What Exactly Is Blockchain Technology?

 

Blockchain technology underpins all cryptocurrencies.

If you are thinking about making a long-term investment in a cryptocurrency, we suggest that you first learn about blockchain technology and the technology platform that your selected cryptocurrency works on.

 Even if you are merely interested in short-term speculation or trading rather than long-term investment, it is beneficial to understand the fundamentals of blockchain technology.

Blockchain technology is an encrypted, decentralized, peer-to-peer database. Its power stems from the fact that it is decentralized. Assume a stock exchange maintains a single database of all the owners of every piece of stock exchanged, which is constantly updated.

 The database is kept on a single server at a single physical location. What if the database is hacked, deleted, or otherwise damaged as a result of a computer virus or natural disaster? Of course, the database is likely to be backed up in at least one other place, but it remains very susceptible and readily tampered with. 

Blockchains, on the other hand, are decentralized peer-to-peer databases in which content files are divided, encrypted, and stored separately on thousands of nodes across the world that connect with one another to create a seamless whole.

 Because modifications to the transaction and ownership records must be agreed upon by a majority of all the components (blocks) to become genuine, fraud or hacking is exceedingly difficult. Because any updates to the publicly distributed "ledger" must be agreed upon and validated globally, cryptocurrency transactions take some time to complete. 

This eliminates the "double spending" issue that will inevitably afflict any digital money. There is no centralized authority or server that can be controlled.

Blockchain technology is seen as a potentially "disruptive" technology having the power to transform the world. It has numerous potential uses, and when implemented, it should replace the power of any central authority with rules that cannot be circumvented: there will be government, but it will be government that cannot be misused, embezzled, or bribed. 

There can be "forks," which we shall discuss later; these essentially modify the rules, but are open and visible at the very least.

Why Should I Be Interested in Cryptocurrency?

Cryptocurrency (and blockchain technology in general) is young, and it has the potential to drastically alter the way the world operates economically.

 Early investors or speculators in new, successful, disruptive technology might reap spectacular profits, but they are not risk-free. A $10,000 investment in Microsoft stock in 1986, for example, would have been worth more than $3 million after 25 years. 

The same amount invested in Apple stock in 1980 is now worth around $4 million. As a result, even small investments can grow into significant, potentially life-changing sums over the medium or long term.

When looking at a shorter time frame, the bigger cryptocurrencies' values vary drastically due to a tremendous amount of short-term speculative interest. During 2017, there was a lot of buying and selling by investors, which kept the price volatility of cryptocurrencies high.

 Because volatility "clusters," an asset that increases in value by a substantial amount is statistically likely to either continue to grow or fall by a comparable amount shortly. Volatility is likely to be high tomorrow if it is high today. 

This means that there will most likely be speculative opportunities in cryptocurrencies throughout 2017 and into 2018, either in purchasing or selling short. For example, this is a weekly chart of Bitcoin, the most popular cryptocurrency, vs the US dollar for the previous two years leading up to September 2017:

Take note of how the price has more than doubled in the last 6 weeks and has increased by 500% in the last 5 months. The indicator at the bottom of the chart represents the price's average volatility over the last four weeks. 

It has been continuously growing, indicating that volatility would most likely rise, or at the very least remain at its current level. Other big cryptocurrencies' price charts during the same time span tell a similar trend. 

When this amount of price volatility is compared to national currencies, which normally only change by around 15% versus a basket of other currencies over the course of a year, it is clear that cryptocurrencies present a profit possibility that must be treated seriously.

Cryptocurrency's Potential

We said at the outset of this section that cryptocurrency is novel and possibly disruptive. The potential for disruption stems from the fact that cryptocurrency has the potential to entirely replace national currencies such as the euro and the US dollar as the cornerstones of the global financial system. 

Governments and central banks have the potential to devalue their currencies, which we are all obliged to use, reducing the value of our savings, losing their ability to act as a "store of value," and forcing us all to become speculators in our old age. Who would not want to keep their money in cryptocurrency if it was secure and completely exchangeable?

 Cryptocurrency is a libertarian and monetarist's fantasy, therefore if you enjoy those political ideologies, you will love what cryptocurrencies have to offer. If national governments are unable or unwilling to block the rise of cryptocurrencies, it is likely that the global financial system will revert to something like to the gold standard, removing the greatest excesses of inflation and manipulation.

 Many economists, however, argue that the gold standard had its own issues of excessive deflation, which needlessly prolonged economic depressions.

You have probably heard of the "war on cash," which refers to the growing shift away from cash and toward debit and credit cards, which has been pushed by many governments on the grounds that limiting or replacing cash transactions makes life more difficult for criminals and terrorists. 

Governments must also recognize another potential benefit: without cash, it will be simple to impose negative interest rates on their populace, either openly (like Switzerland and Japan are doing today) or secretly via bank charges. Because cryptocurrency is functionally private, its widespread adoption should put an end to the idea of negative interest rates.

You probably understand why cryptocurrencies are so controversial, and why their widespread adoption as a means of exchange will either face severe opposition from governments (as we are seeing now in China), or governments will try to seize control of the dominant cryptocurrencies, or even launch their own versions!

 Governments are likely to argue that maintaining control over currencies is necessary for the prevention of crime and tax evasion, both of which are legitimate concerns. The issue of whether governments will be able to halt or ban cryptocurrency usage inside their borders remains unanswered.

 If they cannot, it is likely to be a wonderful long-term investment. If governments are able to limit or restrict the usage of cryptocurrencies, they may not be as successful as investments.