryptocurrencies have been stolen.
- Price uncertainty: Businesses are also dissuaded by bitcoin’s volatility. Companies don’t like price uncertainty and they want to ensure that the payments they accept will retain their value. Bitcoin unpredictably rises and falls, making it a challenging currency to hold, even for short periods of time.
- Lack of adoption: Considering that most consumers anyway prefer conventional forms of payment like cash, credit cards, and debit cards, for most (legal) businesses, there’s little incentive to set up a crypto payments option in the first place.
Companies might be more willing to accept bitcoin as payment if its price becomes more predictable. At the highest level, the ecosystem system likely needs more dispersion of the cryptocurrency itself—more people who own small amounts. Today, too much bitcoin is concentrated in too few people’s hands, and because of that, price movements can be dramatic and unsettling.
While it’s unlikely that the price of bitcoin will ever rest at one level, if bitcoin’s macroeconomics ever become predictable, users would have a better idea of how to price it in the long run. That would make the cryptocurrency more viable on a global scale, as has been the case for government-backed currencies.
This might be too optimistic. However, now that the investment fervor has passed, it seems an appropriate time for Congress to create a tax exemption for small cryptocurrency trades (perhaps, under $500). It’s unreasonable—and impractical—for the IRS to collect capital gains taxes from every user who profits off the appreciation of bitcoin, or other cryptocurrencies. Gathering a dollar here and a few dollars there is meaningless for the IRS, and it would greatly aid cryptocurrency adoption if Congress formally granted some degree immunity.
For instance, I recently withdrew $22 of bitcoin from Bovada, a gambling website. Since I didn’t convert my crypto into dollars immediately, my holdings have risen to $24. (Terrific, right?) Not exactly—now, I’m faced with a frustrating tax matter, as I must file on my winnings, as well as on the $2 appreciation of my bitcoin. It almost makes me wish I lost my bet in the first place.
In addition to becoming economically robust, bitcoin also requires significant technological leaps if it can ever hope to fulfill the demands of millions or even billions of people. Right now, much of the bitcoin community is focused on creating the “Lightning Network.”
As suggested by its name, this is meant to be an ultra-fast payments system. This solution would sit atop the bitcoin blockchain and directly connect users so that they can send transactions to one another and ultimately settle those payments on the blockchain later. Today, at least three different startups are working on their own versions of Lightning, the most prominent of which is the San Francisco-based Lightning Labs, which is backed by Twitter founder Jack Dorsey.
The place where bitcoin originally thrived—on the dark web—is one of the areas where it is truly useful. But in this sketchy neighborhood of the internet, where drug trafficking and weapons sales abound, bitcoin actually seems unlikely to remain the primary payment method of choice.
That’s because the bitcoin blockchain—the currency’s entire transaction history—is public by design, so tracing payments and identifying users is feasible, if laborious. Although people can try to hide, it’s just not easy to do in plain sight. Even when a person uses multiple pseudonymous wallets and tumblers (mixing services) to conceal their activity, hunting them down is only a matter of time.
The US government has hired blockchain analytics firms like CipherTrace and Chainalysis to track the criminal usage of cryptocurrencies, and by analyzing spending patterns and following trails of digital breadcrumbs, these firms are able to identify users and help root out illegal behavior.
Since bitcoin is one of the most transparent crypto units, in the future, dark web transactions will likely head toward more anonymous, privacy-enhancing cryptocurrencies. Some of the most popular “privacy coins” include Monero, Grin (a Harry Potter-themed cryptocurrency), and Zcash.
But these privacy-oriented tokens won’t spell the end of bitcoin on the dark web, where it may remain useful as a settlement unit, allowing illicit actors to cash out through regulated exchanges. Indeed, cryptocurrency developers are working on features to enable the simultaneous reconciliation of payments—otherwise known as “atomic swaps”—so bitcoin and other digital currencies can be exchanged instantaneously and without counterparty risk.
Prior to the crash, bitcoin was touted as a safe haven for long-term investment. Now, that may be the least promising uses of the token.
Tech luminaries, such as Reid Hoffman, cofounder of LinkedIn, and Peter Thiel, the Donald Trump-supporting venture capitalist, have long believed that bitcoin could become “gold 2.0.” In 2014, back when bitcoin was still in triple digits, Hoffman backed Xapo, a company that protects bitcoin holdings in a Swiss bunker.
Meanwhile, Thiel purchased $15 million to $20 million of bitcoin through his venture capital firm Founders Fund, starting in mid-2017. That investment seems to have matured handsomely, rising to a few hundred million dollars in a matter of months. Despite bitcoin’s drop, Founders Fund may have returned close to 50% on its bitcoin purchase, assuming they bought around $2,000 and haven’t liquidated any holdings.
In a March 2018 interview at the Economic Club of New York, Thiel—ever the contrarian—predicted “there is going to be one cryptocurrency that will be the equivalent of gold.” Bitcoin, he said, is most likely to fulfill that role.
Thiel’s predictions were restrained compared to those of Chamath Palihapitiya, a former Facebook exec and founder of venture capital firm Social Capital, who projected $1 million bitcoin sometime in the next 20 years.
Of course, many prominent investors were unpersuaded.
Warren Buffett, chairman of Berkshire Hathaway, sees bitcoin as anathema for investors since it doesn’t produce any sort of revenue stream. “You’re just hoping the next guy pays more,” the Oracle of Omaha observed. “I can say with almost certainty that [cryptocurrencies] will come to a bad ending,” Buffet declared near bitcoin’s peak. “If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it.”
Not to be outdone, Buffett’s business partner, Charlie Munger, slammed professional crypto traders. “It’s like somebody else is trading turds and you decide, ‘I can’t be left out,’” he zinged.
If you believe that bitcoin will gain wider recognition as an inherently valuable—though intangible—asset, then it might make sense to purchase a small amount. However, as Buffett notes, it’s a nonproductive unit, so you can’t expect coupons or dividends. You can only hope for appreciation.
In the increasingly digital world, it’s possible bitcoin will retain its status as the granddaddy of online, peer-to-peer commerce. The cryptocurrency isn’t exactly how Satoshi Nakamoto envisioned it, but the booms and busts of the last decade have shown that few people are immune to its allure. Even though it isn’t shiny and wearable, bitcoin has an excellent brand and that seems likely to persist.
In many ways, bitcoin’s future depends on its miners.
Miners operate computers that solve incredibly difficult mathematical problems to secure the bitcoin network. In the process, miners confirm transactions on the bitcoin network (a process known as “mining a block”). When that happens, the miner who solved the problem first is rewarded with 12.5 bitcoins—about $44,000 at current prices—plus any transaction fees included by the people who submitted transactions.
Although it requires high upfront costs to purchase the most efficient computing hardware as well as pay for its enormous power demands, mining can be extraordinarily lucrative. As such, an entire industry has cropped up around mining bitcoin. There are massive mining farms in China and Iceland, and industrial scale mining operations have optimized their profitability by reducing their energy costs.
Mining, though, is a delicate balance for bitcoin. The network automatically adjusts the difficulty of its math problems according to how many miners are securing the network. The more miners there are, the harder the problems. The fewer the miners, the easier the problems (at least, in theory.) This setting—bitcoin’s “difficulty”—can also be a liability for the network.
The bitcoin network targets a block production time of 10 minutes, and it readjusts its difficulty every 2,016 blocks—or approximately, every two weeks. Mining activity depends on energy costs and consumption, hardware costs and efficiency, and, of course, the price of bitcoin, and if one of those variables gets out of whack, then the entire system can be thrown into disarray.
If the price of bitcoin falls precipitously, as it did during this past year, then miners may elect to shut off their machines until the activity is profitable once again. When this happens, the network can face problems as not enough computing power is allocated to processing transactions. Sending bitcoin can take much longer than 10 minutes, and the fees to get a payment through can skyrocket. Fortunately, this “death spiral” hasn’t come to pass, but it’s a major pain point for bitcoin and illustrates how simple capitalism can make or break the system.
There’s almost no way to fix the incentives governing bitcoin’s difficulty. The only thing that can be done—and it’s extremely unlikely at this point—is for bitcoin’s developers to “fork” its code (introduce a major update), which would require widespread support from a majority of the mining community. In the last couple of years though, miners have failed to agree on upgrades to improve bitcoin’s processing speed, and that’s led to a fracturing of the bitcoin community. Ultimately, modifying bitcoin’s energy-intensive consensus algorithm is unlikely to ever happen because the people who profit most just won’t want to make a change.
The reach of peer-to-peer digital currencies and public, blockchain-based services remains limited. In the wake of the crypto crash, it’s not obvious there will be a rush toward adoption anytime soon.
But as the world wakes up to the importance of online privacy, cryptocurrencies may be one way netizens reassert control over their digital lives. Cryptocurrencies have shown that there’s an alternative way of economic life and that individuals can wrest control from political and corporate institutions.
The prophets of bitcoin like Taihuttu may be in retreat, but they’re not going to disappear, and so long as financial libertarians, conspiracy theorists and economic idealists have reason to mistrust Silicon Valley and Wall Street, cryptocurrencies will continue to have appeal.
Even if bitcoin fails catastrophically and blockchain never takes hold, the mutinous ideas they planted have taken root.