There has been perhaps no financial revolution in the 21st century more important than cryptocurrency. Despite being often misunderstood, cryptocurrencies are gaining popularity not just with techno-geeks, but with the general populace in general.
But what exactly is cryptocurrency, and why is it such a hot commodity?
Cryptocurrency is basically any digital asset that is designed to be a medium of exchange for goods and/or services. Basically, it’s virtual money. Cryptocurrency, like its namesake, uses extremely complex cryptography to govern all aspects of the currency, from securing transactions and creating new units of currency to verifying asset transfer.
Most, if not all, cryptocurrencies use a decentralized form of control, as opposed to the traditional money which uses centralized banking systems. This decentralization has been crucial to its success, with prices of cryptocurrency being dictated solely by users and not by any financial institutions.
To maintain order and to further democratize the cryptocurrency process, all users of a particular cryptocurrency system use some form of distributed ledger technology, with the most common being blockchain. Blockchains also function as the community’s financial transaction database. As of 2018, there are over 4,000 different types of cryptocurrency, with around 3 to 6 million unique users, most of whom use Bitcoin.
The first and perhaps well-known decentralized cryptocurrency is Bitcoin. First released as open-source software in 2009, it is now the largest and most valuable cryptocurrency in the market. Created by Satoshi Nakamoto, a pseudonym for a still unidentified person or group of people, Bitcoin has been the favorite cryptocurrency of the internet, with the fluctuation of its prices dictating the prices of other digital currencies.
Over the years, however, Bitcoin has been criticized for its use in illegal transactions such as in the purchase of drugs, weapons, sexual services, and sometimes even criminal activities. The extremely high energy consumption needed to “mine” Bitcoins has also been cited as being a major drawback of the currency.
Because of its complicated nature, unregulated activities, and volatile markets, several banks and regulatory agencies around the world urge investors to treat Bitcoin and other cryptocurrencies with extreme caution. Some governments, like South Korea, have even banned the use of cryptocurrencies, with shops and individuals facing severe fines and possible criminal charges should they be caught transacting with a cryptocurrency.
A Democratized Currency
One of the main draws of cryptocurrency is its completely decentralized, non-partisan, and completely community-curated nature. Satoshi Nakamoto, the mysterious and near-mythical founder/group of founders of Bitcoin, believes that, while trust is the main engine that drives conventional currencies, central banks have proven time and again that they cannot be trusted.
Early adopters of cryptocurrency joined so because many of them believed that it was the start of separating money and currency from state control. Because of this, many libertarians and anarchists were attracted to cryptocurrency, so much so that The Economist described cryptocurrency, Bitcoin specifically, as “”a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks”.
And it wasn’t entirely wrong; in a unified message directed at users, financial institutions, governments, and other political entities, various Bitcoin supporters declared Bitcoin as “…inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because bitcoin is fundamentally humanitarian”. The Bitcoin “declaration of independence”, as fans called it, quickly became the dominant ideology behind the management of the cryptocurrency. Indeed, since its inception, Bitcoin has tried to remove all form of governmental, even social, control of its value, relying instead on the power of the blockchain.
Since their inception, cryptocurrency has been viewed both with fear and admiration, with political pundits on both sides of the aisle seeing it as either a revolutionary piece of tech that encourages disruptive populism or a destructive and highly illegal practice that should be stopped at all costs.
Rise and Demise
Cryptocurrencies are notorious for the volatility of their rates, with some currencies experiencing a 10% rise or fall in a single day. Because of this, crypto analysts caution buyers that any prediction of future rates is based mostly on guesswork, although trend research does compliment it.
Despite the volatility of its market, and indeed the entire cryptocurrency market, Bitcoin enjoyed a very fast rise in value, reaching parity with the dollar just 2 years after its release. From 2009 to late 2018, the value of Bitcoin shot up a whopping 21,428,471%, from $0.07 in 2010 to an all-time high of $15,000 in January of 2018.
In late 2017, Bitcoin was on route to breach the $20,000 mark, finishing just $5,000 short of its goal. However, in a span of just a couple of weeks, Bitcoin lost nearly 1/4th of its value, and by mid-2018, the cryptocurrency was trading at around $10,000 per Bitcoin.
The reason for this volatility is simple: supply and demand. In classic economics, prices rise when demand is high and supply is low. During its inception, the Bitcoin founders decided to put a cap on the total amount of Bitcoins that can be mined so as to control the overall value. In this regard, only 21 million Bitcoins can be mined and circulated forever.
Adding to the scarcity is the difficulty in which a Bitcoin is mined. To control the flow of Bitcoin, the original programmer (or programmers) created an algorithm that increased in complexity for every Bitcoin that has been mined. Because of this, Bitcoin miners need increasingly massive amounts of computing power to mine a single Bitcoin, usually in the form of home-made supercomputers. A drawback of this is the amount of electricity required for the computers to run and to keep them cool, all of which drive up maintenance costs.
While these factors contributed to Bitcoin’s early rise in value, the political backlash towards cryptocurrency is one of the main reasons for its fall. From South Korea’s crackdown threat against cryptocurrencies and FCC’s issuance of shutdown orders on bitcoin miners to the European Commission’s attempts at strict regulation, cryptocurrency users are now extra wary of using their digital money in everyday situations.
While Bitcoin and other cryptocurrencies are accepted in some online shops and a few brick-and-mortar stores around the world, it did not get the widespread usage that crypto supporters wanted. A combination of government crackdowns and volatile prices made the use of cryptocurrencies inefficient, for now.
The future of Bitcoin, and cryptocurrencies in general, is just as volatile as its value. On one hand, governments and financial institutions are trying their best to stifle cryptocurrencies because it hinders their own operations, but on the other hand, more and more people are starting to rely on cryptocurrencies as an alternative to traditional money because of the latter’s capitalist-driven ideology.
The difficulty of predicting the value of cryptocurrencies also contributes to the uncertainty of its long-term future. However, as time goes on, I believe that more people will understand how the crypto market works. Indeed, isn’t it time that the value of our money is decided by the people who have earned it, rather than by some faceless banking corporation?
What do you think about cryptocurrency? Hit us up in the comments section!