Disruptive Tech & Innovation: Cryptocurrency

By Aline Wealth Management on July 29, 2021

Cryptocurrency is a growing part of the digital finance world that refers to virtual/digital currencies that write and solve codes (known as “cryptography”) to verify transactions that are typically stored in a decentralized system. Cryptocurrencies that can be used for transactions are created by “cryptocurrency mining,” where a network of computers across the world works to solve increasingly difficult computational mathematical problems; the results of which will be verified during the transaction (i.e., making sure the currency has not been used before). The “miner” whose computer first solves the equations then receives payment in the form of cryptocurrency for their part in the verification process.

Using cryptocurrencies for transactions requires computer power that is sufficient to solve the equations in a reasonable amount of time, and therefore sucks up an enormous amount of electricity. Experts say that Bitcoin mining is currently at 120 TWh (Terawatt hours per year), which is roughly the same as a small country. (source: https://www.bbc.com/news/technology-56012952) This ultimately creates a higher barrier of entry to earning crypto through the mining process and facilitates the demand to trade it on cryptocurrency exchanges.

Most cryptocurrencies traded right now use what is known as “blockchain” technology. At its core, a blockchain is a type of database that can be viewed by anyone; a database being a computer system on which electronic information can be stored. Databases allow information to be filtered and view by multiple individuals at once; they can host a significantly larger amount of information than a simple spreadsheet, for example. Larger databases require more computer power to be able to support the number of users accessing, reviewing, and/or manipulating data. Instead of storing data in tables, blockchain technology collects groups or “blocks” of information at a time that have a limited storage capacity. Once filled and “completed”, a new block will be filled and added to the chain. While this process does leave a timeline of events, it’s created to be nearly impossible to reverse because of its decentralized nature (and each block can contain information from the one preceding it). Also, because cryptocurrencies encode transactions into databases not owned by one entity, record details can’t be looked up easily. Cryptocurrency, therefore, was created for enhanced security throughout digital transactions, and to provide a high level of anonymity and privacy for each individual involved.

[Blockchain/privacy explainer] (https://www.youtube.com/watch?v=SSo_EIwHSd4)

Cryptocurrencies are currently traded outside of the SEC’s authority and can be traded on cryptocurrency exchanges 24 hours a day, 7 days a week. There is no limit to how many times you may buy or sell cryptocurrency in a day or week. Traditional cryptocurrencies sold on major crypto exchanges such as Coinbase can be moved to a digital wallet thereby increasing security even further. These wallets store cryptocurrencies and lock them with private “keys,” which is a type of cryptography that allows only the user in possession of it to unlock and then use the currency. Many brokerage firms that are offering zero commission trading for cryptocurrencies are not actually trading the currency itself and are instead trading on the current value(s). Additionally, cryptocurrency fund-like securities traded on traditional stock exchanges are also traded on the current value and the buyer won’t own the cryptocurrency itself. As of right now, there are over 5,000 different types of cryptocurrencies being mined and traded on different exchanges.

Strengths: Potential to be secure and private; value retention (as long as the mathematics remains sufficiently difficult to solve); starting to be used or integrated into more establish fintech systems and businesses/corporations; global usage; no need to exchange countries to make transactions in different countries.

Weaknesses: Cryptocurrencies are out of any individual person or entity’s control and could be abandoned or rendered obsolete if the network of systems, miners, and regular traders broke down; unless you can move your cryptocurrency to a digital wallet you don’t actually own it, and it can’t be used for transactions off (and possibly, on) the platform; depending on the type of currency massive amounts of energy may be required for greater use; not widely understood yet.

Opportunities: Online shopping and interactions are expected to increase in the coming years and decades; cryptocurrencies offer a digital option for individuals to make payments; the possibility to serve as a steppingstone to transferring other types of data securely, as well as other developments in related technologies.

Threats: Technological advancements in computational solving power or the advent of genuine quantum computers may be able to overcome the mathematical complexities of the blockchain, and therefore could make cryptocurrencies less valuable; potentially long and unreliable processing speeds of transactions; requires a large amount of power; anonymity enables the increased potential for illegal activity.

In Sum: There are a lot of moving parts that have the power to influence the future of cryptocurrency and its complete adoption of digital currencies into societies. But the prospect continues to have risks and volatility, and it’s hard to see what will provide the backbone for long-term stability. Potential environmental costs may impact the viewpoint of younger generations about the viability of fully adopting cryptocurrencies. Ultimately, cryptocurrency has been receiving a lot of attention recently because many believe that it has a lot of room for growth and potential as a new way to make secure transactions digitally; however many months or years into the future that will last is difficult to speculate about at this time.