Investing in digital currencies isn’t new. Since the advent of Bitcoin in 2009, investors have been jumping on the opportunity to be a part of this highly volatile market that shows potential for big returns.
Cryptocurrencies, like any monetary system, can be difficult to understand. We’ve covered some basics about blockchain, Ether, and other alternative digital currencies. Now we’ll explore their history and speculate about the future of digital currencies.
The Beginnings
You might not have heard much about cryptocurrencies before Bitcoin hit the scene, but digital currencies have a history dating back to the 1980s. Researcher David Chaum invented many of the first cryptographic protocols that digital currencies would come to be based on.
He was the first person to propose the idea of a secure digital currency that overcame the issue of double spending. A functional digital currency needed a way to ensure that users could not duplicate a single spending unit (dollars, bitcoins, ether). Chaum founded the company DigiCash based on these principles and utilizing cryptographic protocols to ensure security of funds.
While DigiCash would not stand the test of time, Paypal was founded in 1998 and represented a big step towards digital currencies as we know them today. Other digital currency startups emerged during the dot-com bubble, including E-gold and Liberty Reserve, but neither exist today.
At the same time that Paypal was emerging onto the scene, computer engineer Wei Dai published a description of an anonymous, distributed electronic cash system called “b-money”. Shortly after, scientist Nick Szabo created the idea for an electronic currency system named Bit Gold, based on Wei Dai’s ideas. Bit Gold was never fully developed, and it wasn’t until years later in 2009 that a cryptocurrency robust enough to gain substantial ground would emerge.
Bitcoin
The Bitcoin was the first real digital currency. Bitcoin was introduced by inventor Satoshi Nakamoto and released as an open-source software. It was based on a revolutionary piece of disruptive technology — the blockchain.
Bitcoin quickly rose in popularity and notoriety, thanks to it’s widely-publicized use on the Dark Web black market. Criminals used bitcoin to purchase all sorts of illegal goods and services, clouding the reputation of the currency. While illegal applications of the currency and malicious interference by hackers tended to result in mostly negative press for Bitcoin in it’s beginnings, many reputable businesses and industries also recognized the opportunity that digital currencies presented.
Today, Bitcoin remains the biggest of the cryptocurrencies, with the largest network effect, most value, and highest number of investors. It’s accepted by a growing number of vendors across several industries, and represents the standard against which all altcoins are judged.
Successors
Following in the steps of Nakamoto, many developers released altcoins to contend with Bitcoin for the distinction of standard digital currency. Each altcoin developer hoped to improve upon the bitcoin model.
Namecoin and Litecoin were among the first contenders, each with their own approach to utilizing the blockchain. Namecoin introduced the ability to store data within a blockchain database, and Litecoin looked to improve transaction processing speeds for payments. Each succeeding altcoin developer looked for new opportunities for cryptocurrencies.
Ethereum has taken the place of the biggest competitor to Bitcoin. This platform and digital currency is based on the concept of the development of “dapps”, or decentralized applications. Decentralizing the development of dapps allows software developers and consumers more freedom when compared to current app development, which depends on third parties for distribution.
The Future of Cryptocurrencies
It’s easy to speculate about how we will use blockchain technology in the future — it’s applications are broad and wide-reaching. For specific digital currencies, it’s a little more difficult to understand how, or if, a specific currency will ever be widely adopted. Right now, digital currencies are most exciting to those who develop and invest in them; they don’t have many real-world applications. Everyday consumers aren’t keeping bitcoins in their digital wallets yet.
But as the availability of smartphones and personal computers only continues to rise, it’s becoming more plausible that individuals will begin to look to digital currencies as a secure, easy way to make their purchases. Apple Pay is the closest thing we have to a widely-adopted digital currency, though it’s not it’s own form of currency. Mobile payments only continue to increase in value. If we look to the popularity of the Starbuck app and it’s mobile payment feature, it’s not hard to imagine a world where we’ve completely abandoned our physical wallets for digital ones.
However, the high volatility of cryptocurrencies represent a major barrier to widespread adoption. Speculators have become the main investors in cryptocurrencies, and until some stability is brought to the market, this is how it will remain.
Blockchain technology can be applied in many ways beyond cryptocurrencies. In upcoming years, we can expect major changes to commerce and trade as we currently know it. Digital currencies represent the first wave in the digitization of exchange, and lots of potential for investors — if they’re willing to take the risk.
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