A currency designed to ease internet payment could revolutionize the way people negotiate, from legal contracts to crowdfunding.
Hillsdale College Economics Professor Michael Clark teaches about when it is rational to pursue high-risk, high-reward investments, such as cryptocurrencies, a $700 billion market as of Jan. 3 according to Business Insider.
Clark said that a cryptocurrency is a digital currency that uses cryptography, a code-breaking system, to verify currency transactions.
Unlike many investments, bitcoin only requires a phone and an internet connection to buy cryptocurrencies.
“Bitcoin to me is this ultimate high-risk, high-reward that everyone can get access to,” Clark said. “A lot of times high-risk, high-reward things are startups, and hedge fund managers have access to these, but you don’t and I don’t. With bitcoin, you can just buy $20 worth of it.”
Clark encouraged others to invest “only as much money as you are very comfortable getting $0 back; not just no return, but ending at $0.”
Clark said initial investments in cryptocurrencies were lucrative, but that no one knows bitcoin’s future trajectory. Bitcoin’s price is volatile, jumping 40 percent in 40 hours before settling at $14,000 on Dec. 6. It shot to $19,000 the next day and then fell.
“I would be very hesitant to say, ‘Everyone, go invest in bitcoin,’” Clark said. “Yes, it’s crazier now, but it’s also worth more. A 25 percent jump used to be from $10 to $12.50. Now it’s from $10,000 to $12,500.”
Clark said the biggest attraction to cryptocurrency is its use of a decentralized ledger technology called blockchain, which causes information to exist omnipresently on every computer running bitcoin software.
“When we use our credit card at Home Depot, Home Depot has all of our credit card information,” Clark said. “So if someone can break into Home Depot, they’ve got your credit card information.”
To pay in cryptocoin, however, users anonymously send coins to a private online wallet or a QR code through an app or wallet.
The transaction is verified by miners. Anyone with an internet connection and enough computing power can be a miner.
They use computers to solve complex math equations and are paid in bitcoin: part newly created tokens and part transaction fee charged to the sender.
Senior Steven Custer said bitcoin is the most popular cryptocurrency, but that Ethereum, the second largest cryptocurrency, and others are used for purposes other than transactions.
“I still think the best analogy is of an operating system: if you had Windows operating system and it had its own internal currency and used Microsoft dollars to build programs built off Windows,” Custer said. “That’s kind of like what Ethereum is like.”
Bitcoin was designed to ease internet payment, but other cryptocurrencies, such as Ethereum, lead the “smart contract” world because its programmable nature allows them to self-execute contracts and stipulate transactions contingent on certain requirements, such as multiple owners’ signatures.
But with great security comes great risk: Losing the private key is like losing a credit card or Personal Identification Number. In fact, bitcoin was modeled to be a digital gold, according to Steve Patterson’s book “What’s the Big Deal about Bitcoin.”
Cryptocurrencies allow universal banking for anyone with an internet connection and enough computing power. Cryptocurrencies have been used to pay remittances, such as when people from other countries immigrate to the U.S., but financially supports their family abroad.
Only Western Union and wire services offer these services for a percentage cut of the transaction. They also charge currency exchange fees and international transaction costs, and the transfer process can take up to six business days. Bitcoin, however, charges only 1/100ths cut of the transaction and can send coin in up to two hours, no matter the distance nor the financial market stability.
Bitcoin transaction fees rise when network demand exceeds capacity.
Government-run currency systems such as Venezuela often adjust the money supply in response to changes in demand for money to stabilize the price level. Venezuela’s central bank on Monday announced a 99.6 percent devaluation of the official foreign exchange rate.
Bitcoin has no such centralized feature, so short-term price fluctuations are often more apparent than centralized currencies.
“To me, it’s a sense of hope,” Clark said. “And it has been for third-world countries already. It’s been a way for them to create wealth in a society where it’s been impossible to create wealth.”
Clark said many people accuse cryptocurrencies of aiding illicit activity such as Ross Ulbricht’s infamous Silk Road or the Youbit hack in December 2017 in which the hackers ransomed the company’s files and demanded bitcoin to decrypt Youbit’s documents.
These illicit transactions, however, are a small percentage of cryptocurrency transactions and aren’t much different from the anonymity of paper cash transactions, Clark said.
He said many people don’t trust bitcoin because it’s a digital currency, yet the U.S dollar is also a digital currency. When the Federal Reserve expands the money supply, they often add zeros to bank accounts instead of printing dollars.
Even amid concerns about safety, cryptocurrencies have other possible future uses, Patterson said. St. Louis’ Federal Reserve research suggests potential applications include e-voting systems, identity management, and fundraising.
Blockchain has disrupted security standards ranging from digital tokens representing tangible assets to CryptoKitties, a game centered around owning and breeding digital kittens, which cannot be hacked because individual miners monitor and securely store data files that autonomously change its hash volume, its unique digital fingerprint if a hack is attempted.
Solar coin allows users to receive solar coins in return for donating energy, some of which is donated toward the mining system.
CureCoin, which is connected to Stanford University’s cancer research center, has donated $31,553 in converted CureCoin to charities since its inception.
CureCoin miners donate computer processing power used to research and analyze data used to literally cure cancer.
Clark said he cared more about future uses of the blockchain than bitcoin’s current price.
“I hope for the long run,” Clark said. “I’m hoping for when my kids start having kids that it somehow helps, not only people in the United States but perhaps the world larger.”