Cryptocurrencies: Our Toxic Relationship

Finance and economics revolve around the fundamentals of an exchange system, either with commodities or forms of money. As we have accepted systems such as paper currency and e-transactions as a society, it is undeniable that these systems are essential to our economy. Still, no functioning systems are flawless and without room for improvement. End consumers can feel the day-to-day restraints of these systems, an example of which can be our unreliable and excessively complex Interac e-transfer system, which most Canadians rely on for private transactions. Many are forced to rely on third-party applications without appropriate encryption for such money transfers, adding an unnecessary layer of risk and insecurity. Signs of these constraints with conventional currencies affecting day-to-day civilian life exhibit some of the issues with traditional e-commerce systems suffering from insecurity, inefficiency, and unreliability.

While turnaround times or encryption of transactions may not mean much to the typical customer, the drawbacks of traditional currencies are felt by larger corporations, where two business days can mean the difference between profit and bankruptcy. Cryptocurrencies and decentralized finance were introduced as a more efficient, secure, and hassle-free alternative for traditional fiat currencies. However, this ideal ideology of decentralized finance remains a fever dream, too volatile and underdeveloped for public and civilian usage. Before we step into the controversial topic of cryptocurrencies and investments, we must understand a concept called blockchains. Blockchains are the basis of any cryptocurrency or decentralized platform; essentially, when talking about the benefits and disadvantages of crypto, we allude to the technology that drives it—blockchains.

Blockchains

Blockchains, the foundations of decentralized currencies, are a new virtual data-storing and transferring system based on decentralized networks of connected members’ computers that process data and calculations. With every transaction, a new “block” is created containing a set of transactions, and these “blocks” are then verified by encryption and decryption by every member of the network. This process makes it almost impossible to forge transaction histories and allows for quick transaction times made possible by the sheer scale of these blockchains. Any ordinary personal computer can become a part of a blockchain, doing calculations with its processors. As calculations are completed, the blockchain network members are rewarded with digital tokens or cryptocurrencies. This makes for a brand new, extraordinarily lucrative, but high-risk cryptocurrency mining industry, which we will touch on later. What separates blockchains from traditional servers and their risk of downtime is blockchain’s decentralized nature, without any particular entity taking full responsibility or complete control of data processing. Blockchain networks can maintain almost unlimited uptime. Every time one point of the blockchain is breached, there are thousands, if not millions, of supplementary members who can fill in and keep the blockchain functioning. This system eliminates the possibility of a single point of failure, such as a power outage, cyber-attack, or natural disaster, setting off an avalanche of crises, similar to that of the 2008 global economic recession.

The critical part about blockchains is that it is not a system that is uniquely available for cryptocurrencies exchanges but is a technology that could be employed in various sectors, including the medical field, business, law, and essentially every existing industry that employs cloud-computing and server operations. Its versatility allows for employment and function in a magnitude of environments, improving the efficiency and security of existing structures. The issue here lies in the word “could.”

It is undeniable that blockchain technology is a direction that society will be aiming toward in the future. However, it’s crucial to realize that blockchains are still years from becoming mature enough for mainstream use by governments, fiat currencies, and sectors vital to the functioning of our society. No business is willing to make sacrifices, time, and finances to switch to blockchain technology without adequate testing of the technology and scalability. Without a good reason or urge for this shift, larger corporations are unwilling to make the initial leap to the experimental phase, given that the enormous investments do not make economic sense for profits and return on investment. As long as there aren’t more prominent players in the blockchain environment, its development and advancement will be stagnant, leaving us uncertain of its full capabilities and apprehensive of its potential risks.

Cryptocurrency

Continuing with this concept of inconsistency and volatility, we can quickly see that these drawbacks of early-stage blockchains are a trend consistent with cryptocurrencies, systems which rely on blockchains to function. The truth is that crypto and blockchain technology is essentially a large, over-publicized experiment. Like being the first adopter of an experimental vaccine, cryptos profitability and return-on-investment in today’s market is a gamble, being highly speculative, volatile, and not making much sense by tilting the conventional supply-and-demand model, which in traditional markets drives values of investments higher. All this is due to the one most significant issue with this early blockchain experiment—utility. Many may believe that crypto investments seem like stocks and bonds but, in practice, they contain much more risk and are, on average, less informed.

When investing in the stock market, an informed investor may analyze income statements, balance sheets and research industry catalysts, allowing them to decide on investments. The issue with crypto is that an investor’s only pieces of information are its transaction settlement times and its total circulation. In contrast with precious metals and other commodities that can retain their value over scarcity, crypto isn’t precisely scarce either. Everyone who has access to a computer can “mine” cryptocurrencies, allowing for a greater flow of such coins into the virtual environment. Supply and demand is a model that every investment follows, and it appears that crypto does too. For the value of an asset to increase, its demand must be greater than its supply, as is the case with stocks of rapidly growing companies or precious gems and metals of limited quantity. With more “commercial” miners entering the crypto field, its supply is exponential. Equally, massive demand is required to allow for value growth or even stabilize the market.

As more coins are mined, and market demand is a significant variable, it is difficult to predict its market direction. Its value is still, to this day, highly unpredictable, with Bitcoin nearly doubling its worth from August 2021 to November and dropping almost 50% again in January 2022. These price fluctuations are rare, even unforeseen in other currencies and markets, giving us an insight into the fragility of the crypto market. 

Blockchain technology’s benefits are already being exhibited in the virtual world through cryptocurrencies and virtual tokens. Its effortless cross-border transfers and industry-leading security are tilting the scales and showing us how this new financial architecture can help create a closer-knit and more connected planet in the future. While it never hurts to venture and explore new fields as a society or diversify investment portfolios, many may want to take a step back and analyze the potential risks and the nature of the investment. It is undeniable that blockchains are the path to the future, potentially innovating and reshaping many industries like law and pharmaceuticals. The cryptocurrency market as of today, however, may very well still be an immature and risk-filled environment, which poses significant risks for the civilian investor.

“Uncertainty and expectation are the joys of life. Security is an insipid thing.” -William Cowper