Cryptocurrency: exposing the true nature of the blockchain
The rapid growth of Bitcoin and other cryptocurrencies over the past few years has sparked interest in the financial community. They find frequent mention on news channels, albeit a large quantity of the general public remains unaware of what it actually is. This article aims to shed light on the true benefits and costs of the blockchain, and what it means for the global economy.
Cryptocurrency is a digital currency that is not regulated by any central authority and is instead, recorded on a network of computers. Its decentralized nature is the main reason for its popularity, allowing miners and developers to control the price of the currency, as opposed to traditional fiat money that is regulated by the government. With countries like El Salvador legalizing Bitcoin as a method of payment, there is growing interest in cryptocurrency being used to send back remittances, since there is often little to no transaction fee.
Recently, the use of cryptocurrency has taken a political turn, with China being the first country to ban its use. The main justification for these actions comes from the fact that since it is not overseen by a central authority, Bitcoin and other currencies have become a hotbed for criminal transactions. Bitcoin has allowed illicit vendors, including terrorists, to conduct transactions from anywhere in the world, without fear of being tracked.
Another issue surrounding crypto has been its security conventions. A benefit of fiat money that is regulated by central authorities are the safety procedures and regulations that need to be followed before a transaction is made. When it comes to crypto, these conventions barely exist, due to its decentralized nature.
However, the least mentioned concern with cryptocurrency comes from its energy consumption. To fully grasp this, it is important first to understand what crypto mining is. Mining is the primary means for a new unit of cryptocurrency to enter the market. It is also the way transactions are appended to the blockchain. When you mine bitcoin, you are essentially trying to guess a complex mathematical code. The miner that guesses accurately, gets bitcoins in return, while the others in the blockchain verify if the code has been guessed. After this, the blockchain is updated and the bitcoins are ready to be used.
The crux of the problem here lies in the fact that mining is an extremely energy-intensive process. The codes that need to be broken for a bitcoin to enter the market, require sizable computational power. To compete with others, miners are continuously upgrading to more strenuous technologies and seeking out the cheapest supply of electricity, which generally are coal power plants. This doesn’t align with the current climate-change narrative, meaning that unless these currencies adapt towards energy-friendly methods, interest in them could fall. Although certain currencies are experimenting with more efficient mining technologies, the premier method of mining crypto remains energy intensive.
Amidst crypto’s rising popularity, users continue to be cautious with fears of new regulations and bans by governments. They continue to treat as assets instead of a viable medium of exchange, giving them a volatile nature. Will they ever replace their non-digital counterparts and enjoy widespread adoption? Only time will tell.
