Breaking down the Bitcoin Mania - Boom or a Bubble?

"Every new and emerging technology that's created comes with its share of excitement, challenges, risks and rewards....."

Some innovations experience exponential growth before they settle down to acceptable levels - examples are Email, search, social networking—each passed through its' “this will solve all our problems” phase before we figured out what its best applications and limitations were.

The year 2017 witnessed a similar phase with the phenomenal interest in Cryptocurrencies and the rise of the Blockchain technology, which has paved the way to the world’s largest cryptocurrency craze called the "Bitcoin"!

It was first introduced to the public in the year 2009 as a private digital currency and the credit of creating this unregulated currency goes to an unknown person(s) who go by the name, Satoshi Nakamoto. Satoshi apparently left the project in late 2010 without revealing much about himself. The community has since grown exponentially with many developers working on Bitcoin.

As part of the implementation, they also devised the first blockchain database. In the process they were the first to solve the double-spending problem for digital currency. Each bitcoin (BTC) is divisible to the 8th decimal place, so each BTC can be split into 100,000,000 units. Each unit of bitcoin, or 0.00000001 bitcoin, is called a Satoshi. "A Satoshi is the smallest unit of Bitcoin."

How does one define a Bitcoin:

• Bitcoin is the world's first open-source decentralized digital currency (a digital token that has a perceived value) and payment network (that can be used to send and receive the bitcoin itself). Due to its many unique properties, Bitcoin allows exciting uses that could not be achieved by any previous payment system.
• Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.
• 2017 was also the year when curiosity about the Bitcoin hit an all-time high, thanks largely to a dramatic surge in its value. Notwithstanding recent fluctuations in its price, interest remains strong in the original cryptocurrency. While any cryptocurrency launched as a sovereign digital alternative to currency is legal and promises to pay the value encrypted in it, Bitcoin has no such value as it is like a digital form of private currency. In all, Bitcoin has seen a roughly 20-fold rise since the beginning of 2017, outshining virtually every conventional investment.
• With the Bitcoin bubble testing astronomical prices every day, cryptocurrencies and the blockchain technology that drives them are now taking their turn in this one-tech-fits-all role. While the Bitcoin does not have any underlying asset or value-base right now, it is nonetheless enjoying a sudden burst of interest - it's rallying price point has moved from $2,000 in May, to $8,000 in November 2017, to as high as $14,000 this month!
• Bitcoin is a type of cryptocurrency, which operates on the encryption technique, but does not have a legal backing from the central bank. It was launched with the intention of bypassing government currency controls and simplifying online transactions by getting rid of third-party payment processing intermediaries.

“Bitcoin is more contagious than all the other cryptocurrencies because it’s the first mover,” says Yale economist Shiller. “Just like Harvard is considered the most prestigious university because it was the first one” in the U.S.

Bitcoin vs Blockchain:

• Are Bitcoin and blockchain the same thing? No, they aren’t. However, they are closely related. When Bitcoin was released as open source code, blockchain was wrapped up together with it in the same solution. And since Bitcoin was the first application of blockchain, people often inadvertently used “Bitcoin” to mean blockchain. That’s how the misunderstanding started. Blockchain technology has since been extrapolated for use in other industries, but there is still some lingering confusion.
• On the other hand, Blockchain is a technology in which transactions made in digital currencies are recorded chronologically and publicly. Blockchain as a technology supports Bitcoin trading, but it is not synonymous with Bitcoin. The blockchain that supports Bitcoin was developed specifically for the cryptocurrency. That’s one of the reasons it took a while for people to realize the technology could be adapted for use in other areas. 
• Blockchain is the digital and decentralized ledger that records all transactions. Every time someone buys digital coins on a decentralized exchange, sells coins, transfers coins, or buys a good or service with virtual coins, a ledger records that transaction, often in an encrypted fashion, to protect it from cybercriminals.
• Part of the confusion around what is blockchain Vs what is cryptocurrency is due in part that the terms have come into use. Instead of being introduced by a formal definition, the term blockchain was developed from “chain of blocks”. Cryptocurrency is a sort-of portmanteau of “cryptographic currency”. But the fundamental difference between these concepts has to do with how distributed ledger technology is used.

I greatly enjoyed the following video posted by Jonathan Strickland of BrainStuff, who explains how the Bitcoin and Blockchain technology works, in a fun way - Enjoy:)

The Bitcoin blockchain in its simplest form is a database or ledger comprised of Bitcoin transaction records. However, because this database is distributed across a peer-to-peer network and is without a central authority, network participants must agree on the validity of transactions before they can be recorded. This agreement, which is known as “consensus,” is achieved through a process called “mining.”

Bitcoin "Mining" explained:

• One question that everyone needs answers to is "what is the process of 'mining' that creates new Bitcoins" and "how does the blockchain technology underpinning the cryptocurrency really work." Bitcoins are generated by a mathematical formula, or algorithm. It started with 50 coins in Jan 2009, the formula produces batches of new coins every 10 minutes. These coins can be 'mined' by anyone willing to dedicate computing power.
• Anybody can become a Bitcoin miner by running software with specialized hardware. Mining software listens for transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions. Bitcoin miners perform this work because they can earn transaction fees paid by users for faster transaction processing, and newly created bitcoins issued into existence according to a fixed formula.
• Miners of Bitcoin use open source software to accomplish two tasks: Firstly, miners confirm the validity of new bitcoin transactions that are waiting to be recorded on a public ledger. Secondly, the miners must decode an encrypted, unique ID, generated by the bitcoin formula, to add the confirmed records to a public ledger known s the 'blockchain'. The blockchain forms a permanent, publicly available history of every bitcoin transaction. Miners are rewarded for their work with new bitcoins automatically generated by the bitcoin algorithm. The bitcoin formula sets a limit of 21 million coins. This limit is expected to be reached around the year 2140!

“Cryptocurrency and Blockchain are here to stay - over time, it will become quite large. It is very clear that new currencies will come to market,” - Huang, CEO of Nvidia Corp.

Blockchain as a Technology:

• Blockchain is the underlying technology behind cryptocurrencies like Bitcoin. Blockchain technology helps counter issues like double spending. The simplest way to think of blockchain is as a large distributed ledger of sorts that stores records of transactions. This “ledger” is replicated hundreds of times throughout the public network so it is available to everyone. Every time a transaction occurs, it is updated in ALL of these replicated ledgers, so everyone can see it.
• Every time a new transaction is initiated, a block is created with the transactions details and broadcast to all the nodes. Every block carries a timestamp, and a reference to the previous block in the chain, to help establish a sequence of events. Once the authenticity of the transaction is established, that block is linked to the previous block, which is linked to the previous block, creating a chain called blockchain. This chain of blocks is replicated across the entire network, and all cryptographically secured which makes it not only challenging, but almost impossible to hack. 
• The blockchain is an undeniably ingenious invention – by allowing digital information to be distributed but not copied, blockchains create the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

A distributed database:

• Picture a spreadsheet that is duplicated thousands of times across a network of computers; then imagine that the network is designed to regularly update this spreadsheet - voila! Now, you have a basic understanding of the Blockchain system. A blockchain system has been designed to use nodes agreement to order transactions and prevent the fraud described above. The Bitcoin network orders transaction by putting them together into groups called blocks, each block contains a definite amount of transactions and a link to the previous block.
• By design, the blockchain is a decentralized technology; a global network of computers uses blockchain technology to jointly manage the database that records Bitcoin transactions. That is, Bitcoin is managed by its network, and not any one central authority.
• Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

“As revolutionary as it sounds, Blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where Blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.” – Ian Khan, TEDx Speaker | Author | Technology Futurist

7 closest rivals of Bitcoin:

From around $1,000 in the beginning of 2017, blockchain-based cryptocurrency bitcoin has touched nearly $20,000 by the end of last year. The boom in Bitcoin value has also helped its rivals surge significantly. Other cryptocurrencies such as Ethereum, Litecoin, and Ripple too have soared to record heights in the past few weeks. Here's a sneak peek at the 7 closest rivals of Bitcoin.

1. Ethereum is one of the hottest rivals to Bitcoin. Launched in the year, 2014, it is currently the second-most valuable cryptocurrency. Like Bitcoin, it is also a type of blockchain network. The Bitcoin and Ethereum blockchains differ primarily in purpose and capability. While the Bitcoin blockchain is used to track ownership of the digital currency bitcoin, the Ethereum blockchain can be used to build decentralized applications. The virtual currency associated with Ethereum is called Ether.
2. Ripple is reportedly considered as logical successor to Bitcoin according to many industry experts. It was launched in the year 2012 by former Bitcoin developers and is a startup using Blockchain technology that as per its website "connects banks, payment providers, digital asset exchanges and corporates".
3. Litecoin was launched in the year 2011 and it is very similar to Bitcoin in its technical implementation. The biggest advantages of Litecoin are claimed to be speed and low fees. Litecoin uses Scrypt algorithm, it reportedly demands memory instead of processor resources. New Litecoins can also be generated through mining.
4. Zcash (ZEC) claims to be the first open, permission-less cryptocurrency that can fully protects the privacy of transactions using zero-knowledge cryptography. Like Bitcoin, Zcash to is a blockchain based currency. Launched in October 2016, as per Zcash website, its monetary base too is the same as Bitcoin's — 21 million Zcash currency units (ZEC) and is mined over time.
5. Dash is an open source peer-to-peer cryptocurrency. Dash can be used "to make instant, private payments online or in-store using our secure open-source platform hosted by thousands of users around the world." Its three biggest benefits, as per its website, are said to be: Instant, Private and Security.
6. Monero is claimed to be a secure, private, and untraceable cryptocurrency. The open-source cryptocurrency created in April 2014 has been soaring for the past five weeks with prices more than tripling since early November. Monero Research Labs is also said to be working hard to bring down the network's transaction fees by as much as 80%. Monero developers are said to be implementation Bulletproofs to bring down transaction sizes on the network. 
7. IOTA is another emerging bitcoin rival. It has market capitalization of Rs 0.75 lakh crore (approximately). IOTA represents a third generation of blockchain after the development of Bitcoin.

Just as there are hundreds of other cryptocurrencies besides Bitcoin, such as Ethereum, Litecoin, Dash and so on, there are hundreds of Blockchains as well. These other cryptocurrencies do not use the same amount of energy that Bitcoin does. Litecoin and Dash, in particular, are much better to use for payments as they use less electricity, have lower transaction costs and are considerably faster.

In fact, bitcoin and ethereum differ in purpose: Bitcoin is pitched as an alternate currency, or digital currency, ethereum facilitates peer-to-peer contracts and applications via its own currency vehicle. That's why bitcoin has emerged as more stable digital currency, while ethereum is more about smart contract applications. 

Another notable difference between these two cryptocurrencies is that the Bitcoin blockchain has a block limit of 1 MB. What that means is the the number of transactions that fit into a single block cannot exceed a 1 MB. The time it takes to mine, or create, a new block on the bitcoin blockchain is about 10 minutes. This effectively means that the bitcoin network can handle 3-4 transactions per second. On the other hand, the ethereum blockchain does not have a block limit. The number of transactions that are put into a block are decided by the miners. Each block is mined in 12-14 seconds and the number of transactions per second are around 15. 

Tulipmania was the first major financial bubble:

The extraordinary rise in Bitcoin's price recently has been likened to the "Tulipmania" of the 17th century. To this day, the Dutch tulip bulb market bubble is believed to be one of the most famous market bubbles of all time, as well as a cautionary tale. It occurred in Holland during the early 1600s when speculation drove the value of tulip bulbs to extremes. The tulip was brought to Europe in the middle of the sixteenth century from the Ottoman Empire. Holland's upper classes soon competed for the rarest bulbs as tulips became a status symbol. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person's annual salary. 

Investors began to madly purchase tulips, pushing their prices to unprecedented highs; the average price of a single flower exceeded the annual income of a skilled worker. Tulips sold for over 4000 florins, the currency of the Netherlands at the time. As prices drastically collapsed over the course of a week, many tulip holders instantly went bankrupt!

The obsession with tulips — referred to as "Tulipmania" — has captured public imagination for generations and been the subject of several books including a novel called "Tulip Fever" by Deborah Moggach which was made into a movie in 2017.

The 'Dotcom Bubble' of the 1990s:

Today's Bitcoin mania brings back memories of the dot-com boom of the late 1990s, when Internet stocks were soaring higher every month. It was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. Companies would add “dot-com” to their name just to attract new investors (much like we’re seeing “blockchain” getting added to company names this year).

During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000. The dotcom bubble grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups and the failure of dotcoms to turn a profit.

Investors poured money into Internet startups during the 1990s in the hope that those companies would one day become profitable, and many investors and venture capitalists abandoned a cautious approach by ignoring fundamentals, for fear of not being able to cash in on the growing use of the Internet. Companies that had yet to generate revenue, profits and, in some cases, a finished product, went to market with initial public offerings that saw their stock prices triple and quadruple in one day, creating a feeding frenzy for investors.

The NASDAQ index peaked on March 10, 2000, at 5048, nearly double over the prior year. Right at the market’s peak, several of the leading high-tech companies, such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value. As investment capital began to dry up, so did the life blood of cash-strapped dotcom companies. Dotcom companies that had reached market capitalization in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital evaporated.

What's a Bitcoin good for and how high can its' price go in the year 2018?

• This may be a question you've asked yourself, looking at the recent run-up in prices. Why, exactly, would you want to pay $18,000 and change to get your hands on one? I have asked myself this question several times. Is bitcoin in a bubble? Or do all those folks who are eagerly snapping it up know something that I don't? Maybe they do. That's the magic of markets, isn't it? 
• However, the bitcoin market is a little strange - it consists of a relatively small band of heavy enthusiasts. A bunch of those enthusiasts work in media or Silicon Valley, so their fixation gets more attention than, say, the market for Hummel figurines. But essentially, the market is similar to a market for collectibles, in that it is disproportionately composed of people who are obsessed with bitcoin. 
• For true believers, the soaring rise rewarded a deep-seated faith. It’s always been kind of obvious to me that this technology is as profoundly revolutionary as the Internet was. But Bitcoin’s spike also represented the revolution’s next phase. Less prescient investors, fearing they’d miss the opportunity of a lifetime, had jumped into the currency, spurring a frenzy. 

• While Bitcoin has provoked hysteria before, it has had an absolutely insane year in 2017. At one point, its price was up nearly 2,000%, from about $1,000 in January to $19,922 mid-December. It exploded in the media and it caught the attention of pretty much everyone – from Wall St. Billionaires to the average Joe just trying to make a quick buck. Over one stretch of 2013, its price surged 85-fold; it crashed the following year after a hack of the exchange Mt. Gox shook the confidence of many early devotees.
• It wasn’t until 2017, though, that Bitcoin hit a tipping point of mainstream popularity. By November, one of the biggest U.S. Bitcoin exchanges, Coinbase, had signed up some 12 million customers, surpassing the number of accounts at 46-year-old brokerage firm, Charles Schwab. Within weeks, Coinbase’s app became the iPhone’s most downloaded. "Bitcoin - once largely an insurgent’s fantasy, was worth some $300 billion in real money!"

“We are going through the biggest wealth generation opportunity of the century, and people want to participate,” says Meltem Demirors, director of development at Digital Currency Group.

Digital Currency Group (DCG) oversees a cryptocurrency portfolio including 1% of the total Bitcoin supply. It also invests in startups working on blockchains, accounting tools that use networks of computers to collectively sustain mutually trusted, shared ledgers of transactions, without relying on any outside institutions as middlemen.

Are Cryptocurrencies experiencing a massive "Speculative Bubble" right now?

• It certainly looks like it. But that’s not necessarily a bad thing. Markets do go into speculative bubbles and all bull markets and manias eventually come to an end. And somewhere along the way, high-flying assets will get hit with a hard reset or two before consolidating and moving higher. So it’s not that crazy to assume a major correction is on the way for bitcoin.
• Interestingly, Bitcoin’s price jumped after the U.K.’s Brexit vote in 2016—and again when Donald Trump won the White House. Combine such surges with ransomware attacks demanding payment in Bitcoin and buyers from countries like Venezuela seeking refuge from hyperinflation, and Bitcoin’s significance has penetrated the public consciousness like never before.
• No one knows how much higher cryptocurrencies can go from here. We can only assume we’re somewhere in the middle of a massive bull run. As with all red-hot investments, it can’t go higher in a straight line forever. In fact, it’s already shown speculators plenty of volatility during its run just this year.
• However, skeptics see a familiar mix of new-paradigm euphoria and get-rich-quick mania, with an unhappy ending looming. “It seems like the dotcom bubble all over again, or the housing bubble all over again,” cautions Robert Shiller, the Nobel Prize–winning economist who literally wrote the book on the subject. (Shiller, who foresaw those crashes, tells Fortune he’s contemplating a fourth edition of his Irrational Exuberance, updated to include the cryptocurrency craze.)

• In 2017, Bitcoin has endured short-term plunges of 20% or more on three separate occasions (not including last night’s flash crash). A bigger crash that effectively cuts the price of bitcoin in half could convince some speculators to cash in their chips and give others a chance to accumulate on the dip, because if Bitcoin were to continue its romp, we’ll experience plenty of volatility along the way. One cannot predict the top or bottom of a market cycle; however, it is important to remember that markets tend to vacillate between optimism and pessimism, which leads to greed and fear (always more than warranted) among investors. 
• To justify Bitcoin’s tremendous rise, bulls like the Winklevoss twins’ point to Metcalfe’s Law, which states that a network’s value increases exponentially with each additional participant. Tyler, along with his brother Cameron, entered the national spotlight after suing Facebook CEO Mark Zuckerberg, their Harvard schoolmate, for allegedly stealing their business plan. In Bitcoin they’ve found a lucrative second act. Having invested a portion of their $65 million Facebook settlement in the cryptocurrency some years ago, the twins are said to have recently become billionaires!

“Money is in many ways the ultimate social network,” Tyler says. “It’s a medium of value that connects us all.”

Bitcoin’s uniquely set payout rate—which rewards “miners” for supporting the network with their computers—also helps make it more valuable. Prices of commodities like corn, oil, or gold often plunge when producers pump out supply to meet demand, creating inadvertent gluts. Bitcoin’s supply, in contrast, is forever fixed, by computer code, at a total of 21 million coins (of which about 80% have been produced). And nothing drives prices up like scarcity!

However, in the eyes of some supporters, these advantages add up to virtually unconstrained upside. Cybersecurity pioneer John McAfee recently set a $1 million price target for Bitcoin by 2020 (revised upward from $500,000). Others say the market value could match gold’s, which clocks in at $9.7 trillion—roughly $460,000 per coin!

Bitcoin and its cryptocurrency cousins have made some forward-thinking investors a lot of money. We also can logically deduce that we’re somewhere in the middle of a major cryptocurrency boom, meaning, at some point in the future, the entire cryptocurrency market is going to have to start dealing with some growing pains which could lead to wild price swings, hacks, attempts at government regulation.

And if my hunch is correct, we’ll see a major crash in the cryptocurrency market this year. It will be terrifying. But it might also offer up a massive opportunity for investors. Historically, some of the frothiest bubbles have been relatively confined: the 17th-century Dutch tulip bubble left little collateral damage beyond the Netherlands; the dotcom boom blew up Silicon Valley, but international stock markets rebounded relatively quickly.

Bitcoin is a free software project with no central authority. Consequently, no one is in a position to make fraudulent representations about investment returns. Like other major currencies such as gold, United States dollar, euro, yen, etc. there is no guaranteed purchasing power and the exchange rate floats freely. This leads to volatility where owners of bitcoins can unpredictably make or lose money.

However, in this day and age, anyone anywhere in the world can buy Bitcoins—including unbanked people living in countries ranging from Afghanistan to Zimbabwe- who have never had access to capital markets before.

“The fact that this is our first global mania will make this cryptocurrency craze the single most speculative bubble of our lifetimes.”!

Like the green paper our economy is built on—and the gold and silver that predate it—Bitcoin is valuable because we collectively decide it is. “And if enough people agree, then the bubble can just persist.”!

What do you think??

Please do share your thoughts, opinion, and valuable input on this fascinating subject by commenting below:

*****************************************************

Thank you for reading!

I hope you found this article informative, useful and relevant to current technology market trends. Kindly share and re-tweet this article with your network on other digital/social-media channels as well. Follow me on twitter: @radhyka

**//**Additional research, inputs & excerpts from mashable.com, forbes.com, Fortunemagazine, businessinsider.com, economictimes.com, quora, mint.com, blockchaingeeks, financialexpress.com, coinbase.com, unocoin.com, wired, ibm.com/blockchain, the motley fool, etc.,**//**

*********************************************************

?