Currency Waves

Image from https://cointelegraph.com

“ Volatility in Bitcoin does not yet have a generally accepted index since cryptocurrency as an asset class is still in its nascent stages, but we do know that Bitcoin is capable of volatility in the form of 10x changes in price versus the U.S. dollar, in a relatively short period of time”

- Jonathan Todd Barker, Investopedia

Like all tradeable assets, cryptocurrencies feel the effects of both macro/micro-economic trends. The state of the global economy will affect the price of bitcoin and so will smaller, more localized trends. However, cryptocurrencies may also have certain fundamental trends that are specific to them. These theorized fundamental value trends are due to: (1) security and (2) features/improvements.

In 1995, a new hash function for encryption, SHA-1 was standardized by the National Institute of Standards and Technology (NIST). It became the backbone of HTTPS and various banking systems. In early 2017, Google and CWI were able to crack it with a collision attack. Data encryption standards change as time goes by and technology advances.

Trends in computer security need to be constantly evolving in order to account for changes in computing power. This is a fact that will not change. Consequently, cryptocurrencies considered secure may no longer be safe as these trends evolve.

One of the new trends in computer engineering is quantum computing. In layman’s terms, quantum computing is essentially using principles of quantum physics to create a super powerful computer. For a better, more in-depth explanation, see “Quantum Computing 101.”

While it may not be in the near future, quantum computing will arrive eventually. Development effort towards a functioning quantum computer are increasing, with Google, NASA, and the CIA all having related projects. According to Andersen Cheng, CEO of Post-Quantum Solution, “Bitcoin will expire the very day the first quantum computer appears.”

Changes to the computer security landscape could have devastating consequences to the current cryptocurrencies.

Put bluntly by Martin Tomlinson at Plymouth University, “[i]f you have a quantum computer then you’re able to just basically calculate the private key from the public key.” And according to Divesh Aggarwal, a researcher at the National University of Singapore, “[t]he elliptic curve signature scheme used by Bitcoin is much more at risk, and could be completely broken by a quantum computer as early as 2027.” Even if the development of a fully functional quantum computer that is able to break bitcoin does not happen for another 20+ years, it WILL happen.

Encryption and security standards changes all of the time. This leads to waves in encryption standards and their usage levels — the same can be expected to happen for cryptocurrencies.

In the past week, the divide between the Bitcoin and Bitcoin Cash factions has grown immensely. Bitcoin puts decentralization above scaling, which means that transactions are slower. Bitcoin Cash puts scaling above decentralization, which means transactions are faster, but fewer people manage the nodes which control/validate these transactions. Forks as a result of feature changes, such as better scaling, will obviously lead to some decrease in usage. A cryptocurrency may see an initial boom, but with a feature fork, it is bound to see some non-negligible bust.

One needs to remember that cryptocurrencies are not simply currencies, they are technologies. It’s impossible to reverse engineer a dollar bill; as our technological capabilities increase, the same may not be able to be said for cryptocurrencies. In addition, adding features and making improvements will lead to splits in the currencies, just like the split we are seeing between bitcoin and bitcoin cash.

Disclaimer: Cryptocurrencies aren’t flawed to the point of being worthless, but the community should be thinking of these possible issues as soon as possible so they do not become realized.

Further reading:

• https://www.technologyreview.com/s/609408/quantum-computers-pose-imminent-threat-to-bitcoin-security/
• http://www.newsweek.com/quantum-computers-kill-bitcoin-cryptocurrency-509053