Cryptocurrencies are here to stay. As we find ourselves in the digital transformation, accelerated by the COVID-19 pandemic, the topic of cryptocurrencies no longer should focus on their stereotypes, or if they are a worthwhile investment but rather on how we can educate and integrate cryptocurrencies into our everyday lives.
Undoubtedly, cryptocurrency has grown in popularity and awareness, as most have at least heard of bitcoin. Yet, many of us are still do not fully understand the mechanisms behind cryptocurrencies such as blockchain or how they can help build a potentially more democratic decentralized-finance (DeFi) system.
Without this collective knowledge, cryptocurrencies cannot reach their full potential – analytics show that if bitcoin were to gain scale and if it were to capture 15% of the global currency market, the total price per bitcoin would be about USD 514,000.
Blockchain is the technology behind cryptocurrencies such as Bitcoin. It seems complicated however, its core concept is quite simple. It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together. As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological order.
Like a database, Bitcoin needs a collection of computers to store its blockchain. For Bitcoin, this blockchain is just a specific type of database that stores every Bitcoin transaction ever made. In Bitcoin’s case, and unlike most databases, these computers are not all under one roof, and each computer or group of computers is operated by a unique individual or group of individuals.
Blockchain is a bit like Horcruxes in the Harry Potter series, it is decentralized, and the database cannot be hacked or destroyed as it is scattered in equally important pieces. If a hacker attempts to hijack a block, other computers will notice this anomaly and highlight where the attack occurred while blocking it. However, unlike Horcruxes, blockchain is a huge network spanning thousands of thousands of blocks. The goal of blockchain is to allow digital information to be recorded and distributed, but not edited.
A common question that is asked about cryptocurrency is how it has value. The answer is that it is based on the same mechanism as any currency or commodity, the only difference is that currencies are classified as fiat whereas cryptocurrencies are decentralized and independent. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that parties will accept that currency.
Successful currencies have six attributes, these are: scarcity (bitcoin is to be capped at 21 million – it is a finite resource), divisibility, transportability, durability, counterfeitability and utility. Bitcoin holds up very well when it comes to these six characteristics, although its biggest issue is its status as a unit of exchange as most businesses have yet to accept it as payment.
Decentralized-finance (DeFi) can pave the way towards a more democratic financial system. The DeFi movement is based on the disrupting perspective that existing services and financial products can be recreated using decentralized architecture rather than the control of centralized companies and governments. The products and service use blockchain and cryptocurrencies instead.
Consequently, anyone with internet connection can have access to DeFi products and a global, open peer-to-peer alternative to the current financial system.
DeFi products have the potential to enable people to gain access to a wider range of financial services, irrespective of their country of origin, their financial status and other traditional, limiting parameters. DeFi products require the use of cryptocurrencies which is a further reason to why mass understanding of crypto and blockchain is mandatory.
However, decentralisation is not without risk – especially at such an early stage in the product life cycle. Despite blockchain technology being secure, quality of code, governance and security is essential.
Of course, not every cryptocurrency is a worthwhile investment and as with every decision, research should be at its core when choosing where to invest. Dogecoin is a good example of this. There are many cryptocurrencies that are circling the crypto market, many never gain value, or some very temporarily gain only to fall again to their starting point. Dogecoin was originally created as a joke.
Yet, nonetheless, in January 2021, it rose 800% in 24 hours from the attention of Reddit users and encouraged by Elon Musk – this gave birth to ‘Dogecoin millionaires’ as stories of how holders had the chance to pay off mortgages and debt emerged.
However, it is unlikely that this will be repeated. Dogecoin, unlike bitcoin, is not a finite resource, with Dogecoin tokens being indefinitely produced – therefore, it can inflate endlessly. Bitcoin and Ethereum are the two largest and most stable blockchain systems.
Dogecoin is further an example of the potentially drastic risks that are associated with cryptocurrencies. Despite cryptocurrencies and blockchain paving a more democratic system, they are not immune to the whims of highly influential individuals.
Elon Musk has developed a ‘hobby’ to build up and break the value of many cryptocurrencies via Twitter as even Bitcoin is not untouchable by such actions. It is the responsibility of such individuals to accept the power they hold over people’s livelihood. However, as blockchain ages it will likely become more immune and less volatile.
However, Elon Musk was right in one thing, cryptocurrencies and blockchain do, without a doubt, have an environmental problem. Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy, due to the computations needed for mining.
By the latest estimates, the bitcoin network uses as much energy in one year as the country of Argentina. 65% of bitcoin miners are located in China, a country that generates most of its energy from coal.
Thankfully, sustainable solutions can be found, and Market participants need to actively work together to realize a low-emissions future powered by clean, renewable energy. Last month, the Crypto Climate Accord (CCA) launched with over 40 supporters and the goal to enable all of the world’s blockchains to be powered by 100% renewables by 2025.
Cryptocurrency is the future. It is unlikely that cryptocurrency will completely replace fiat currencies however, the two can build a symbiotic relationship with cryptocurrency and DeFi providing more opportunities. We should work towards making the systems that govern it as transparent and understandable as possible to the general population and to educate investors (no matter how big or small) on how cryptocurrencies can diversify their portfolios and prove a valuable holding asset.