JOHANNESBURG - Bitcoin, and its associated transfer technology of Blockchain, seem to be all the rage at the moment. In fact, news stations have taken to quoting the latest Bitcoin traded price, investors are still buying into the virtual currency even though there were recent scares of a bubble, and even the South African Reserve Bank (SARB) has been investigating this new technology.
But what exactly is all the noise about? And what is Bitcoin? And will it take over from money as we know it?
Bitcoin, the most-often spoken about cryptocurrency, is an electronic or digital currency that uses cryptography (the science of ciphering and deciphering codes) to make secure payments around the world and to verify the transfer of assets.
It is different from other currencies because it is decentralised, has no central point of administration and is not backed by, or issued by, any country’s central bank.
Digital currencies are very public and visible to all. Bitcoin may well have been the first cryptocurrency in existence, and still the largest by market capitalisation. It is just one of more than 1500 different digital currencies. Together with Bitcoin, Ethereum and Ripple make up the “big three”.
While it’s difficult to determine which cryptocurrencies will outlast the others, what is certain is that the technology on which cryptocurrencies are based, Blockchain, is sure to survive and develop over time. Blockchain is a secure, encoded, decentralised, public, unalterable ledger of transactions (stored in blocks) that sits on a global network of computers.
These blocks of encoded records are connected (chained) to each other via a code between adjoining blocks.
The attraction of Blockchain is that a transaction can be completed more quickly, more safely and more cheaply than with current traditional systems. That’s its disruptive appeal. It cuts out intermediaries and costs and the full application potential of the technology still has to be unleashed.
Blockchain has immense potential to change the way we make payments and transfer assets in the future but the technology is new and still developing and it needs to overcome a number of hurdles - monetary authorities and governments need to understand its operation and see where it needs to be regulated. At present the system is extremely secure but what of the future when computing power improves?
This may explain the SARB’s interest. In early June, it announced that its test of Blockchain, code-named Project Khokha in which Absa was involved, was a success. However, this disrupted ledger technology is not yet ready for the more mainstream application of being used to settle wholesale transactions between banks, because further exploration of the technology is needed.
Then we should also take into account the fact that cryptocurrencies have been tainted, to some degree, by unscrupulous offers of a quick buck. The exponential increase in the price of Bitcoin attracted many an “investor” who believed that the Bitcoin price could only go up. Bitcoin fans will tell you how the price rose from $1 to $20000, but they will be more quiet about its fall from $20000 back to $8000. China banned all forms of cryptocurrencies within its borders, while Facebook removed all adverts for Bitcoin from its pages - in a bid to save people from investing their life savings in a highly-volatile digital asset.
While Bitcoin has grown in popularity to such a degree that cubicles have sprung up in local shopping centres, banks around the world have stopped clients from buying digital currencies on their credit cards as any big decline in coin prices would see clients left with a huge liability.
Goldman Sachs has said most cryptocurrencies would end up worthless, while investment guru Warren Buffett also warned of a “bad ending” for cryptocurrencies.
Cryptocurrencies are being used as a medium of exchange and are being accepted as a means of payment by some vendors around the world. The use of the likes of Bitcoin to pay for goods and services is gaining momentum but it’s still very early days. Central banks have appeared sceptical when it comes to digital currencies but it is likely more about trying to understand the new technology and its implications.
It’s very unlikely that cryptocurrencies will spell the end of currencies as we know them any time soon. It may be a stretch to compare the threat of cryptocurrencies to national currencies to the threat of digital to the printing industry, as the two seem to be co-existing as people still buy books and newspapers. Compact disks and DVDs are also still being sold in media shops and vinyl records have even made a massive comeback.
Time will tell how much more important cryptocurrencies will become, but it’s going to take time to gain more widespread acceptance by governments and central banks. The technology of Blockchain, however, is here to stay.
Craig Pheiffer is chief investment strategist at Absa Stockbrokers and Portfolio Management.
The views expressed here are not necessarily those of Independent Media.