Beyond the speculative sizzle, cryptocurrency may still be a long-term game changer

It only took a few weeks in January to wipe out half of bitcoin's market capitalization. The volatility of cryptocurrencies have made some people very rich and others very nervous.

The recent price drop comes as governments around the world begin cracking down on cryptocurrency exchanges and initial coin offering scams. This has led to a sharp fall in the price of many cryptocurrencies, but it hasn't dampened many people's fascination with them, given the large potential gains.

Dogecoin creator calls cryptocurrency frenzy a bubble

Last year, the price of a single Bitcoin went from $996 USD at the beginning of the year to a peak of $19,206 USD around mid-December. Ethereum, another popular cryptocurrency, also saw its value increase from $8.36 USD at the beginning of 2017 to a peak of $1,339 USD on January 13 — an astounding 160 fold increase.

We've charted the daily movement of Bitcoin from January 1st, 2017 to January 23rd, 2018 into music. The higher the note, the more it cost that day to buy a single bitcoin. The synthesizer represents the daily price of Bitcoin, while the bells represent the number of daily transactions.

With this kind of growth, it's hard to ignore the frenzy in cryptocurrencies. But some industry insiders are worried.

Jackson Palmer is the creator of a joke cryptocurrency called Dogecoin. "I think a lot of [the growth over the past year] was driven by speculations," he said. "We're beyond the point where we were wondering if it is a bubble given the amount of money poured into it. I think it is, and it's just a case of when it pops and how that happens."

The idea for Dogecoin came to Jackson back in 2013 when he saw a popular meme floating around the internet. It showed a cheeky picture of a Shiba Inu, a Japanese breed of dog, which later became the face of Dogecoin.

Jackson tweeted about Dogecoin being the next big thing in cryptocurrency as a joke, and it blew up from there much to his surprise. Just recently, it surpassed $2 billion in market capitalization before dropping down below $1 billion two weeks later.

"It was meant to take a jab at all those cryptocurrencies popping up overnight and the mania surrounding it." Jackson explained. "To see it become the butt of its own joke is a barometer of how much speculation is at play in this space right now. "

Many of the cryptocurrencies in the market today aren't backed up by robust technology — Dogecoin's software hasn't been updated in over two years, Jackson pointed out. "There's no real excuse for its two billion market cap except speculation."

Investing in cryptocurrencies

For investors who are still interested in cryptocurrencies, Jackson said they need to perform due diligence on the technology powering them. What are its use cases? Does it have practical applications? Is the software being updated regularly?

Jackson said he dabbles a bit in cryptocurrencies where he believes the underlying technology has promise, and will address some of the scaling issues that networks like Bitcoin and Ethereum are facing right now.

"But I only invest very small amounts though, because I think it's relatively unwise to hold any significant amount of your portfolio on cryptocurrencies, given that it can drop 50 percent in value overnight."

Challenges and long-term potential of cryptocurrencies

There are still many challenges to overcome before cryptocurrencies can become a widely-used currency. The underlying blockchain technology needs to improve its performance and security before it can scale up to accommodate more users.

"We have quite a way to go in terms of a blockchain revolution, but it's just about now hitting the mainstream"- Emin Gün Sirer, co-director at the Initiative for Cryptocurrencies and Smart Contracts, and associate professor at Cornell University's Computer Science Department

The state of affairs now is that it can take up to an hour for users to send bitcoins through the network. The transaction fee is also exceedingly high, regardless of how much money you send (it costs around $30 per transaction).

Emin Gün Sirer is the co-director at the Initiative for Cryptocurrencies and Smart Contracts, and associate professor at Cornell University's Computer Science Department. His organization works on the core technologies powering many of the cryptocurrencies and tries to make them better.

"We have quite a way to go in terms of a blockchain revolution, but it's just about now hitting the mainstream," Emin said.

Beyond the speculative sizzle, Emin believes cryptocurrency may still be a long-term game changer. The underlying technology has many practical use cases: it could make business activities more transparent, financial institutions more accountable, and commerce easier and cheaper for regular people. His organization is working on refining the blockchain technology needed to realize those applications.

"It's going to take at least half a decade to a decade to play out, but there's quite a lot coming down the pipe," Emin said. "At the heart of it all is a brand new way of structuring data, sharing information and facilitating business processes that we just did not have before."

This is a condensed article based on the radio interview. You can listen to the full story below.