Neha Pant deciphers the mania behind the crypto currency

In the last one week, Bitcoins have come up in almost every conversation that I have had with my friends and family. While most have openly complained about not listening to the people who told them that the crypto-currency would hit big one day, most of us had felt the pinch. (If only we had listened to those annoying people who told us helped us access the dark-web and kept reminding hinting to invest in the ‘parallel economy of the future’.) To be honest, at that time, it felt like a loose hoax that you couldn’t afford to take seriously, but who knew that the day of reckoning would come less than a decade later.

In order to truly understand the hype around Bitcoin, let’s first understand the phenomenon.

Bitcoin was introduced to the world by a pseudonymous person Satoshi Nakamoto, who explained the basic framework in a 2008 paper. In the paper, Nakamoto stated that, “commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party. What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed time-stamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

In the nine years since it was launched, the Bitcoin has managed to amass hyperbole around it, enough to make it a mainstream. The cost of a single Bitcoin right now is $17,500—seventeen times more than what it cost at the start of this year. But what is perhaps the biggest irony is the fact that, the currency has failed to do away with the “transaction fee,” as Nakamoto hoped. Instead people now pay fees to ensure that their transactions get processed. Besides this basic loophole, the crypto-currency is continuing to enjoy a boom.

But what is the reason for this seemingly sudden surge?

The answer lies with the two financial organisations, Cboe Global Markets and CME Group. These two companies will start offering Bitcoin futures later this month, which means that Wall Street is expected to invest money into the Bitcoin industry and that will give this alternative currency legitimacy. Add to this the fact, that people are already seeing the rewards on their investments and this is fueling their desire to add it. Which is creating an increased demand for it and as basic economics teaches you, the higher the demand for a commodity, the higher the price for it.

So does that mean that you should sell all your investments and jump on this bandwagon? There are various things to consider before you take part in the Bitcoin boom, considering that a lot of its success is predominantly speculative and forced inflammation, due to an increase in demand. It is best to wait and watch if this alternative currency is scalable enough for the big mainstream world.