Financial advice Self-Development

Cryptocurrency: an Instrument of Shadow Schemes or a Monetary System of a Free Society?

bitcoin

Obviously, there is no media in the world that doesn’t publish news about the bitcoin rate. In fact, even on websites about pets and farming, you can find the headlines “Bitcoin has crashed!” or “Bitcoin has renewed its all-time high!”.

Since the appearance of the first cryptocurrency, people around have been advising me to invest in it. I felt that I didn’t trust this new trend, although always kept my eye on this ‘game’. Whether I was right or not is a rhetorical question. Here are my current brief observations.

What exactly is cryptocurrency?

Any existing digital file can be copied as many times as you like, and the original file remains unchanged. You can duplicate and endlessly reproduce pictures, sound, video, information about the weather and the harvest of legumes, whatever it is, including data on financial transactions.

This is why banks and financial institutions carefully encrypt all financial information and distribute it through their own private channels. This is the only way to control data and prevent misuse and fraud.

However, in 2008, someone (the identity is unknown yet, which lead to many speculations) under the pseudonym Satoshi Nakamoto published on the Internet a protocol of a fundamentally new payment system. Information in it is distributed through public channels, between computers connected to a common network.

At the same time, all these computers remain equal and jointly control the distribution of files. Such a database is called a blockchain. No outside interference is possible, all data is immediately distributed throughout the network, and all client computers are busy constantly confirming the reliability of financial data.

This independent payment system was named with the word ‘bitcoin’ (from bit – ‘unit of measurement of information’ and coin). Computers connected to the network operates for a reason. With the constant confirmation of files, the system pays its owners a reward in the same bitcoins – this process is called mining.

At the beginning, these were fairly simple operations that even basic home computers could handle. Gradually, mining became more and more complicated, it required more and more computing power. To date, only so-called mining farms, consisting of many very powerful computers and, by the way, consuming a huge amount of electricity, can fully mine cryptocurrency.

largest_bitcoin_mining_farm
The largest bitcoin mining farm

It is worth pointing out that the system has a limitation: it can only produce 21 million bitcoins and not one more. With each new payment unit, the production of the next one becomes more and more expensive, and therefore the intrinsic value of bitcoin is constantly growing.

What makes the cryptocurrency rate go up and down? Here precisely the general laws of the market come into play: bitcoin appears on exchanges on a par with other currencies, and therefore the same forces and laws act on it. But I don’t want to go deep into that, not in this article.

A quick dive into the types of cryptocurrencies

Currently, there is a large selection of various cryptocurrencies in the financial market, the number of which is only increasing every year. This is probably because digital money attracts great interest from both the general population and large investors who are ready to invest in a rapidly developing market segment. Large banks, international corporations and even entire states are now ‘playing this game’.

cryptocurrency_icons
Cryptocurrency icons

Virtually, the main role in creating such a situation was played by the success of bitcoin. It has the highest capitalisation, fame and demand. However, several dozen names of currency units are included in various top lists of digital currencies today, some of which appeared more recently, while others were created not much later than bitcoin.

At the time of writing, there are over 7,800 cryptocurrencies available, and the number is expected to grow in the future. If you would like to discover more about the particular types of cryptocurrencies or get to know the most popular for the current moment, take a look here: Top 10 cryptocurrencies in 2021.

What is cryptocurrency really for and what can you do with it?

The growth of cryptocurrencies was facilitated by their basic principles: decentralisation, the impossibility of blocking payments and anonymity. In other words, it is a decentralised payment method that allows holders to manage their finances and make purchases anonymously without relying on government-issued fiat currencies. Additionally, international payments can be made easily and cheaply as bitcoin is not tied to any country or regulator.

While bitcoins don’t have the same penetration rate as fiat currencies when it comes to day-to-day spending, there are already ample places where you can pay with bitcoin, much to my surprise. Here’s a quick list.

  • Food and Drink

One of the funniest stories about paying for food in bitcoins happened when one American, Laszlo Hanyecz, bought two pizzas for 10,000 bitcoins in 2010. This is recognised as the first commercial bitcoin transaction. Can you imagine how much these two pizzas cost him at the current bitcoin rate, unbelievable…

Meanwhile, Pizza Hut now accepts cryptocurrency as payment, at least in Venezuela. Another food delivery app, Just Eat,  also accepts bitcoin at its 15,000 restaurants.

  • Clothes

Some online stores have started accepting bitcoin and other cryptocurrencies as payment methods. Take, for instance, MtSocks or more fashionable Lanieri, which offers a complete wardrobe of bespoke clothing including shirts, suits, trousers and more, all made in Italy, by the way.

  • Car

There are a few dealerships such as BitCars and AutoCoinCars that sell almost all brands, including luxury Porsche, Lamborghini, Bugatti, etc. These merchants accept payments in bitcoin and other cryptocurrencies.

  • Private Jet

I don’t think anyone here is interested in buying a private jet, but just in case, using bitcoin, you can buy a fairly wide variety of private jets. One of the aircraft traders – Aviatrade recently added bitcoin as a payment method.

  • Real Estate

In 2014, a villa in Bali was sold to an unknown buyer for 800 bitcoins, which that time was equal $500,000. In the same year, another anonymous purchased a country house in Kansas City for the same number of bitcoins. Nowadays, the use of bitcoins as payment has been seen when buying real estate in different countries all over the world: Thailand, Portugal, Argentina, Spain, Germany and Panama.

Moreover, in 2019 Australia hosted a live auction in which a buyer was asked to pay whether in Bitcoin or Binance Coin. The subject of the auction was a futuristic-style beachfront home in northern NSW – Jetsons House.

Interestingly, this list is not limited to the above items. Now you can pay with cryptocurrency for other goods and services, such as web services, holiday tours, video games, works of art, gold, yacht rentals, and more. Extra ideas can be found here.

Shadow side of cryptocurrency

However, all these distinctive qualities of cryptocurrencies – decentralisation, the impossibility of blocking payments, and anonymity – turned out to be incredibly in demand in the shadow business when buying illegal goods, money laundering, and so on.

  • Black market

Cryptocurrency is actively used in the sale of drugs and other illegal goods (weapons, fake documents, databases, etc.). As mentioned above, the organisers of such a business are attracted by relative anonymity: the system does not store information about participants in the payment chain, and the technology allows the use of many tools to hide traces.

One of the most striking examples here is the story of the illegal Silk Road, an online store operated in 2011-2013. The website, which was considered as a clandestine eBay, used bitcoins to settle payments between drug sellers and buyers. Sales through Silk Road were estimated at $ 14-15 million per year, and by the time the website was closed and its founder was arrested, the total transaction volume was 9.5 million bitcoins.

  • Money laundering

Another shady way of using cryptocurrencies is money laundering and withdrawal. The withdrawal of money to other jurisdictions is the reason for the prohibition of Initial Coin Offerings (ICO) in several countries.

This is especially evident in the example of China and South Korea who have both banned ICO. It is difficult to judge the volume of crimes, but if the government decides to intervene in this process, then it must be hundreds of millions of dollars.

  • Difficulties in regulation

In general, while cryptocurrency is not regulated in most nations, countries such as the United States, European Union, Australia, Canada, China, Japan have attempted to regulate the cryptocurrency market, but still not comprehensively.

For example, in the United States, the US Securities and Exchange Commission (SEC) treats cryptocurrencies as securities. It means security laws are very much applicable to them. On the other hand, the Internal Revenue Service puts across cryptocurrency as a digital property with all the ensuing consequences.

While Australia treats cryptocurrency as property and it is subject to Capital Gains Tax (CGT), Canada considers cryptocurrency to be a commodity, for this reason, classifying it as business income.

It is quite obvious that regulators even within the same country don’t have a uniform approach as to what a cryptocurrency is, whether it is a security, property or commodity, etc. This is why more and more often, the heads of financial institutions around the world are calling for urgent regulation of cryptocurrencies.

  • Cryptocurrency vs Fiat money used for laundering

It is quite clear that money laundering continues to be one of the most serious problems for the global financial system. According to the United Nations, between 2% and 5% of global GDP ($ 1.6 to $ 4 trillion) annually is associated with illegal activities and money laundering.

Bitcoin vs Dollars
Bitcoin vs Fiat money

According to some experts in this field, this means that the use of cryptocurrencies in this vicious business is much less than the use of fiat currencies and the share of the former is decreasing every year.

This is confirmed by the study of the international interbank system SWIFT, which showed that the role of cryptocurrencies in money laundering is often exaggerated, and fiat currencies are much more often used for money laundering. According to SWIFT, even money generated by cyber-attacks and extortion is rarely laundered with cryptocurrencies. Traditional methods such as cash companies or drug dealing are more commonly used.

The future of cryptocurrencies

It looks like the future of cryptocurrencies is very shaky: there are no proper regulations, some countries will most likely not accept cryptocurrency, and others may even ban it. In addition, according to some experts, cryptocurrencies are weak as a means of payment – the strong volatility of the exchange rate makes it difficult to express the value of goods and services in them.

Another problem is the ecological footprint left by bitcoins. Crypto mining currently consumes about 0.55% of the world’s electricity production, which is roughly equal to the annual energy consumption in countries like Malaysia or Sweden.

Moreover, the majority of this electricity comes from environmentally dirty sources. After conducting surveys among miners, the Cambridge Center for Alternative Finance (CCAF), experts found that about two-thirds of the energy consumed still comes from fossil fuels.

There is one more question that makes the future of cryptocurrency even more uncertain. The number of bitcoins is limited to 21 million in total, and by February 2021, 18.6 million bitcoins had already been mined. What will happen when miners will unlock this number of bitcoins and the supply will be depleted?

Well, this is a hotly debated topic among cryptocurrency fans. According to some sources, the last bitcoin will most likely not be mined until 2140. However, there is a high probability that the bitcoin network protocol will be changed, removing the main limiting condition.

Finally, no central bank in the world will ever give up the exclusive right to print money. Most likely, they will take something useful from the very idea of cryptocurrencies and continue to issue fiat currencies.

Conclusion

Cryptocurrency itself is neither good nor bad. This is a phenomenon that allows someone to earn money, and someone to commit fraudulent transactions. However, the use of cryptocurrencies for illegal purposes casts a shadow on blockchain technology, the use of which can actually be pretty much beneficial.

Quite a large number of people already use crypto coins to pay for goods and services, participate in their mining and make money on market volatility. However, since its inception, the cryptocurrency has been actively used in illicit transactions, serving the shadow business.

While some countries ban using of cryptocurrencies, others are trying to regulate them in order to prevent market manipulation. However, it is quite clear that without being recognised as a means of payment by states or at least corporations, crypto will be doomed to extinction, since it has no intrinsic value.

Bitcoin mining involves enormous computing power and therefore high energy consumption, which is a major challenge in an era of growing environmental awareness.

Finally, according to Kenneth Rogoff, a professor of economics at Harvard University and former chief economist at the International Monetary Fund, two key characteristics of a successful currency are – an efficient form of exchange and a stable store of value. And bitcoin is neither one nor the other.

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