Decrypting Cryptocurrency

Authors: Sean & Shrey Region Head: Saumya Rajawat

Editor: Harsh Didwania

"The price of Bitcoin will go to $238,855. I measured the distance in miles between the earth and moon, and just converted it." - A Crypto Enthusiast’s tweet online

There has been much debate over cryptocurrencies, ranging from arguments over its market value, usefulness and practicality in everyday life, its environmental impact, and even legal implications. There’s even talk of it completely replacing traditional financial institutions such as central banks. But what is it exactly? In plain english, it is a digital form of money composed of and secured by a cryptographic system (a form of computer code) (Investopedia, 2021). There is no central authority governing it and, depending on the type of cryptocurrency, its supply is finite. Knowing all that begs the question, why bother with crypto when we already have fiat? And what are the drawbacks of this swanky new form of currency? This article will discuss the biggest arguments for, and against cryptocurrency’s relevance in the future.

Cryptocurrency is ‘free for all’ to use, not subject to government intervention and institutional barriers and middlemen. It allows for massive sums of ‘money’ to shift around from one account to another in a relatively short amount of time, while providing anonymity, security, and low fees (Investopedia, 2021). To compare, a transfer of about USD1000 via a local bank could set you back about USD25, while the largest recorded transfer of Bitcoin at USD1.1 Billion cost a mere 68 cents (Chandler, 2020). The independence and competitive nature of the blockchain systems that most cryptocurrencies operate on allows for these perks, and the highly complex and modern encryption attached to the whole process enhances said security. These security features however are not perfect, and a simple Google search will reveal the numerous heists conducted on the digital ‘wallets’ used to hold cryptocurrencies such as Ethereum and Bitcoin (Vigna, 2020). Billions of dollars to date, lost on the very same exchanges and wallets that tout their sophistication and security, not to mention the elaborate ‘exit scams’ conducted under the shroud of new ‘coins’ going public. This ‘revolutionary’ financial tool, cryptocurrency, seems to be plagued by very ‘traditional’ problems, but with much less precedent to handle it.

Cryptocurrencies in a way transfer power to the people. Modern money is a government regulated, issued, and backed form of value. Trouble with that is that people’s wages could overnight lose buying power given some political instability or rash decision. Cryptocurrencies may solve that, given its value is derived from the people themselves backing it and accepting it as a store of value and form of payment, essentially diversifying the roots of its perceived value and legitimacy. In a way, it ‘democratises’ finance, given the way it derives value and the way it’s produced. This however, is deceptively optimistic.

With no central authority declaring its value, volatility becomes synonymous with it. In fact, the arguments for buying crypto seem to have a common thread. ‘Buy and hold. It’ll go up in value.’. If one is supposed to buy it and ‘HODL’ it (as the crypto enthusiasts like to say), it is a difficult position to ‘HODL’ the claim that it is used per se as currency. These complicating factors spotlight the highly speculative nature of the crypto market, with values halving and doubling in a month. The high volatility of it almost single-handedly refutes the arguments for it, it’s supposed function as a store of value and currency. Far from transferring power to the people, it becomes subject to the often highly volatile and irrational movements in the market exchanges. If that is what ‘power to the people’ means, then there really is no value in it.

Amongst those concerns, we also have the fact that it is energy-hungry. The ‘mining’ of these digital tokens require massive computing power, translating into massive energy consumption. The cost of production is so significant, that mining facilities (warehouses filled with processors) have reached countries far removed from the hubs of ‘traditional finance’, such as Inner Mongolia and Siberia, for their low temperatures and low energy costs. In an age of environmental awareness and concern, the relevance and desirability of such an energy-guzzling ‘currency’ is questionable. It's been calculated that Bitcoin production alone uses as much energy as the nation of Argentina or Greece, consuming an estimated 121 terawatt hours per year to produce (Criddle, 2021). Paper currency takes 5 (McCook, 2014). For something modern and revolutionary, it seems to be very old-school energy inefficient.

The most damning argument of all against the value, use, and existence of cryptocurrency is that it simply does not function like a currency. ‘Conventional’ money serves three main purposes - a store of value, unit of account, and medium of exchange. As a ‘store of value’ we see much of the hype surrounding it because of the belief that certain ‘coins’ will explode in value. The massive swings in valuations are testament that people treat is more as a speculative instrument than a haven of value. A medium of exchange: only a mere fraction of crypto holders actually transact with the ‘currency’ they hold, and an even smaller fraction of businesses accept it. Perhaps as a unit of account does crypto even have anything similar to conventional fiat currency. This once again begs the question, if it doesn't behave like money, if it isn't backed by any underlying assets or commodity, if people don't even treat it as the currency they say will render central banks obsolete, what then is it? What future can it hold if its present status is so tenuous?

Who knows, the crypto-enthusiasts may be right in the end. Central banks will fall, governments will lose their monopoly on money, and the power of finance goes back to the hands of the people. Till it solves its own issues and stabilises, till its acceptance by businesses becomes widespread, and till [people treat it as actual ‘currency’ instead of another speculative toy, that would all just be a ‘crypto bro’s’ wet dream. The future of cryptocurrency lies in how its believers treat it. For now, given the astronomical projections of future prices, a future for crypto either goes ‘to the moon’ or ends up as a moonshot.

References

1. Cryptocurrency. (2021). Investopedia. https://www.investopedia.com/terms/c/cryptocurrency.asp ‌

2. What Are the Advantages of Paying With Bitcoin? (2021). Investopedia. https://www.investopedia.com/ask/answers/100314/what-are-advantages-paying-bitcoin.asp ‌

3. Chandler, S. (2020, September 16). Here Are The 5 Biggest Bitcoin Transactions In History. CryptoVantage; CryptoVantage. https://www.cryptovantage.com/news/here-are-the-5-biggest-bitcoin-transactions-in-history/ ‌

4. Vigna, P., & Eun-Young Jeong. (2020, February 8). Cryptocurrency Scams Took in More Than $4 Billion in 2019. WSJ; The Wall Street Journal. https://www.wsj.com/articles/cryptocurrency-scams-took-in-more-than-4-billion-in-2019-11581184800 ‌

5. Criddle, C. (2021, February 10). Bitcoin consumes “more electricity than Argentina.” BBC News; BBC News. https://www.bbc.com/news/technology-56012952 ‌

6. Hass McCook. (2014, July 5). Under the Microscope: The Real Costs of a Dollar. CoinDesk; CoinDesk. https://www.coindesk.com/microscope-real-costs-dollar ‌