Digital currency: here to stay, or gone tomorrow?

Updated 6/11/15

Let’s take a look at a phenomenon that’s likely to have consequences for the way you do business for many years to come: digital currency. There has been a lot of talk about the future of digital currency, and specifically Bitcoin, the first digital currency to attract mainstream attention.

But are digital currencies an over-hyped fad or part of our new reality?

Answering that question gets to the heart of my work, which is to teach people how to properly examine the trends and facts on the ground in order to gain valuable insight into what will actually happen in the future.

A Bitcoin Overview

If you’ve heard of digital currencies, it has probably been in the context of a discussion about Bitcoin. But what is Bitcoin? Bitcoin is a virtual, decentralized, cryptocurrency. This means that no one is in charge of it and it isn’t backed by any hard asset or government. Bitcoin’s value is protected only by a distributed network that maintains its ledgers and protects its transactions by means of cryptography and the faith of those people who accept Bitcoins for goods and services.

The concept behind Bitcoin was proposed by an anonymous programmer (or programmers) using the pseudonym Satoshi Nakamoto. The open-sourced concept was proposed in 2008 and the first Bitcoinclient emerged in 2009. A single Bitcoin is today valued at $222, while the value of all Bitcoins in circulation tops $3 billion. Currently, the protocol is overseen by Bitcoin.org, with many different parties contributing to the integrity of the currency.

Proponents of Bitcoin claim that transactions using Bitcoin are not anonymous. However, Bitcoin transactions are actually as close to anonymous as you can get. Every Bitcoin is connected to an address and every Bitcoin is sent or received by a digital wallet attached to the address. Names aren’t associated with the transactions. These factors combine to create a system that is wholly transparent while remaining functionally anonymous, and that’s both the genius and the appeal of Bitcoin.

Bitcoin: Hard Trend or Soft Trend?

So, what exactly can you do with Bitcoins? It’s a currency, so spending them seems to be the immediate answer. However, in order to spend Bitcoins you need someone to accept your Bitcoins. While there are a growing number of businesses that accept them, the bad news is that most popular merchants and service providers (Amazon, iTunes, etc.) do not accept Bitcoins.

Currencies have failed before, often due to political upheaval or hyperinflation. Bitcoin is the canary in the digital currency coal mine: It can seem like an awfully risky enterprise because it’s so reliant on technology and users’ faith in its longevity. So is Bitcoin built to last?

Before we answer that question let’s look at a few definitions of terms from my New York Times best-selling book Flash Foresight. These terms are going to help you understand the future of digital currency, and separate what’s certain to happen from what’s merely likely to happen.

A Hard Trend is a trend that will happen and is based on measurable, tangible, and fully predictable facts, events, or objects. Hard Trends represent future facts that cannot be changed.

A Soft Trend, on the other hand, is a trend that might happen and is based on an assumption that looks valid in the present, and it may be likely to happen, but it is not a future fact. Soft Trends can be changed.

All Soft Trends are based on either a Hard Assumption, an assumption based upon good, hard data making it more likely to happen, or a Soft Assumption that is not grounded in research or data, but rather they are based on gut instinct, intuition, and guesswork, making them far less likely to happen.

Keeping those distinctions in mind, we can see that Bitcoin is a Soft Trend. Its future is at best uncertain. Bitcoin has not achieved widespread recognition. Many people use it not as money, but as a speculative venture. Bitcoin’s association with illegal online enterprises does further harm to the currency’s reputation. Like the French Franc or Italian Lira, Bitcoin could very well end up in the dustbin of discarded currencies.

But digital currencies, or crypto-currencies to be specific, are examples of a Hard Trend that isn’t going away. Here’s why:

Digital Currencies: A Hard Trend

Bitcoin’s survival is uncertain, but the technology driving it is here to stay. What digital currency like Bitcoin represents is a radically new idea in finance: a decentralized system for exchanging value. Bitcoin itself is a young technology, but, due to its open-source and copyright-free core program, it is constantly being improved and developed into other, more functional, and desirable currencies. Programmers around the world have already developed military-grade encryptions and new ways to trade, thus stabilizing the prices. The wrinkles with digital currencies are being smoothed out.

Digital currencies exist as mere entries in an accounting system. That system acts as a transparent public ledger that records transactions among “addresses.” Owning digital currency isn’t analogous to having paper money in your pocket. Instead, it means a personal claim to an address, with your own password, and the right to do with it as you see fit. The ingenious system behind digital currencies will increasingly disrupt traditional models and global currencies.

What I’m saying is that, whether it happens with Bitcoins, Digital Dollars, or Digital Euros, digital currency will play an important role in the digital transformation ahead.

The Future of Currency: Digital Payments

What is a future where we all use digital currency going to look like? Imagine you want new shoes, and your favorite shoe store only accepts some form of digital currency. If you don’t already possess digital currency, you purchase some from an online exchange and assign it to your “wallet” (an online account).

When it’s time to pay, you open your smartphone app, possibly with your smart watch, which uses your biometrics as a password to unlock an address. The currency network is then publicly informed that you’ve transferred $100 worth of digital currency to the store. All of this happens in a matter of milliseconds. There are almost no fees and no personal information was divulged. Compare this to the three days or so that a debit or credit card transaction usually takes, and the amount of sensitive personal information that must be exchanged in order for those more conventional kinds of transactions to happen. When you think about it this way, the benefits of upgrading to a digital currency are clear.

Other Virtual Currencies

Bitcoin introduced a decentralized currency. It’s the trendsetter. It’s the first, but not the last, and it almost certainly won’t be the best. Other digital currencies now exist, and the list is expanding. As of this moment, there are over 150 digital currencies available. Here’s a brief look at two other digital currencies already making waves:

Litecoin: Litecoin is the second-largest digital currency in the world. Created by former Google engineer Charlie Lee, it was launched in 2011. It too is open-sourced and decentralized.

Darkcoin (DASH) (Editor’s note: As several readers have noted, the Darkcoin (currency ticker: DRK) project has recently renamed and re-branded their service to the name Dash (currency ticker: DASH).) : As the name suggests, Darkcoin is a much more secretive version of Bitcoin. While Bitcoins are already anonymous, thereis still a record of transactions recorded in a ledger. That ledger can reveal a lot of information. Darkcoin works on a decentralized mastercode network that makes transactions nearly untraceable. In the short time since its launch in January 2014 it has amassed a large and dedicated following.

In Conclusion

When we separate the issue of Bitcoin’s future from the future of decentralized digital currency at large, we get a clear example of the difference between Soft Trends and Hard Trends. Hopefully you can apply these tactics to gain foresight into the future of your own industry.

Think about it this way: there’s a general thought in the air right now (a Soft Assumption) that Bitcoin might be going places, but there’s very little hard data to support that thought. It’s just an opinion, a hunch. This means that Bitcoin’s influence is a Soft Trend. Following that risk involves more risk because it’s based on a Soft Assumption rather than a Hard Assumption.

Meanwhile, there’s incontrovertible evidence that the tech driving digital currencies will continue to evolve and proliferate. Decentralized digital currencies are going to become a part of the landscape of our economy and everyday life. This means that the ongoing development of decentralized digital currency is a Hard Trend.

It’s important to know how to make this distinction in your field. What’s the emergent technology that everyone says is “the big new thing”? Is it really all it’s cracked up to be? Or is it just the first iteration of a larger phenomenon?

When you’re able to distinguish between the Soft Trends that are grabbing everyone’s immediate attention and the underlying Hard Trends that are the real engines of change, you’ll be able to make the moves that keep you ahead of the game. You’ll be anticipating change instead of reacting to it, and that’s what it takes to succeed.

Daniel Burrus is an American futurist, business advisor and author. He recently presented at the Design Futures Council’s Leadership Summit on Innovation in La Jolla, CA.