BY ANTONY MUTUNGA
In 2009 the world witnessed the emergence from the blues of a mysterious technology. At the time, no one imagined the technology, which came to be known as Bitcoin would eventually come to take the world by storm.
Bitcoin was the work of Satoshi Nakamoto who mined the first ever block; the genesis block, for a reward of 50bitcoins after many years of research and development.
Bitcoin although, did not start off on the right track as in the year it was introduced to the world, it went for close to nothing and in its second year, 2010, it wasn’t even able to pass the dollar mark. This was a difficult period for the technology that was referred to as the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem (BGP). However, in time, things started picking up as people got to understand what bitcoin was and the advantages that one could benefit from it.
It has now been eight years and bitcoin has reached heights that were thought to be impossible. From one bitcoin being worth close to nothing in 2010, it is now worth over Sh740, 000. This has seen the cryptocurrency become quite popular all over the world as people, especially millennials, move to invest in it in order to enjoy the good returns it has to offer. Bitcoin has even helped push the larger cryptocurrency market to new heights, as the combined market capitalization of all cryptocurrencies is now over $200 billion.
Even though bitcoin has been enjoying a successful period, it has recently faced some difficulty that has most people questioning if maybe it is time to move on from it. One of the major problems that the cryptocurrency is facing now is due to its characteristic that it is decentralized. Before reaching the heights it has, most governments saw bitcoin as a novelty and thus they did not see the need to crack it down.
However, things seem to be changing as some governments start feeling the impact of allowing the ever-growing bitcoin in their economies. This is due to the fact that by allowing bitcoin, people have been able to evade paying taxes while others have moved to use it for criminal activities. This has seen several governments ban the exchange of bitcoins in their countries. For example, China’s government, concerned about the use of bitcoin in capital flight and tax evasion, announced the ban on bitcoin exchange in September.
On its way to join China soon is India as its’ central bank considers to follow in suite and shut the door on bitcoin in the country. This is after Shri S. Ganesh Kumar, executive director of the Reserve Bank of India (RBI), signaled that bitcoin will not be allowed in the country. “Our current position on bitcoins is that we will not be using it for any payments and settlements… Though the technology underlying cryptocurrencies will not end,” he said.
There is also the risk that there is a bitcoin bubble as warned by many investors who feel the cryptocurrency will soon implode and cause a disaster for those invested. Investors such as Warren Buffet and Nouriel Roubini, better known as Dr. Doom for predicting the 2008 financial crisis, have all put their thoughts across about the bitcoin bubble.
Those who believe there is a bitcoin bubble argue that there is no fundamental reason behind the current increase in its price level. Therefore, the only reason that could explain the increase in the price levels is what is known as the greater fool theory. The theory states that the price of a product is not determined by its value but by the beliefs and expectations of the market participant. Therefore, in this case, the reason behind the price surge can only be the fact that most people are buying and holding bitcoin in the essence of selling it back at a higher price.
Henceforth, if everyone was to decide to convert their bitcoins into fiat money the results would be catastrophic. This is because it would lead to the bitcoin market drying up which in turn would cause the prices to fall. As a result, this would eventually lead to the crash of bitcoin, which would result to bitcoin users making major losses.
Apart from this, bitcoin also has another major problem in forking. A fork in terms of bitcoin refers to the splitting of the chain that bitcoin runs on, making it go on a different path with its own set of rules. Forking is usually categorized into two; hard and soft fork. Hard fork usually refers to a permanent split from the blockchain for example, this year bitcoin has already seen two hard forks which have resulted in the establishment of bitcoin cash and bitcoin gold. On the other hand, there is soft fork, which refers to changes that take place without splitting from the blockchain.
A fork in bitcoin usually affects the value of bitcoin as it means there is a disagreement in the bitcoin community about the way forward. In November, advocates of a bitcoin hard fork were planning on what is known as the Segwit2x hard fork, which would have split the bitcoin blockchain in two. Even though the hard fork was canceled, it seemed to have affected the value of bitcoin for a short while before it soared again. With there being a possibility of the hard fork coming up again soon, it may end up causing the value of bitcoin to fall.
Bitcoin is currently in a stable position regardless of these problems however, it is important for cryptocurrency users to start identifying other cryptocurrencies that they can move to in case the so called bitcoin bubble ends up bursting or worse yet, bitcoin ends up being banned. Some of this cryptocurrencies that are faring on well despite the dominance of bitcoin include the likes of Ethereum and Litecoin.
Litecoin is among one of the oldest cryptocurrencies to come after bitcoin, it was launched in the year 2011. It is often referred to as the silver to Bitcoin’s gold. The current worth of 1 litecoin is over Sh6, 600. On the other hand, Ethereum is among one of the newest cryptocurrencies having been launched in 2015. Even though being among the latest altcoins, it has grown to be the second in terms of market capitalization after bitcoin. One Ether is currently worth over Sh33,000. Other notable cryptocurrencies include Bitcoin cash, Ripple (XRP) and Zcash.
Bitcoin, regardless of all these warnings, is continuing to soar on but maybe it is time for every participant who is interested in it to think twice before putting all their eggs in one basket. In addition, unless the bitcoin community finds a way to deal with these problems, we might soon be seeing the crash of one of the best digital currencies.
