By Vijaya Rao
Bitcoin prices surged to record highs last week after an exchange-traded fund in the US raised investor participation in the world’s largest cryptocurrency. Investors seem to see Bitcoin as an alternative to gold as a hedge against inflation. Some leading investment strategies expect it to hit $100,000 by the yearend.
As the world sat and debated about cryptocurrency in the last few years, this asset class has gained a lot of attention and value. Cryptocurrency is digital money, pretty much the same as credit cards, but hugely differing in regulatory controls and the way data is distributed. As against the data for credit cards that have a single centralised database, this is decentralised and shared across thousands of computers worldwide.
Advocates of cryptocurrency believe that this technology will eventually replace traditional money like the dollar or the pound or the rupee. Let’s listen to what the staunch supporters of cryptos on why it will happen.
Cryptocurrency gaining ground
Amid the confusion world over, cryptocurrencies have become a popular investment tool. Those who invested in Bitcoin early on have made a lot of money. Bitcoin skyrocketed in value over the past few years. The price of a single Bitcoin has crossed $66,000. The total value of all cryptocurrencies is estimated to be more than $2 trillion.
At the moment, cryptos are largely preferred as an investment tool like a stock or a commodity, and not as much to buy real things in the real world. Critics say cryptocurrency has no intrinsic value and is better off as an investor’s delight than the regular currency we use every day.
Cryptos make for a good currency for traveling and for transfer between different locations, especially for banks and organisations that deal in large transactions all the time. The biggest advantage is that they go without intermediaries. Transactions can be made without intermediaries, making them far more efficient, fast, and cost effective. This gives them a huge edge over traditional currencies.
What does critics say
They say cryptocurrencies have a huge environmental impact and carbon footprint. A lot of energy is used in mining cryptocurrency. The Bitcoin network requires as much energy as the entire country of Argentina — 121 terawatt hours of electricity every year. According to Dichotomist, a cryptocurrency analytics site, Ethereum, another leading cryptocurrency, uses as much power as the nation of Qatar.
More than 65% of this energy is used by the miners in China, which comes from coal as China still relies on coal for a sizeable part of its energy requirements. This in turn increases the carbon footprint, placing the environment in jeopardy.
Why does cryptos need so much energy
These abominable costs arise out of proof-of-work type of blockchains such as Bitcoin and Ethereum. These use a decentralised network of miners to store account balances, further made important to miners by block rewards. They require specialised computers to record new blocks, which can only be created by solving cryptographic puzzles. These computations require huge amounts of energy.
A large number of other cryptocurrencies have negligible environmental consequences. For example, proof-of-stake blockchains like EOS and Cardano do not have mining, which entirely negates the need for high energy requirements. This means transactions can be processed with the same energy requirements as any normal computer network. Ethereum’s plans of upgrading to proof-of-stake have been pulled down time and again by miners who stand to benefit from its current way of working.
Another stumbling block in the adoption of cryptocurrency is the e-waste generated by cryptocurrency mining. This happens as the hardware used in mining becomes obsolete. The bitcoin network is said to generate 11.5 kilotons of e-waste every year. Unlike other computer hardware, these circuits cannot be reused for any other purpose, and become obsolete faster.
Ready to stay and slay?
Love it or hate it, cryptocurrency has made its way into our lives stealthily. As a potential gold mine, there are optimists and opportunists and the habitual investors looking for a rich harvest, who give crypto a thumbs-up. Some choose to go against the new wave, saying it is more likely to cause more harm than benefit to humankind. A case in point was Elon Musk retracting his decision of allowing people to pay by Bitcoin for Tesla cars.
There are a large number of experts and economists who believe that crypto and blockchain are the future. The idea of a global virtual currency, protected from FX fluctuations or hedged against inflation, is indeed an interesting one. The challenges that cryptocurrencies are facing in terms of energy usage, or intangibility will soon fade away.
Every advancement in technology such as e-commerce, AI, AR, etc has always had sceptics. I believe cryptocurrencies will become mainstream in the next 3-5 years and will no longer just be a vehicle for people to make a quick buck. They are here to stay.
(Vijaya Rao is founder and CEO at Techvio, an IT solutions platform. The views expressed here are personal.)