David Zeger, JHU
On September 12th, Jamie Dimon, the CEO of JPMorgan, stood in front of the seventh annual Delivering Alpha conference, and declared Bitcoin fraudulent. Mr. Dimon is certainly not the first wall-street executive to discredit the digital currency, but when the CEO of the largest financial institution in America speaks, the market listens. In his remarks, Mr. Dimon compared cryptocurrency to the oft-referenced “Tulip-Mania” of the late 17th century, and further stated that any JPMorgan trader found speculating in cryptocurrency markets would be fired immediately. This archaic comparison, which has been used to strike fear in the hearts of bubble or boom investors for centuries, demonstrates the level of contention surrounding cryptocurrency markets.
Ten days prior to Mr. Dimon’s remarks, bitcoin had pumped to an all-time high of $5,000. In response to his comments, Bitcoin, which is still traded speculatively, shed more than 30 percent of its value over a three-day period, closing at $3,000 on September 15th. The foretold doomsday for Bitcoin had arrived, and an ever-growing collective of financial institutions and investors stepped into the limelight to denounce Bitcoin.
Included among them was the founder of the largest hedge fund in the world, Ray Dalio, of Bridgewater Associates. While appearing on CNBC’s ‘Squawk Box”, Mr. Dalio dismissed the currency on the foundation that it is not, in fact, a currency. “It’s not an effective storehold of wealth because it has volatility to it, unlike gold”, said Dalio, who’s managed Bridgewater Associates for more than 40 years. “Bitcoin is a highly speculative market. Bitcoin is a bubble.”
However, though future of Bitcoin is still unclear, the technology behind Bitcoin has been proven, and blockchain technology has found a place in almost every sector of the world economy.
Currency is nothing more than a system of accounting. In traditional markets, one has a ten-dollar bill, and its value is backed by the US government. One can use that bill to buy whatever goods and services one might need, because the bill itself is proof of ownership over the value, and the bills value is, once again, backed by the U.S government. One can simply transfer ownership of that ten-dollar value by handing the bill to someone else.
When creating a fully digital currency, early pioneers were confronted with an accounting issue, often referred to as the double spending problem. When a currency is nothing more than a digital file, who is to say that somebody won’t simply copy that file a million times over? There would be no real way of determining ownership of a currency’s value. In overcoming the double spending problem, the developer of Bitcoin Satoshi Nakamoto created Blockchain.
Imagine a public ledger, which is reproduced millions of times across a network of computers. It is constantly updated to reflect transactions that have changed the ownership of files and thus, the ownership of value. Users are incentivized to update and verify the public ledger by a system that pays them in Bitcoin to do so. As the ledger exists on millions of computers, which have all joined the Blockchain voluntarily, it is nearly impossible to hack, as one would be required to edit the ledger on every one of its millions of hosts. The double spending problem had been solved. By creating a public system of accounting, the Blockchain provided the technology necessary for an online currency to properly function.
Beyond its usage in cryptocurrency, blockchain technology can help solve a number of the Internet’s most pressing problems. At the beginning of September, it was reported that Equifax, a consumer credit reporting agency, had been hacked. The data of approximately 143 million users had been compromised, and information ranging from birthdates to social security numbers was lost. This loss of enormously compromising information occurred because Equifax had users input various forms of personal information, such as social security number, in order to verify their accounts. Using blockchain technology, Equifax users would have been required to provide fewer personal details, as transactions are securely verified by permissioned participants and are heavily encrypted. Its applicability for proprietary data security barely scratches the surface of blockchain’s potential.
Within the decade, blockchain technology could solve some of today’s most pressing issues. If blockchains can offer a truly secure, encrypted system of identifying oneself online, the possibilities are endless. What politician could complain of voter fraud, if all votes have been tallied and accounted for in a secure, decentralized ledger?
Hospitals all around the world could be enabled to share patient data without compromising the security of said data. This could revolutionize the medical field, allowing for more accurate diagnoses, better treatment, and lower costs.
The legal industry has already begun adopting blockchain to create smart-contracts. There will now be irrefutable, paperless evidence of any legal contract, hosted on a public, ‘unhackable’ ledger. These contracts will serve as indisputable proof that the legal event occurred, and they can be accessed remotely from every corner of the world.
Bitcoin has had an enormously successful year. The value of one Bitcoin has increased four-fold since March, leading many, including some of the financial industries biggest players, to see it as a bubble. While their warnings should not go entirely unheeded, it is important to note that the Jamie Dimons of the world often speak from a place of bias. Mr. Dimon has a vested interest in the fulfillment of his prophecy. In 2015, JPMorgan began developing its very own blockchain. Their in-house blockchain, Quorum, utilizes Bitcoins greatest rival currency, Ether. It is not too much of a stretch to say that JPMorgan, and thus Mr. Dimon, likely stand to benefit financially from a devaluation of Bitcoin.
Ignoring their prophecies of doom, Bitcoin has rebounded in the past few weeks, and currently sits at roughly $4,400 per coin. The technological backing of Bitcoin, blockchains can and likely will be utilized in a plethora of information-based industries going forward. While it was created as a means to allow for the successful transfer of digital currency, the applications of blockchain technology are limitless. The verdict is still out on Bitcoin; however, its underlying technology has found mainstream acceptance. Bitcoin may boom, or it may bust; but the Blockchain is here to stay.