Is the Crypto market destined to die, or is it, like any other asset market, self-regulating due to high levels of volatility? Recently we have seen how Bitcoin’s declines are becoming more acute than usual and that it’s lost 70% of its value in just one year.
Sure, we’ve read the news that a company with a large number of assets, Crypto FTX, is on the way to bankruptcy, but is it the only reason? Let’s take a deeper look in this article.
Bitcoin’s rise to power
The story of Bitcoin starts with a shadowy figure, or group of figures, named Satoshi Nakamoto. The mystery of where Nakamoto disappeared to and who he is still eludes the world; the location of Nakamoto’s untouched bitcoin wallet even more so. In the words of one particularly poetic Redditor, u/admiralCeres, ‘Satoshi’s laptop, which prior analysis shows was a Windows machine and probably less powerful than an i5, belongs in the Smithsonian.
Aside from the wallet which once held (or still holds) billions of dollars in bitcoin (in today’s price), the machine is a unique artifact in human history, being the machine that created the means from which billions of people gain true freedom.’
Mysteries aside, Bitcoin was officially released 13 years ago, on the 9th of January 2009. Prior to that, in October of 2008, Satoshi Nakamoto published a whitepaper entitled ‘“Bitcoin: A Peer-to-Peer Electronic Cash System.’ You can read the full whitepaper in all its glory here, but the gist of it is that Bitcoin was intended to be a decentralized peer-to-peer electronic cash system. The word Bitcoin, first coined – excuse the pun – in the whitepaper, combines the words ‘bit’ and ‘coin.’
Fun Fact: For anyone not completely obsessed with computers and the millions of fantastical processes happening inside them each millisecond, bit is short for binary digit. Binary digits are the smallest units of data that computers are capable of processing and storing. Bits have only two physical states; 1 and 0. You can also represent these states as on/off (like a switch or a transistor), yes/no, or true/false. Basically, any binary expression.
Bitcoin’s value is largely determined by five factors:
- The supply of Bitcoins
- The market’s demand for Bitcoin
- The performance of its competing cryptos
- The availability of Bitcoin with which to trade and transact
- The Sentiment of investors
Essentially, like other resources to which humans have ascribed great value, Bitcoin is finite in supply. In total, there are only 19,203,168.75 Bitcoins in circulation. Of those, 91.444% have already been mined. That leaves a minuscule figure of 1.8 million estimated to still be in the Bitcoin virtual mines, so to speak. Analysts predict that the last Bitcoins will be mined by the year 2140.
If we look at gold, another valuable commodity, we see a different picture. Gold on earth is finite. Even though we keep finding new veins of the precious metal, eventually, we’ll either mine all of the gold on earth, or we’ll get to a point at which gold mining is no longer sustainable. However, we’ve already found that the Moon contains rare metals such as gold and silver.
Even further than the Moon, there’s an asteroid known as Psyche 16 that is made up primarily of gold. Gold is plentiful outside of our current mining abilities, but with time, it will become more within our species’ reach. The likelihood that we’ll find Bitcoin out in space, however, is zero. Once it’s done, it’s done. This rarity is one of the prime reasons that Bitcoin has so much value today.
The key to understanding Bitcoin’s historical popularity lies in the word ‘decentralized.’ In its simplest sense, decentralized means away from the control of one government or organization. This is the dream for wealth and legal tender. We’ll take a look at our current form of currency, Fiat, in another article.
But what you need to know right now is that Fiat currency, dollars, rands, pounds, etc, are all controlled by their respective governments. Governments can ascribe more value to their currency, or devalue it, depending on the socioeconomic climate. Governments can also use the currency to bail out banks, as we saw happening after the 2008 financial crisis.
What this essentially means is that if you bank with, for instance, BigBank, a fictional investment and money management firm, your money is at their mercy. Should BigBank make bad investments, experience mass defaults on the loans it issues, or even lose all its money due to fraud and corruption, your money can and might be used as collateral. Your money will go towards bailing the bank out and ensuring its survival, all while you lose your entire life’s savings. This isn’t a horror story, it’s something that has actually happened numerous times in history. Cryptocurrencies are meant to mitigate this threat.
Truly decentralized currency means that only you have control of your money, only you can access it, and no financial institution or country has any claim to it whatsoever. This idealized concept of financial security and independence is what I believe holds the greatest draw to cryptocurrencies like Bitcoin. Unfortunately, the world is no place for idealized concepts.
The fall of a titan
‘Cryptocurrency is volatile, with a track record of “boom and bust“ cycles that have left many wondering whether it’s safe to invest.’ This expertly written headline by Hannah Smith for The Times captures the unfortunate reality of cryptocurrency all too accurately.
But why is Bitcoin so volatile? Well, many people attribute the current decline in Bitcoin’s value to global events and phenomena such as the 2022 Ukraine Invasion, the fear of inflation, and the increased interest rates. The last of these makes borrowing money a more expensive endeavor for businesses, and the other two simply make people less likely or willing to invest in global stocks and cryptocurrency.
The fall of Bitcoin was likely also compounded by Celsius Network freezing withdrawals and transfers in June 2022. Celsius Network is a major lending company in the U.S specializing in cryptocurrency. This move added fuel to the Bitcoin dumpster fire as cryptocurrencies across the board fell below $1 trillion. China’s refusal to introduce global cryptos doesn’t help the situation at all. There are even speculations that Russia might follow in the CCP’s footsteps and ban the use of cryptos too. Immediately after the Celsius Network announcement, Bitcoin plummeted to $23,476.
The issue with cryptos like Bitcoin is that they aren’t backed by anything tangible. In the good old days, currencies were backed by gold. This was termed the gold standard, and it meant that a country could not have more money in circulation than the gold it had in its vaults. Every dollar before the 5th of June 1933 was literally worth its weight in gold. Cryptos are backed by demand, supply, sentiments, and so on. But none of these is physical, and none of them provides the market with the assurance it requires for it not to be so volatile.
Should we trust crypto and Bitcoin?
Yes. You should trust the idea of a decentralized currency that is yours to accumulate, trade with, and invest. However, you also need the assurance that the worth of your money, crypto or otherwise, won’t be so volatile as to rise and fall drastically day by day with the whims of investors. You also need to keep in mind that while Bitcoin is a decentralized currency, a lot of the apps and wallets that you likely use do not function in the same way.
Another Redditor, u/existing-vegetable, said it best when he posted:
‘I am posting this because I constantly see people giving each other bad advice. The thought is that “Coinbase is pretty safe” or “Gemini is pretty safe” and self-custody is complicated and hard. Well, FTX was bigger than both and look at them now. They froze withdrawals yesterday, lied about it, and are going under. Do you feel safe keeping your Bitcoin there? Read the terms and conditions for Coinbase where they tell you that they will use your assets as collateral in case they become insolvent. Believe them when they say that!
If you feel that self-custody is frightening, know that it is actually the whole point of Bitcoin – “a peer-to-peer electronic cash system.” Not my Gemini account to my friend’s Coinbase Pro account cash system. Paradoxically, once you withdraw your corn there will be a sense of calm you will have knowing you no longer need to trust a third party.’
To sum up, I don’t believe that cryptocurrencies like Bitcoin have yet attained the level of stability that they need in order to be a truly viable option for the majority of the population. I believe that cryptocurrencies still have a long way to go before they completely replace fiat currency, if ever.
The cost of crypto
I left this section for last because it’s the most important to the survival of the human race. The computational power necessary to mine cryptocurrency like Bitcoin is far more than your average PC rig can handle. Even setups dedicated to gaming aren’t guaranteed to be powerful enough. The cost of all the components you’ll need in order to start down the path of crypto mining, however, pales in comparison to the cost of cryptos on the environment.
If you don’t yet believe that the mining rig you have is contributing to climate change, read this bit. The Cambridge Bitcoin Electricity Consumption Index basically lets you see in real-time how much electricity the Bitcoin network is consuming. While Green energy is a real alternative to fossil fuels in this day and age, much of the world hasn’t been able to switch over. Green energy, or clean energy, is still far too primitive to deal with the vast amounts of energy that both emerging markets and first-world territories demand. This means that most of this electricity that Bitcoin miners use, is generated by the burning of fossil fuels, thus contributing to the global carbon footprint and negatively impacting climate change. To date, Bitcoin is responsible for an estimated 200 Million tonnes of CO2 emissions.
The future of Bitcoin and cryptocurrency
Yes, Bitcoin is falling, fast. But that doesn’t mean that the cryptocurrency has no future. As many seasoned financial columnists will tell you, Bitcoin, and the cryptocurrency industry, on the whole, is still very much in its infancy. We’ve seen remarkable highs from this crypto, and they’ve routinely been followed by crashing lows. Although this is the furthest that it’s crashed to date, there is hope for this crypto yet. That means companies like Binance still have a chance at survival.
Cryptocurrency holds the promise of being a way for you to interact with your money without the need for a third-party or overpriced intermediary. While it might take a while for the market to recover, and it might take even longer for the system to be less destructive to the environment and more stable, Bitcoin is poised to weather this storm, as it has others in the past. So, don’t give up on crypto wallets like MetaMask, Trust, and Exodus just yet.