Bitcoin challenges status quo

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This article was published 24/02/2018 (2905 days ago), so information in it may no longer be current.

Josh Nekrep is a Winnipeg realtor and self-professed “hobby nerd.”

Having once had a career in IT, Nekrep admits he was also a “professional nerd” in the 1990s.

You can add “economics nerd” to the list too, he says with a laugh.

It’s this mix of hobbies and intellectual affinities that led him a few years ago to buying Bitcoin.

First hearing about the digital currency in 2013, he initially “brushed it off.”

“Then, I came back to it a little later and had that ‘aha!’ moment… like, holy cow, this is going to change everything. And that was it — I was way down the rabbit hole at that point.”

Unlike recent bandwagoners driving Bitcoin — an unregulated, decentralized digital currency — to bubbly heights and manic price swings, what Nekrep and other early adopters found and still find so compelling about the world’s premier cryptocurrency is that it challenges the status quo of the global financial system.

“When you look at the U.S. Federal Reserve, it can print into existence a trillion dollars at the bat of an eyelash and loan it out at zero interest to major financial institutions, who can pump it into the stock market and create another financial bubble,” he says.

In contrast, Bitcoin is deflationary by nature — so long as people believe it has value. Instead of wealth being eroded by inflation, Bitcoin’s value presumably increases over time, he says

But cryptocurrency’s potential extends beyond that of being an alternative to using loonies to pay for everything from pizza to pillows and mattresses — just a few of the goods you can actually buy in Winnipeg.

“And that’s what I mean when I say, ‘This changes everything.’”

Exactly how Bitcoin will change everything remains to be seen, but Nekrep likens what we’re seeing today to the early days of the internet.

“I remember at the time, people saying it was a fad,” he says, adding even the most forward-looking techies could not have predicted how ubiquitous the internet would become.

In the same way, Bitcoin and its underpinning technology that has spawned hundreds of other cryptocurrencies could reshape not just finance, but health care, manufacturing, logistics and even how we elect governments.

To get a sense of its potential, it’s important to understand its origins, says Hilary Carter, director of faculty at the Blockchain Research Institute in Toronto.

Created by Satoshi Nakamoto, the “pseudonymous coder or group of coders… the very first Bitcoin block that was mined has a piece of code linking to a headline of the day about the banks getting another bailout from government.”

It’s evident Bitcoin’s creators wanted to shake things up, says Carter, a certified Bitcoin professional, who is among a small but growing number of experts in the fast-growing field featuring more than 1,300 digital currencies.

Still, creating an alternative currency is hardly innovative — we’ve been creating new ways to exchange value for thousands of years. What makes Bitcoin so potentially transformative is the blockchain platform it invented, an innovation off which all other cryptocurrencies are based, Carter says.

An ingenious form of software architecture, blockchain is a decentralized, democratic and digital process. Collectively supported by a community of users and miners, all transactions are verifiable, tabulated and updated simultaneously across the network. That alone may not seem game-changing, but it’s how the system is maintained that makes it revolutionary.

This is where the “miners” come into play. These are individuals, businesses and other organizations that use energy-hungry super-computers designed to run algorithms that verify transactions. Miners compete to create new blocks of information — digital ledgers of transactions — linked to other blocks of transaction data in a virtual chain. In exchange for creating a new block and supporting the system, miners are compensated in Bitcoins.

“There’s a built-in incentive to support the system,” Carter says.

She adds that these traits also make blockchain very stable and secure.

“You can’t just hack one computer. You have to hack all the computers simultaneously and alter the previous block and then the previous block,” Carter says. “The way the network is designed — brilliantly so — makes it incredibly tamper-proof.”

Its structure also eliminates the need for a third-party verifier — Interac, for instance, when we use debit cards.

In effect, it’s blockchain, not Bitcoin or other cryptocurrencies, that many proponents find groundbreaking.

“The financial-services industry is just one area where blockchain will have a huge impact,” Carter says.

“If I can securely cast my vote in a national election without leaving my home, for example, that is a really good thing for engaging citizens in the democratic process,” she adds.

To date, the public has focused largely on Bitcoin as an investment, with many people drawn to the notion that because only 21 million Bitcoins will ever exist, if demand for the currency keeps rising, so too will its value.

But most investors are generally better off not chasing cryptocurrency returns, says Scott Clayton, a senior analyst with TSI Wealth Network.

Their rapid rise is “a classic sign of an investment mania,” he says. And any given cryptocurrency’s ascent is hardly guaranteed.

“Why assume that the U.S. won’t join other governments including China, South Korea and India in moving to limit the use of cryptocurrencies?” he notes. “Governments may use blockchain technology for their own purposes… but they have no incentive to support Bitcoin, or any cryptocurrency that can thwart taxation and help people hide assets and transactions.”

Still, that doesn’t mean an astute investor can’t make money.

“If you want to invest in blockchain, then the way to go is with the stocks that will gain from” its increased importance, he says.

“For example, Microsoft offers a blockchain service in partnership with several banks.” Other leaders include IBM, and microprocessor manufacturers NVIDIA and Intel.

Although the technology has yet to drive these firms’ profits, they are positioning themselves to be dominant players in the future — like the early days of the internet.

“If we look back to the dot-com bubble burst, there was a tremendous amount of speculation and over-exuberance that naturally corrected itself,” Nekrep says.

From the rubble, Amazon, Google (Alphabet) and other tech giants emerged.

“It’s the same with cryptocurrencies,” he predicts. “We will eventually see the wheat separated from the chaff.”