The blockchain has become mainstream. Last year, 16% of Americans said they had speculated in cryptocurrencies based on blockchain technology, and this year’s Super Bowl broadcast included several advertisements for crypto markets. But even as their cheerleaders encourage others to get into cryptocurrencies, their value remains questionable. Their values are quite volatile, and as unregulated assets, they leave average investors vulnerable to mishaps and scams. Equally worrying, the creation of these digital assets consumes energy at a prodigious rate, contributing to climate change.
This is a highly unregulated industry in the era of the Wild West. The Biden administration recently signed an executive order directing federal agencies to investigate the issue because the crypto market lacks the consumer protections that stabilize this type of investment and discourage its use by criminals. If people decide to wade into these uncharted waters, they should do so with the utmost care.
The blockchain, a digital ledger that records transactions, is public, decentralized – distributed among computers on a network – and secure. Theoretically, data stored via the blockchain is almost impossible to modify without leaving traces of fraud. As a result, the technology can support a variety of applications, including secure sharing of medical data and tracking of financial transactions.
Cryptocurrencies, such as Bitcoin and Ether, can be used to pay for goods like legal tender, except the exchanges are recorded through the blockchain. Although the technology ostensibly frees crypto users from central authorities such as governments or banks, most people still interact with it through intermediaries. Crypto exchanges allow people to buy and sell cryptocurrencies the same way investors trade stocks. Unlike stocks, however, cryptocurrencies do not derive their value from a tangible object or business and cannot be guaranteed by a trusted authority.
As a result, cryptocurrency speculation can be extremely volatile. For example, the value of Bitcoin has already fallen by 30% in a single day. Although the stock market has weathered similar declines, when this happens the federal government and other entities may step in to try to stabilize the swings. With cryptocurrencies, there are no such safeguards.
The blockchain also allows users to protect their identity. This anonymity, along with the lack of official oversight, has made cryptocurrencies popular among ransomware hackers. Anonymity also makes it difficult for buyers to assess the legitimacy of a given cryptocurrency exchange – the person running the exchange may receive money from investors while hiding behind a pseudonym and then steal the exchange. booty. In 2021, scammers nabbed $14 billion worth of cryptocurrencies.
Additionally, cryptocurrencies are not minted by a government; instead, many must be “mined” by members of the decentralized network performing computational tasks to help validate transactions of that particular cryptocurrency. These tasks require enormous energy: in 2021, mining a single bitcoin required enough electricity to power an American household for nine years. And the more Bitcoins are mined, the more power it takes to earn new ones. This escalation favors the early adopters of the system, who entered when it was easier to earn Bitcoins. Just like in a pyramid scheme, early adopters benefit from new entrants into the fold: additional merchants will increase the value of their existing assets.
Similarly, power-intensive processes are also used to mint NFTs – non-fungible tokens – but the two technologies are not the same. Think of an NFT as a digital receipt that represents ownership of a specific object, with the blockchain helping to track that ownership as it is transferred from one entity to another. Using NFTs could be a boon for artists: people can often share and download digital art for free, but by selling an NFT of a digital artwork, the artist gets paid while still getting paid. ensuring that the person buying the art is recognized as the official owner. . Like cryptocurrencies, however, the value of NFTs can vary wildly.
This type of value-distorting craze is nothing new – think of the convoluted mortgage market derivatives that caused the 2008 financial crisis. Unlike those, crypto has become a mass commodity advertised to buyers of all days. But the risk of creating bubbles that could put countless people out of business is the same. So, until this industry is better monitored or regulated, investing in crypto or NFTs remains a gamble caught in the dark – buyer beware.