Cryptocurrency: the next financial crisis? (Part 2)
An analysis of the shortcomings of cryptocurrency and an assesment on its viability as a sustainable currency.
Cryptocurrency is a digital form of money that is becoming more popular as it moves into the foreground of discussion in the financial sector. Whilst Cryptocurrency offers potentially lucrative returns, the capacity for losses is large. We’ve taken a further look at the dangers that cryptocurrency poses, whilst also considering the potential benefits of proliferating digital currencies.
As cryptocurrency becomes more popular, it is becoming subject to increasing levels of regulation from governments across the world. Greater taxes and tighter regulation both devalues the digital currencies and affects versatility, thus devaluing it further. For example, China recently imposed sanctions on the mining and trading of Bitcoin, which caused its value to drop significantly. As action against cryptocurrencies becomes more prevalent, the value will continue to be affected adversely and their use as an untraceable currency will be diminished.
So, ‘has the cryptocurrency bubble already burst?’ Several issues recently have considerably impacted the perception of cryptocurrencies, as well as harming their long-term sustainability. The volatility of these currencies makes them sensitive to global activity, especially when its capacity to be used is affected by governments and businesses alike. The best example of this was Tesla’s endorsement, then opposition to, Bitcoin in 2021. Elon Musk, founder and CEO of automotive company Tesla, started advocating Bitcoin on social media in January, and by February Tesla had announced that it would start accepting the digital currency as payment for their vehicles. However, this was not to last as in May of the same year Musk negatively reviewed the currency by no longer accepting Bitcoin as a payment, due to the devastatingly high environmental cost of mining the currency. This sent the value of Bitcoin into freefall, which could be a demonstration of the first of many price crashes that could force investors away.
This links to the second crisis situation of crypto: the environmental cost. Bitcoin ‘mining’ is the process of creating new Bitcoin by solving computation puzzles, which keep a ledger of the transactions on which the currency is based. Initially, it was not an environmentally harmful technology; all you needed was a computer to get started. Now that Bitcoin is such a desirable asset, ‘miners’ have improved the speed of the process by linking together masses of computers, so that they work in unison and mine Bitcoin at a rate not previously possible. However, the energy it requires to power this type of mining is a crisis situation in itself – it was calculated that Holland uses as much energy per year as is required to power the global mining of Bitcoin. This also has bad implications for its continuity. Due to the crippling environmental cost of mining these cryptocurrencies, many corporations and Governments are unwilling to back them publicly, which further adds to the uncertainty surrounding them, and their volatility accordingly.
On the other hand, there is a plausible future where cryptocurrency has not crashed and burned like all the experts say. For example, Bitcoin’s relative is relatively easy to mine means the price is affected often by its supply. However, when ‘Nakamoto’ created the digital currency, they limited the supply to 21 million coins. They did this to manage inflation and create an electronic currency that serves as deflationary hard money, meaning that the value remains the same whilst its utility increases. This should impose greater control on the value of Bitcoin and reduce the risk of massive marginal gains and losses, which can be dangerous for investors. Developers are also finding real-world uses for cryptocurrency which will increase the interest of states and corporations, such as the ‘Dfinity Project’ that is aiming to reduce the cost of cloud services for business by creating a publicly available blockchain. This will essentially employ the technology which is used to protect and log Bitcoin transactions by applying it to protect and support business activity. Moreover, developers are also looking to move cryptocurrency away from environmentally degrading processes and into a greener, more sustainable future. Bitcoin itself is looking to dispose of the free-for-all mining process that it currently employs and turn it into a ‘proof of stake’ system, rather than a ‘proof of work’. This means that to mine greater amounts of Bitcoin you must first prove that you have a large stake in the currency. This creates higher barriers to entry, thus reducing the amount of people mining Bitcoin and decreasing the overall environmental impact.
In conclusion, the greatest issue with cryptocurrency is the uncertainty and speculation surrounding them. The volatility of their prices jeopardises their future as businesses and governments are afraid to take the risk by proliferating them as standard currencies. Furthermore, despite the work being done to improve this, the environmental cost means they are not sustainable in a globalised world that is moving increasingly towards ‘green’ alternatives, especially when social media is quick to call out degrading practices. For now, cryptocurrency is increasing in size, but the bigger it gets the more its drawbacks will come under scrutiny and until it produces real solutions for them it will never be accepted as a standard mode of currency.
Even when aware of the risks and rewards of trading in cryptocurrencies, it can still be very difficult to assess the sensibility of an investment. MA-Change offers expert advice to its clients from our Professional Partners. Part of the downside of trading in cryptocurrency is the size of the risk due to the uncertainty. However, our Professional Partners will offer sound advice in the right time so the only thing our members our certain of is their decision to subscribe to the platform.