Economy and Finance
84 Cryptocurrency’s
Sam Mensforth and Abigail Caveness
Introduction
“A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.” (FrankenFeild 2021). In other words, cryptocurrency is an alternative currency transferred through the internet not represented by a physical bill or coin. Today, over 23,000 individual cryptocurrencies are being traded on the market. Cryptocurrencies aim to remove power from large organizations like the government and private companies. “Today we live in a world of pure discretionary government fiat monies” (Dorn, 2017). Crypto aims to replace fiat currency, or currency not backed by the physical value of the materials used but rather assigned by a powerful group. The largest and most well-known cryptocurrency is Bitcoin. The price of any cryptocurrency often fluctuates and is very volatile. In the past year, the price of one Bitcoin has been in the range of $28,000 to $73,000, generally trending upward. As technology advances and becomes accessible to more people, cryptocurrency’s importance continues to grow and will eventually become an integral part of our economy.
Connection to STS
Cryptocurrency has already made significant waves in society, disrupting traditional financial systems and sparking debates on the future of money. Its decentralized nature challenges the conventional banking model, offering individuals greater control over their finances and reducing reliance on intermediaries. Moreover, cryptocurrency has facilitated financial inclusion, enabling millions previously excluded worldwide access to banking services. However, its impact extends beyond finance, influencing technological innovation and exploring blockchain technology for other applications. “Blockchain is a distributed database that is shared across a network of computers. Once a record has been added to the chain, it is very difficult to change. To ensure all the copies of the database are the same, the network makes constant checks. Blockchains have been used to underpin cyber-currencies like bitcoin, but many other possible uses are emerging” (Pehcevski, 2020). The innovations in blockchain technology can be applied to other industries, such as the medical industry, as a safe way to store private information. As cryptocurrencies evolve, their societal impact is poised to deepen, potentially reshaping economic structures, governance models, and even the concept of value itself. However, challenges remain, including regulatory concerns, environmental impacts of mining, and the need for more significant security measures to mitigate risks such as fraud and hacking. Thus, while cryptocurrency holds immense promise, its full societal impact will depend on how society addresses these challenges and harnesses its potential.
History
“The idea behind Bitcoin was introduced to the world on Oct. 31, 2008, at the depth of the financial crisis by a pseudonymous person called Satoshi Nakamoto” (Pinkerton, 2024). Bitcoin’s original creator adopted an alias to remain anonymous. At first, the value of a bitcoin was stagnant, remaining under one thousand US dollars for the first six to eight years. During this period, Bitcoin was used as a gag gift or a placeholder that people short on cash would give to someone they owed money to show they were good for it. Unaware of its financial potential, early traders were optimistic yet realistic about the value of the new currency. In these early stages of Bitcoin, many alternative cryptocurrencies, or altcoins, were created to try and improve the technology used by Bitcoin. Most altcoins never gained traction and are currently valued at a fraction of a US dollar. In 2016, the value of Bitcoin began its first steady climb. Starting the year at around four hundred USD and entering 2017 at nine hundred USD. This trend continued into 2018 when the value of a single bitcoin peaked at nineteen thousand USD. At this point, Bitcoin amassed a stronger following of cryptocurrency optimists who were using the cryptocurrency not only to store their cash but also to invest and potentially make more money from holding an asset that was appreciating in value. During this initial growth period, alternative cryptocurrencies, such as Ethereum, launched and began to be used for trading and investing. Still, in the early stages of its life, people began to take trading and investing in cryptocurrencies seriously. Platforms such as Coinbase and Robinhood became known as entry-level platforms for all things cryptocurrency. This was the beginning of the modern era of cryptocurrency trading and investing. Investors dumped money into Bitcoin and Ethereum as their values skyrocketed, specialized computers were developed for mining cryptocurrencies, and large corporations started buying large quantities of cryptocurrencies to jump on board the potential value in the online currencies.
Controversy
Bitcoin and other cryptocurrencies have ignited controversy since their inception in the mid-2000s. Bitcoin is either hailed as a revolutionary force that will catalyze positive global change or derided as a divisive influence that threatens national currencies. In 2021, “the People’s Bank of China and the National Development and Reform Commission outlawed cryptocurrency mining and declared all cryptocurrency transactions illegal.” (Rapoza, 2021). As a growing technology, Bitcoin impacts future technological developments and exerts a profound and immediate influence on society, as exemplified by events in China, where regulatory measures have disrupted governmental market dynamics and marginalized voices within the crypto sphere. Cryptocurrencies are facing another controversial issue in the form of power consumption and climate change. Mining cryptocurrencies is extremely complex due to the advanced blockchain security, causing the mining process to require high computing power. “The process needs a massive amount of hash rate (computing power) and consequently makes the blockchain difficult from tampering (Li, 2019, p. 160-168)”. While mining computers are powerful, the process is still slow, and fractions of cryptocurrencies are being developed by a machine that requires considerable electric power. The slow process of mining, coupled with the skyrocketing prices of cryptocurrencies, caused wealthy crypto miners to use multiple mining machines at a time. Miners own warehouses and fill them with specialized mining computers that are both extremely powerful and energy-consuming. This trend caused environmentalists to question the ethics behind mining cryptocurrencies. Recent studies estimate that each $1 in BTC market value created between $0.16 and $0.82 in global climate damage (Jones, 2022). Mining cryptocurrencies on a large scale puts a large strain on the already challenging global climate crisis. Both of these topics demonstrate that as cryptocurrency matures and has more influence on society, regulatory laws must be made to limit the possible negative impacts.
Future
Cryptocurrencies are heralding a new era in the market, potentially benefiting society, provided equal access is ensured. The future trajectory of cryptocurrencies remains uncertain, characterized by volatility and regulatory ambiguity. Despite expectations of price declines following regulatory interventions, instances like Bitcoin’s price surge after China’s ban display the complexity of market dynamics (Rapoza, 2021). Economists grapple with forecasting the future of crypto, oscillating between optimism and caution. The average investor has changed from a tech-savvy hobbyist to a large corporation, taking advantage of the rapid growth of cryptocurrencies. Companies are pumping millions of dollars into Bitcoin and other cryptocurrencies, allowing sales and transactions to be fostered completely within the crypto world. Entities that hold large amounts of cryptocurrencies communicate and coordinate buying and selling based on news or economic trends. This scares some cryptocurrency traders as wealthy holders moving behind the scenes put the free market advertised by cryptocurrencies in jeopardy. The market’s volatility necessitates constant vigilance, precluding accurate predictions of Bitcoin’s trajectory for the foreseeable future. One of the main sources of uncertainty comes from cryptocurrencies adopting exchange trading funds or ETFs. This allows users to invest in cryptocurrencies without going through the complicated process of owning them in a wallet. “Simultaneously, cryptocurrencies have exceedingly high probabilities of exceptional negative and positive daily returns; henceforward, a scenario analysis as disclosed by crypto ETF fund managers explained above should be adopted on mainstream financial reporting platforms rather than just limiting to metrics derived from traditional asset pricing models” (Singh, 2022). Experts acknowledge the increased accessibility for ETF trading options but highlight the possible negative outcomes of making crypto trading more accessible. As the world continues to digitalize, cryptocurrency is likely to play a large role in future economic movements.
Conclusion
The perception of cryptocurrencies is polarized, eliciting enthusiasm from proponents and skepticism from detractors. Regardless of one’s stance, cryptocurrencies have significant influence and are poised to profoundly shape our world. In navigating this landscape, informed decision-making is paramount. Research thoroughly before engaging in crypto transactions to mitigate risks and maximize opportunities for informed participation.
AI Acknowledgement
I acknowledge the use of ChatGpt V3.5 https://chat.openai.com/ to edit the chapter and fix grammatical issues as well as reword areas for more clarity. The prompts used include
- Can you take an already written block of text and make it sound more professional?
- this is good work but can you leave the quoted points as they are in the original because they are direct quotes
- This is really good but can you simplify some of the language, use less formal words but still make it read well and professional. Also please continue to leave the text in brackets alone
. The output from these prompts was used to speed up the editing process, help generate new ideas, and supplement the content that was being added to the chapter.
References
Dorn, J. A., & Selgin, G. (2017). Monetary alternatives: Rethinking government fiat money. Cato Institute.
Frankenfield, Jake. “What Is Cryptocurrency?” Investopedia, Investopedia, 7 Dec. 2021, https://www.investopedia.com/terms/c/cryptocurrency.asp.
Jones, B. A., Goodkind, A. L., & Berrens, R. P. (2022). Economic estimation of bitcoin mining’s climate damages demonstrates closer resemblance to digital crude than Digital Gold. Scientific Reports, 12(1). https://doi.org/10.1038/s41598-022-18686-8
Li, J., Li, N., Peng, J., Cui, H., & Wu, Z. (2019). Energy consumption of cryptocurrency mining: A study of electricity consumption in mining cryptocurrencies. Energy, 168, 160–168. https://doi.org/10.1016/j.energy.2018.11.046
Pehcevski, J. (2020). Blockchain technologies and crypto-currencies. Arcler Press.
Pinkerton, J. (2024). The history of Bitcoin, the first cryptocurrency | cryptocurrency | U.S. news. US News. https://money.usnews.com/investing/articles/the-history-of-bitcoin
Rapoza, Kenneth. “China ‘Banned’ Crypto. Can the SEC Try Doing the Same?” Forbes, Forbes Magazine, 12 Oct. 2021, https://www.forbes.com/sites/kenrapoza/2021/10/11/china-banned-crypto-can-the-sec-try-doing-the-same/?sh=3c956dab455c.
Simplilearn. (2021, June 29). Cryptocurrency in 5 minutes | Cryptocurrency explained | what is cryptocurrency? | Simplilearn. YouTube. https://www.youtube.com/watch?v=1YyAzVmP9xQ
Singh, P. (2022). Is the financial market ready for cryptocurrency etfs? – A critical evaluation. The Journal of Risk Finance, 23(4), 456–460. https://doi.org/10.1108/jrf-08-2022-241