Bitcoin: bubble or major innovation?

Bitcoin: bubble or major innovation?

Unless you’ve been completely cut off from the financial world in recent months, you will have heard talk of Bitcoin, Ethereum and the other “cryptocurrencies”. The reason for all this media focus has been Bitcoin’s massive rise in value during 2017, from 966 dollars at the start of the year, to over 13,000 dollars in late December, having reached a historic high of nearly 18,000 dollars just a few weeks ago! Some experts view its rocketing value as purely the result of speculation and are predicting the imminent bursting of what they describe as a bubble, while others see it as a real financial revolution that might eventually replace the currencies of certain countries.

One thing is for sure though: this new type of currency lies at the crossroads of a globalised and hyper-connected world where the superpower of computers occupies an ever-growing role in our lives. Bitcoin and the like are a reflection of the 21st century and a financial sector in the throes of a profound transformation.
So it seems like an opportune moment for Waterloo Asset Management to take stock of this subject and to focus in particular on the best known of the cryptocurriencies, Bitcoin. 
Definition of Bitcoin and “Blockchain” technology
Bitcoin is a decentralised electronic currency and payment system that was created in 2009 and has been the leading light of so-called “blockchain” technology ever since.
“Blockchain” is a type of technology used for the secure storage and transmission of data. In a figurative and simplified sense, it can be likened to a vast and anonymous public register in which all transactions are recorded and approved by a community. Anyone with a computer can become part of this community, whose raison d'être is to certify and record the transactions that take place in the register. This makes Blockchain forgery-proof, as before information present on the chain can be modified, the entire community has to approve the change.
How are Bitcoins exchanged? 
There are several exchange platforms where, in return for dollars, euros or other currencies, cryptocurrencies can be bought, sold or stored. One of the best known of these is Coinbase, which in November 2017, boasted over 13 million users in 190 countries.
The security and quality of these platforms is a key factor, given that some have well and truly imploded in recent years as a result of computer hacking, most notably the South Korean platform Youbit, which was forced to file for bankruptcy recently after suffering two attacks during 2017.
How are Bitcoins created? 
The issue of Bitcoins is linked to an activity known as “mining”, which involves performing complex calculations on blocks of data on the computers of the community that verifies and approves blockchain transactions. The “miners” are rewarded for this activity by the regular and decreasing issue of Bitcoins. The maximum total number of Bitcoins issuable has been fixed at 21 million and 16.5 million of these have already been mined to date.
What can you do with Bitcoins?
Bitcoin has an extremely long way to go before it can gain recognition as a full-fledged payment method. Having said that, it is increasingly being accepted as an exchange currency and giants such as Microsoft are already accepting bitcoin payment for some of their products online.
What does the future hold for Bitcoin and the other digital currencies?
Blockchain, the technology behind Bitcoin, has already proven its usefulness and thousands of companies are now working on concrete projects based on this new principle. 
Due to its system of assigning a certain date to transactional events while guaranteeing their storage and integrity, Blockchain looks set to significantly alter our conception of intermediation. Basically, once an operation has been recorded, it can no longer be modified, which is leading some to predict an end to the days of intermediaries guaranteeing the authenticity of transactions.
However, nobody can predict with any certainty what’s around the corner for digital currencies. Some specialists are forecasting exponential growth as they are gradually adopted by more and more people. But just as many are envisaging the collapse of what they call “the Bitcoin bubble”, due to it being an asset with no real value and no economic reality, based solely on the confidence which its holders have in this innovative system. 
And if this confidence was to evaporate, what would be the remaining value of this digital code stored on your computer?
So while Bitcoin may have gained some legitimacy in late 2017 courtesy of the launch of derivatives based on the cryptocurrency by two US stock exchanges, this currency has not yet reached its maturity. Cryptocurrencies still have major modifications ahead of them and so remain, for the moment, the preserve of financial thrill-seekers!