Coming off the “Summer of Bitcoin,” there does not seem to be a more discussed topic in FinTech right now than cryptocurrencies. FinTech is the word used to describe the market sector of finance and technology. The platform that these currencies are based on is known as blockchain, or a “decentralized network.” Currently, the majority of the virtual world is running on what we call a “centralized network”, meaning there is a central provider for the many computers that are contacting the server. Blockchain is a much more direct process.
Blockchain operates on a peer-to-peer basis. Peer-to-peer, or P2P, as it is commonly known, allows people to interact directly, leaving out a third party. One of the most successful cryptocurrencies that uses this method is Bitcoin. It was started in 2009 by Satoshi Nakamoto, a pseudonym for the mysterious founder. It was the first to successfully implement a blockchain. Because it works on a peer-to-peer basis, people can send Bitcoin directly to one another without an intermediary service. The servers are created by multiple nodes that communicate to one another through the blockchain. Using this method, people can securely transfer funds while staying completely anonymous. Ethereum has adopted a similar system, where users can anonymously hold funds in an “Ethereum Wallet”. Each “wallet” is identified by a series of numbers and letters. The number is the only information visible. Therefore, one could be in Russia sending money to a wallet in India, and the transaction would not be traceable by location or anything other than one’s wallet number. Using special exchanges such as Coinbase, a San Francisco based company, people can trade these currencies similarly to how one would trade a security on a stock market. Through the blockchain, people can transfer funds in the most secure way to date.
For many countries with tightly regulated economies, such as China, the blockchain platform is both appealing and concerning. China has taken steps to regulate Bitcoin, and this past summer, even ordered local Bitcoin exchanges to shut down. However, China has also stepped up their investments in FinTech, and are supporting a few companies who are trying to create new crypto currencies (which would be under control of China).
Just like the U.S. Dollar, each currency needs to be distributed and kept running in some way, and with bitcoin, this is done through a process called “mining.” For every block “mined,” which is completed by solving complex math problems in the form of a cryptographic hash, the miner receives a set number of Bitcoin. Currently, the number received is 12.5 bitcoin per block “mined.” Nakamoto made sure that the supply of Bitcoin would never go above 21 million Bitcoin. Nakamoto also implemented a proof-of-work system to verify that the “miner” has solved the problem, and that same method is used in multiple currencies. During this process, Blockchain cuts out the middleman. In the example of banking, this middleman would be the very institutions that essentially control our modern economies in most developed countries: banks. If our current internet is an internet of things and information, this new form is the internet of values.
JPMorgan CEO Jamie Dimon has expressly threatened to fire anyone who trades cryptocurrencies of any kind. Other banks have taken a different stance, where they have actually supported the idea of cryptocurrencies, such as Bank of America, who have invested in research regarding a switch of certain platforms to blockchain. Dimon and CEO of Blackrock Lary Fink have also voiced their opinion that Bitcoin is a bubble, like we have seen in 2008 in the mortgage crisis, and in 2000 with the dotcom boom. Despite these claims that it is a fraud, Dimon admits that he believes it’s value will continue to rise. He has proved to be correct, as bitcoin has risen from a 52 week low of $1908.08 in July of this year to a current price of around $5200.00. Another cryptocurrency, called Ether, has risen from around $0.90 at the end of 2015 to about $307.00 now. These currencies are still very volatile, and can be influenced fairly easily, proving unstable. For example, when Mr. Dimon mentioned that he thought Bitcoin was a fraud the markets responded immediately. Within a day, the price of Bitcoin had fallen 10 percent.
Thanks in large part to their success, cryptocurrencies have started to gain the attention of these large institutions who fear they could potentially be forced out of business if they do not benefit from the boom. Although the largest US bank, JPMorgan, has not been a supporter of the phenomenon, many other major banks have. Goldman Sachs has looked into potential options for itself and its clients regarding cryptocurrencies. Bank of America has filed for over 20 patents regarding Bitcoin and the blockchain. Change seems to be coming, and for many financial institutions, this change could be devastating if they cannot adapt to the new system. Continuing this path, the current Internet of Things will become the Internet of Values.