Bulbs, bubbles and bans: the bitcoin phenomenon

J.P. Morgan Chief Executive Officer Jamie Dimon made headlines recently for his criticism of cryptocurrencies – in particular, bitcoin, which he described as a “fraud”. Ray Dalio, founder of one of the world’s largest hedge funds backed Dimon’s criticism, suggesting “bitcoin is a bubble”.

Dimon went on to draw comparisons between the bitcoin craze and the 17th century tulip market crash…Tulip mania (tulpenmanie in Dutch) was a period in the Dutch Golden Age during which contract prices for bulbs of the recently-introduced tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. It’s generally considered the first recorded economic bubble. Interestingly, tulpemanie had no critical influence on the prosperity of the Dutch Republic – the world’s leading economic and financial power at the time – it was more of an unknown socio-economic phenomenon than a significant economic or financial crisis.

“It’s [bitcoin] just not a real thing, eventually it will be closed”  Jamie Dimon

Just as Dimon and Dalio were spouting vitriol over bitcoin, Chinese authorities announced plans to ban the cryptocurrency’s trading in the country. Chinese regulators decided on a “comprehensive ban” on platforms that allow people to buy or sell virtual currency in China, planning to shut down bitcoin exchanges, with government officials apparently offering an explicit directive to the nation’s currency exchanges.

But banning bitcoin seems as trivial as comparing a cryptocurrency to 17th bulb craze…

Director of research at Coin Center – a Washington-based nonprofit research firm focusing on cryptocurrencies – Peter Van Valkenburgh, says:

“The efficacy of any bitcoin ban is pretty dubious. If a powerful government like China feels the need to ban major trading, then it’s a good indicator that the technology works and that it does what it’s supposed to. If it overcomes those controls, then it’s further proof that it’s independent from government controls, which is pretty radical.” 

“If a powerful government like China feels the need to ban major trading, then it’s a good indicator that the technology works and that it does what it’s supposed to”

And while debate rages amongst some over the validity of cryptocurrencies like bitcoin, far more are concentrating on their underlying technology: the blockchain. Financial services firms are eyeing potential windfalls in the blockchain’s ability to improve efficiency in the trading and settlement of securities. The real estate industry sees potential in the blockchain to make homes and other illiquid assets trade and transfer more easily. The blockchain is also seen as disrupting global supply chains by boosting transaction speed and improving transparency.

The Title Insurance industry is using blockchain to validate ownership of assets. Title insurance exists to protect the financial interests of the property owner or mortgage lender during a real-estate transaction against losses which occur due to title defects. Such defects may include outstanding encumbrances like liens and easements which remain unaccounted for at the time of the transaction. Blockchain can help in reducing cost borne by the insurers and can be used as a primary source of records instead of local real estate records.

The application of the blockchain allows PokitDok – a software development platform – to free healthcare data so that it can be integrated with new and existing services. This means building healthcare applications in days rather than months and providing greatly improved healthcare experiences. PokitDok is now also exploring application of the blockchain by clients to assess eligibility for insurance.

Microsoft and Accenture, working with the United Nations recently unveiled a Global ID System for refugees. The software tool, developed in part by Microsoft and Accenture, combines biometric data (like a fingerprint or an iris scan) and the blockchain, to create a permanent identity – something which is especially useful for refugees who lack social documents.

Toyota is betting on the blockchain to exploit and expand Mobility-as-a-Service (most likely in the form of an autonomous vehicle) rather than a resource you own. Autonomous vehicles require a suite of different services, for example locating a recharging station. But companies like Toyota don’t plan to deploy charging stations everywhere in the world for their vehicles. Instead, they envision an economy/ecosystem of services surrounding the car. Services, which the car must be able to communicate with, as well as perform trades immediately: by exchanging currency or some other token representing value. But creating a single central database in the world for all these partners and transactions is impracticable, and that’s where the blockchain comes in.

Even if the craze for bitcoin abates, the power of the blockchain technology behind it is very real. As I’ve illustrated, many industries are already exploring these benefits and are testing the limitations of the blockchain to better understand how it can add value to their business. The reality is businesses need to try to harness technologies like blockchain and bitcoin, they can no longer afford to ignore it.

What is bitcoin?

Bitcoin is a digital currency that enables individuals to transfer value to each other and pay for goods and services outside of the regulated financial system. Because it is not backed by any government and has been tied to crimes, including money laundering, hacking and drug trafficking, most financial institutions have stayed away from dealing in bitcoin.

What is the blockchain?

The blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. A blockchain is an open, distributed ledger that can track and record credits, debits and other transactions between two parties efficiently and in a verifiable and permanent way. Blockchains use complex mathematical functions to create a secure and definitive record of who owns what, when. The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem, without the use of a trusted authority or central server.

The first blockchain was conceptualised by Satoshi Nakamoto in 2008 and implemented the following year as a core component of bitcoin, where it serves as the public ledger for all transactions. By design, blockchains are secure and are an example of a distributed computing system with high Byzantine Fault Tolerance. This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, such as identity management, transaction processing, documenting provenance, or food traceability.

 

 

 

 

Secure transaction management

Decentralising trust

Distributed trust

Decentralisation

 

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