Newsweek, Bloomberg, and Marketplace, among other media outlets, have recently touted the meteoric rise of the Bitcoin’s value (almost 90 percent last year). In fact, Bloomberg declared Bitcoin the world's best performing currency in 2016, a title that the cryptocurrency has held every year since 2010 (with exception of 2014, when governments cracked down on its use and a major exchange lost account-holders' funds). The recent surge in adoption has a lot to do with the implosion of global currency markets, as people are looking for more efficient ways to move money and store value in the face of considerable geopolitical risk. The new year will likely be more of the same, including increasing acceptance and recognition among institutional investors as well.
(If you're still not exactly sure what Bitcoin is or how it works, this Newsweek article includes an animated video that breaks it down in layman’s terms. We also explain Bitcoin and blockchain in an earlier post on this blog.)
Bitcoin's bright future
According to MIT Sloan Assistant Professor Christian Catalini and his colleague Joshua Gans of the University of Toronto, the overall promise of crypotechnologies is very intriguing. In their new MIT working paper, Catalini and Gans discuss how blockchain technology (the underlying technology of Bitcoin) and cryptocurrencies will influence the rate and direction of innovation. They focus on two key costs that are affected by the introduction of blockchain technology:
- The cost of verification. Markets facilitate the voluntary exchange of goods and services between buyers and sellers. Key attributes of these transactions need to be verified by the parties involved at multiple points in time. By allowing market participants to perform costless verification, blockchain technology lowers the costs of auditing transaction information and allows new marketplaces to emerge.
- The cost of networking. When a distributed ledger is combined with a native cryptographic token (as in Bitcoin), marketplaces can be bootstrapped without the need of traditional trusted intermediaries, lowering the cost of networking.
The technology has the potential to dramatically change how we conduct transactions on a global scale. As Catalini states on his website, and as we've seen in recent months, this could disproportionately help segments of the population that are currently underserved by financial intermediaries as well as countries with weak financial institutions. In 2014, all 4,494 undergraduates at the Massachusetts Institute of Technology were given access to decentralized currency as part of a study to understand the process of diffusion of Bitcoin, but also to enable the MIT community to take part in and shape the evolution of digital currencies.
Amidst the enthusiasm around Bitcoin's ascendancy, however, there are still many concerns. While optimists assert that cryptocurrencies will force out entrenched financial players and payment systems, thereby reducing transaction costs for businesses and fees for consumers, those more skeptical argue that cryptocurrencies may undermine traditional monetary policy, support illicit activity, or fall short of real-world privacy requirements. All the above may be true. Not to mention that Bitcoin and blockchain are still waiting for the one application--or applications--that will catapult the technology into widespread use.
Last year may have been the year Bitcoin's value, acceptance, and usage rose exponentially, but 2017 holds the promise to be a breakthrough year for the currency and its underlying technology. For some, especially those in industries dabbling in blockchain, that means it’s time to become very serious about developing their technology, before an unknown innovator uses it to disrupt traditional markets.
Christian Catalini teaches in the Entrepreneurship Development Program for MIT Sloan Executive Education and is an Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management. He is one of the principal investigators of the MIT Digital Currencies Research Study.