Disclaimer: I am not a financial analyst or qualified to offer financial advice. This article is based on speculation, I urge you to seek further advice and research carefully before making any financial decisions.
Bitcoin was invented in 2009, the underline technology it uses (known as blockchain) was created in 1991. Bitcoin was the first to implement blockchain technology in public ledger and after its success a wave of new cryptocurrencies followed suit. Notably, Bitcoin has turned some 100,000 individuals from regular working class backgrounds into millionaires and raised net worth of others substantially.
Before we get into the crypto debate it’s important to understand the link between blockchain and decentralised banking. Decentralised technology means that there isn’t a central database, instead data is shared between millions of computers around the world –principally similar to how Napster would let you download a single song from multiple computers that were online. The song was never stored in just one place, it was “decentralised”. If a user switched off their system it would seamlessly continue the download from another user with the same file (OR wait until it became available again).
The problem with using decentralised technology in Fintech was maintaining the integrity of data, after all who wouldn’t add a few zeros to the end of their balance if they could. Enter blockchain which uses SHA256 (Secure Hashing Algorithm). Without getting too technical mining is the process used to verify the integrity of the data in the blockchain, in doing so computing power is required to solve mathematical problems. The bigger the blockchain grows the harder these problems are to solve therefore more computing power is required.
Hint: If you’re interested in learning more about how blockchain technology works, one of my favourite explanations comes from this YouTube video.
Why do people love crypto currency?
Rapid rise in value, decentralised banking and the ability to transact anonymously –what’s not to love right?
We demystify these benefits below and explain why some day they may be the cause of its failure:
1. Transacting anonymously or without trace
Ever been a victim of fraud? Contrary to popular belief Bitcoin can be stolen in the same way that an individual can be duped into giving up their credit card details to someone OR having their data stolen. Whilst regular banks will offer their customers protection cryptocurrencies do not, once the money has left your vault it’s untraceable.
2. Decentralised Banking
Thanks to years of countless failures from fat cats in banking and those meant to be regulating the industry it’s no surprise that we’ve lost trust in where our money is held and how it’s created. Is decentralised banking via blockchain the answer? No, it’s obviously unsustainable and has a terrible impact on our environment. As blockchains get bigger they require more computing power to validate transactions this process is called mining. Bitcoin miners get paid for the use of their computational resource, simply put the more computers you have solving these problems, the more money you will make. There are organisations creating entire server farms specifically for mining crypto-currency.
Myth buster: There are supporters of decentralised banking that argue cryptocurrencies will encourage organisations and individuals to use and even create greener energy sources or use renewable energy in order to lift their margins because their electricity usage is so high, anyone who understands the collective volume of energy consumption that is required to mine (especially as the blockchain grows) will also know this is an unachievable expectation, especially for global banking.
3. Rise in value
There has undoubtedly been exponential rise in the value of cryptocurrencies over the past few years, this is fuelled by overnight millionaires, press, social media and adoption by miners. This highlights that the value of cryptocurrencies are closely linked to emotional factors that are not part of any real economies or controlled by regulation –it’s not a matter of when they will be either, people just haven’t yet realised that they can’t be.
Bitcoin’s fight to stay valuable is propped up on people continuing to invest in it for a return and those who have lost money due to recent announcements that caused it to tumble will soon wake up to the reality of not wanting their net worth to be determined by a tweet from someone like Elon Musk.
I do believe that crypto is a rewarding stepping stone in the evolution of taking some control back from banks and corporation however, it is unlikely to ever be a dominating method of transacting (especially in decentralised form).
So what happens next?
Eventual regulation of cryptocurrencies will of course impact their value, as will the falling number of legitimate merchants accepting them once this starts to take place the popularity for mining will also decrease, it is likely we’ll start hearing about mining farms being decommissioned in the not too distant future. All of this will inevitably mean that decentralised cryptocurrency will work less efficiently without so many resources, which will lead to much greater risk.
I don’t believe this is the end of the road for decentralised currency, In actual fact its probably just the beginning. There will be a few more highs and lows before the above really starts to become an obvious reality. Looking ahead into the future, there will be an emergence of new forms of cryptocurrency that won’t use decentralised approaches and may possibility function in a “decoupled” or semi-detached capacity from regular banking networks.