Bitcoin Ushers in Blockchain Technology – by Jerry Jasinowski
The happiest investors today must surely be those who invested money in bitcoin last year. Bitcoin surged about 1,375 percent in 2017, despite a modest correction at Christmas, and the last time I looked was knocking on $17,000 a share. It started 2017 around $1,000.
The soaring price suggests a bubble in the making, especially when you consider that the majority of excited investors rushing to get in on the action have at best a sketchy understanding of what bitcoin actually is. The simplest description is that of an alternative currency independent of any government. But the lack of government backing leaves one to wonder what its value is based upon beyond wild-eyed speculation.
Bitcoin was carefully designed to avoid any dependence on government. The result is a currency controlled exclusively by computers running cryptographic algorithms created and traded without cognizance of any central bank or government. It is a dramatic new financial system operated off the books. It is self-regulated in that the system is comprised of diverse computers distributed all over the world. Anyone who tries to game the system is quickly identified and automatically excluded from trades.
The bitcoin system was designed with a finite number in mind. Only 21 million bitcoin can be created via the process called “mining” that requires substantial use of electricity. Nearly 80 percent of that number have been created so far.
But bitcoin itself is just the tip of the cryptocurrency iceberg. There are at least 30 different digital currencies that have sprung up in bitcoin’s shadow that are worth more than $1 billion, with more coming online every week. They are all unique and differ from bitcoin in various ways. Bitcoin itself is cumbersome, only able to process seven transactions per second. Also converting bitcoin into established currency or using it to conduct business requires payment of fees. It summons memories of some of the early online computer systems with their irritating dial tones and sluggish response. They were soon left in the dust by competitors.
The real key to the promise of bitcoin is the blockchain it’s built upon, though the two are not the same. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. It is an open record of transactions maintained in an online ledger that is distributed across a network of computers that cannot be compromised. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data.
Another cryptocurrency that can be more easily used to purchase goods and services is ether which was created to fund the Ethereum network, being sold as a blockchain which some describe as the next stage of the Internet, or Web 3.0. In addition to exchanging digital money, it can be used to facilitate transactions of other kinds of digitized data such as property registrations, medical records or bills of lading. The possibilities are endless. In essence, the blockchain is a decentralized system that enables people, business and enterprises to interact directly with each other, without expensive layers of lawyers and regulators.
In sum, the bitcoin phenomenon is about more than money. The current run-up of bitcoin may be a bubble, but beneath that bubble is a major technological breakthrough. There will be a lot of pain and disruption while the new technology evolves, but I predict it will become a major factor of the world economy in the years ahead.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. January 2018