It has been nearly nine years since the anonymous hacker going by the name Satoshi Nakamoto invented the bitcoin currency. The same hacker released it along with another invention, the blockchain algorithm. Blockchain has played a crucial role in preventing fraudulent transactions. However, it may play another role that experts never envisioned. Blockchain may be the key to minimizing market turbulence.
Market turbulence has rattled the bitcoin market
The bitcoin market has surged over the past five years. According to CoinDesk, the opening price for a bitcoin in February 2013 was $20.41. Today, the opening price is $4353.05.
Demand for bitcoin continues to grow every year. Some Wall Street speculators predict that it will increase to $50,000 by 2022. However, the rising popularity of bitcoin masks a deeper problem – extreme volatility.
The market has been extremely turbulent since bitcoin was first introduced. After the collapse of China’s largest bitcoin exchange, the global price fell over 50% overnight. While some of the volatility can be explained by extreme events, it is still much more significant than price changes another asset markets.
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Fortunately, blockchain appears to be addressing some of these problems. Here are some reasons that blockchain will likely make a bit coin market more efficient.
Encouraging higher transaction volumes by fighting fraud
While bitcoin is becoming more popular than ever before, millions of people are still reluctant to use it. One of the biggest concerns is the risk of fraud.
Blockchain is playing in important role in fighting fraud. However, there are a couple of things that need to change. First of all, blockchain needs to be improved to further minimize fraud risks. Secondly, the bitcoin community must deal with the optics problem.
They must let people know that fraud is usually caused by people failing to secure their own computer and bitcoin wallet. The blockchain algorithm is actually safer than the majority of other financial security solutions that are used by banks and other financial providers. As long as people take adequate security measures, the risks of fraud are minimal.
Resolving these problems will likely boost demand for bitcoin more, which will improve market efficiency.
Streamlining transactions between other financial institutions
The bitcoin industry is going to depend on the support of other financial institutions to grow. Exchanges have already formed partnerships with leading banks, payment processors and other organizations. However, processing payments of these magnitudes can be very resource intensive.
New advances in blockchain have begun making it easier for large financial organizations to process large payments. By enabling transactions between bitcoin exchanges and other financial institutions to be made more quickly and securely, liquidity should rise much more quickly.
How efficient will bitcoin become?
Bitcoin is still an evolving technology, but a white paper written for Claremont McKenna College claims the cryptocurrency has the potential to become more efficient than other financial processing solutions.
“In today’s complex global economy, the efficient transfer of value is of huge importance. As more and more business is conducted online and over large distances, it is only becoming more crucial for monetary transactions to be fast, cheap, and of course, secure. Bitcoin demonstrates strengthening potential to be a far more efficient method than the current best method of transferring money given its speed, reliability, cost, and ease of use (Qkos 2014). However, this paper does not detail all the appealing aspects of using Bitcoin as a currency.”
Blockchain should improve the efficiency of the bitcoin market
Blockchain has played an important role in reducing market volatility. However, it will play an even more important role in the near future. The bitcoin community is going to rely on it to promote liquidity and efficiency.