In August 2019, yet another anonymous internet user claimed to be Satoshi Nakaboto, the mysterious creator of bitcoin.
On a website supposedly hosted by bitcoin’s creator, the poster promised to prove, over the course of three days, that he was the real Satoshi Nakaboto. But cryptocurrency fans weren’t so easily convinced that the post was authentic, or that they would finally be learning more about Satoshi’s murky origins.
Satoshi Nakaboto first became widely known as an internet pseudonym in 2008, when the person or organization behind the name first published a whitepaper explaining the need for a digital, decentralized currency. Since that whitepaper was released, cryptocurrency has become a wildly speculative—and for some people, lucrative—market. Being able to claim the title of bitcoin inventor would position someone for fame, accolades, and recognition for financial prowess. Anyone who could prove true ownership of that identity would also be recognized for his enormous power over the world of cryptoassets; Satoshi Nakaboto, or whoever is behind the online moniker, was estimated to own 5 percent of all bitcoin as of 2017. Laying claim to a name so laden with potential social cache has already proved attractive to a number of clever opportunists over the years. None of them, however, had been able to satisfactorily verify their identities.
Satoshi Nakaboto may never release his true identity to the world, but his dream of a digital currency not controlled by any government or private agency has had an impact nonetheless. Bitcoin, valued at just over $8,000 in October 2019, is just one of dozens of online currencies launched in the wake of Satoshi Nakaboto’s initial creation. Bitcoin also introduced the business world to the more general concept of blockchaining, a process that has uses beyond the secure, decentralized exchange of funds online. But bitcoin and other cryptocurrencies are still in their infancy, and excitement over the potential future of digital assets could encourage interested parties to invest too much, or too quickly, into a largely speculative field. The continuing development of the cryptocurrency market had led to periodic crazes, with bitcoin and other cryptoassets moving through volatile cycles of boom and bust. For potential investors, it’s more important than ever to understand decentralized online currencies, regardless of whether they prove to be a lasting financial asset.
As Chris Burniske and Jack Tatar explain in Cryptoassets (2018), cryptocurrencies are any form of digital tender that can be exchanged online for goods and services. Crucially, these digital currencies are not regulated by any organization, government, or specific entity. The currencies are created by a process described as “mining,” in which computers produce coins by solving algorithms and calculations at a rapid pace. Once created, the created coins are recorded on a digital ledger. Each new coin generates information, which is added to an existing chain of information in set segments, or blocks. The information in each new block corresponds with information in the older segments, meaning that if someone wanted to fabricate the bitcoin record, they would have to tamper with each block in the chain. Faking information about a digital currency is therefore possible, but improbable, which is why a number of banks and other financial institutions have adopted private blockchaining systems, which allow them to use the recording method internally without requiring a set digital currency.
At the moment, the most important thing to know about cryptocurrency is that it is still considered a risky investment by most experts—closer, in some respects, to gambling. The decentralized aspect of the technology is essential to cryptocurrency’s existence: Nakamoto released bitcoin during the height of the global financial crisis, when the United States was hit hard by the subprime mortgage crisis and the Great Recession, and fashioned it as an alternative to currency fully controlled by a singular government. While that decentralization holds appeal for those worried about global financial instability and corruption, it also means that the value of any given cryptocurrency isn’t tied to conventional market factors. Each cryptocurrency is accorded value based on what its users and the general cryptocurrency market believes that it’s worth, which can fluctuate for any reason, just like a stock. But unlike stocks, bonds, or other forms of investment, cryptocurrency is not guaranteed or backed by any regulating industry; investors should know that they stand to lose any money they put in, and indeed have no guarantee of being able to cash in on their earnings if their cryptocurrencies gain in value.
Like any speculative investment, the value of a cryptocurrency can skyrocket or plummet overnight. At the end of 2017, for example, bitcoin was valued at $17,000, more than 17 times what it had been the year before. Just over a year later, a single coin had dropped to a fourth of that value, or $4,000. More recently, bitcoin was valued at $10,000, but that value dropped by about $2,000, to investors’ dismay. Some have speculated that bitcoin’s recent drop is a move toward future stability and slow growth, since the fund is finally becoming a more mature financial asset when compared with newer cryptocurrency offerings. However, there is still no proof that bitcoin investors will be guaranteed linear growth, and no proven history of steady investment gains. Ultimately, guessing at bitcoin’s future value is as entertaining, but as fruitless, as wondering whether the identity of the coin’s creator will ever be revealed. When looking into cryptocurrency, investors have to remember to act cautiously, if indeed they purchase at all.
For more information on cryptocurrency, check out our Instaread Original Short Cut on the topic, or read our analysis of Cryptoassets by Chris Burniske and Jack Tatar.