The Rise of Cryptocurrencies

Is Crypto ready for the mainstream?

As we work primarily in the Fintech space, the ever-evolving subject of Cryptocurrency is one we are keeping an eye on. So here is our latest article that delves a little deeper and explores the possibilities and challenges of this complex currency.

Bitcoin has broken out of the shadows and is now mainstream news, with details of fortunes made and lost hitting the headlines. However, cryptocurrencies remain highly volatile and fuelled by speculators keen to make a fast buck, sensitive to market movements.  Still, with blue-chip businesses such as Microsoft, Starbucks and Amazon are accepting the currency, is it time we accepted that cryptocurrencies are here to stay?

Is crypto ready for the mainstream?

Bitcoin has become the byword for cryptocurrencies, but more than 6,000 out there are jostling for a position and competing for investment. The anonymity of cryptocurrencies makes them attractive to people wanting protection from regulators, who cannot monitor transactions. On the flip side, there is little protection from hackers  (or if you forget your password).

The biggest concern around crypto is trust. National currencies are typically supported by a central bank, such as the Bank of England, which provides surety. In contrast, cryptocurrencies such as Bitcoin are owned by those who hold the currency, a situation made possible through a distributed ledger system known as blockchain.

The Financial Times has created a simple explanation of how blockchain works and is a great place to start. In a nutshell, digital transactions are grouped into data blocks that are chained together and protected.

Each new transaction is added to the ledger, but the network must verify it before doing so. PWC describes blockchain as “a type of next-generation business process improvement software,” with the solution offering potential for application outside of the world of crypto. Blockchain will transform everything from energy to engineering.

Blockchain is a highly secure way to manage and record information, but the system is energy-intensive. So, in the end, it may not be a lack of security that holds back crypto, but its lack of sustainability.

Is crypto sustainable? 

New Bitcoins are created through a process known as mining. Computers must solve complicated puzzles using vast amounts of processing power to unlock every Bitcoin. A new Bitcoin is mined every 10 minutes, but the process won’t last forever, with the number of Bitcoins being limited to just 21 million.

So-called mining “rigs” must draw ever-increasing amounts of power as they’re asked to solve more complex puzzles. Across the world, mining rigs are completing quintillions of calculations every second and using vast amounts of energy to do so. The Bitcoin Electricity Consumption Index suggests that Bitcoin globally consumes around half as much electricity as the UK – and the figure is growing.

“The health and environmental costs of cryptocurrency mining are substantial; larger perhaps than most people realised,” said the University of Mexico’s Benjamin Jones. In a 2019 paper, Jones established that an equivalent amount of damage is done to the environment for every dollar earned (or created) through the mining process.

To solve increasing complex calculations, Bitcoin miners must use the latest high-performance hardware. Unfortunately, as complex calculations require greater processing power, mining rigs only last 18 months before being replaced. The result is an incredible amount of e-waste, with estimates suggesting that up to 11.5 kilotons of waste end up in landfills each year.

Mining Bitcoin and maintaining the ledger draw enormous amounts of power and create mountains of waste, hardly suggesting strong sustainability credentials. But, it’s still less than the carbon footprint and environmental impact of global banks.

Sustainable currency or a speculative bubble?

The biggest issue affecting cryptocurrencies isn’t sustainability; it’s stability. The emergence of cryptocurrencies is fuelling “talk of market instability, rising volatility, and bursting bubbles,” say researchers writing for the Royal Society. Without backing from nation-states, cryptocurrencies are investment vehicles for speculators, with rapid bubbles and bursts evident in its price index.

Previous performance can offer us a few lessons about future potential. In a currency as young as Bitcoin, there’s no “business as usual”. Every day brings new opportunities, with even the World Bank being forced to recognise cryptocurrencies but greater scrutiny from regulators, such as the FCA.

Investing in cryptocurrency is a risk and depends on how much you trust the currency and your wallet provider. Even if the currency itself is safe, hackers can – and have – found ways to deprive owners of their cash. Unfortunately, the existing protections in place to protect consumers don’t extend online.

But those are problems that can be solved. The interconnected global financial system is braced for climate-related shocks, and its stability is, academics argue, threatened by climate change. Could a global currency, free from nation-states, be a more sustainable solution?

There’s no consensus on crypto. In the Harvard Business Review, Marco Iansiti and Karim R. Lakhani suggest it will take “decades” for Bitcoin to become part of the world, but it’s likely to come much sooner. Elon Musk, a man who has done more to popularise Bitcoin and polarise opinion, is a passionate advocate (despite Tesla refusing to accept payment in Bitcoin), and it’s a brave person who bets against the world’s richest man.