It is really rare for financial innovations to be frequently mentioned in pop-culture. This year, however, I have been hearing more and more people talk about the latest development with the cryptocurrency know as Bitcoin. The vast fluctuations in the value of Bitcoin have piqued the interest of many people from all walks of life, while leaving others completely mystified. So for those of you who are feeling completely lost, your friendly Econ major is here to help. In this article I hope to touch on what Bitcoin is from a technological perspective, how it can be used as money with no government backing, and how you can get rich from it.

From a technological standpoint Bitcoin is a sophisticated form of cryptocurrency that utilizes blockchain technology. This technology ensure that Bitcoin is always secure from hackers and scammers and solves a major problem with traditional money: theft. That’s right, as far as we know it is impossible to steal or reproduce a Bitcoin (for now). This achievement is largely due to the gigantic verification network that Bitcoin uses and cryptographic keys (a one of a kind digital signature). With traditional money, anyone who holds the dollar has the power to spend it, including robbers. Imagine it was possible to make our US dollars as secure as Bitcoin. As you are standing in a convenience store, you open your wallet and inside you see an ink covered, mangled paper mess. Everyone who has ever held the dollar that is in your wallet, has signed it. This is possible with Bitcoin because a record of all transactions is readily available for Bitcoin owners. Now back to our scenario, when you walk over to the counter to pay for your soda-pop, you have to push through the dense crowd of thousands of people, because everyone who signed the dollar is now here waiting to view the transaction. With Bitcoin, everyone in the verification network bears witness to new transactions. Now this is just not possible with traditional dollars and that is why Bitcoin has certain advantages that our money may never have. The thing that really confuses most people about Bitcoin, however, is how it can be used as a form of currency?

So just how can a computer program that someone says is money have real value just because they say it does? Could you and I do the same thing with seashells or those creepy porcelain dolls that everyone knows move when you turn your back to them? The short answer: yes. All it really takes to create currency is the agreement of two or more people. The US dollar works the same way, It has value because everyone says they will accept it as payment. Although Bitcoin is not widely accepted, it is getting there. Bitcoin ATMs are located not too far from our school:

The primary difference between Bitcoin and the US dollar is what’s behind it. Behind the US dollar is the fact that there will always be some level of money that people desire in order to more easily buy and sell goods and services in the US. Bitcoin on the other hand, has nothing behind it as far as we know, maybe drugs (some theorize that Bitcoin is largely used by drug cartels). Which means that Bitcoin’s value is likely the result of a bubble. This phenomena is not new, it has been seen before mostly during financial crises. A bubble occurs when you have people who are buying something just because they want to resell it at a higher price (sound familiar). This results in artificially high prices far exceeding its normal value. This happened with stocks during the great depression and housing prices during the 2008 recession. However, Bitcoin is something unlike anything we have ever seen before because it has no inherent value. So there really is no telling exactly what will happen next.

Now some of you might be saying, “all this knowledge is good and fine, but how do I make billions off this innovation like Mark Zuckerberg's two evil lone-ranger arch nemeses twins from the Social Network”? Well if I knew that I would not be writing this. I would be in my mansion 3 pizzas deep only five more slices to go, with my chef begging me to stop, “I’m not even hungry”, I tell him with a dead look in my eyes, “I just need to prove I can do it”. It is interesting, however, to try and guess how you could do it. The biggest payout would be if you could successfully short Bitcoin. Shorting is a term used in investing that is slightly complicated. The general idea is that you are betting that the price of something will go down and you would then stand to make however much it falls by. This strategy is very risky and is not very common but when used successfully has seen billion dollar payouts. The biggest instance of this being the financial crash of 2008 and Goldman Sachs large subsequent profits. For anyone seriously interested in shorting Bitcoin here is a link on how to do it: https://www.investopedia.com/news/short-bitcoin/

Bitcoin is a very interesting proposition. Financial innovation is a different animal than technological innovation. It is rarely thought of or seen by the general public, but its effects are generally still felt one way or another. Here’s to hoping this one doesn’t end badly.