JCL Journal

The Cryptocurrency Phenomenon

In March of 2018, the Merriam-Webster Dictionary added the term “cryptocurrency” to its pages. The definition: “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” 

First conceptualized in the 1980s, cryptocurrency has become an international phenomenon over the past decade. However, most of us don’t really understand what cryptocurrency is. Wall Street Journal reporter Paul Vigna wrote, “As an asset class, crypto is so new even some people inside it don’t understand it.”
This week the JCL Energy Journal took a deep dive into the world of crypto to take on the task of answering the question “What IS cryptocurrency?”

The History of Cryptocurrency

The concept of virtual currency was conceptualized in 1983 by American cryptographer David Chaum. Referred to as “the godfather of cryptocurrency,” he proposed that a user could be able to obtain digital currency. They could then spend it in a way that was untraceable by a bank or any other party. In the 1990s, he founded DigiCash in Amsterdam to commercialize his ideas. The first electronic payment successfully sent in 1994.

In 1996, the idea of cryptocurrency moved into the mainstream. The NSA published a paper in the MIT mailing list (1996) and in The American Law Review (1997) called How to Make a Mint: The Cryptography of Anonymous Electronic Cash. The first decentralized cryptocurrency (Bitcoin) appeared in 2009. A year earlier, Satoshi Nakamoto had outlined the idea in his paper Bitcoin: A Peer-to-Peer Electronic Cash System.

The next decade saw a surge in different types of cryptocurrencies. Today, cryptocurrencies fall into two “camps”- Bitcoin, and alternative cryptocurrencies that are referred to as “altcoins”. As crypto surged in popularity, there was a rise in countries trying to assess whether this was something they could recognize and regulate on a national scale. Even today, attitudes towards cryptocurrency as a form of legal tender varies widely.

Where Does Bitcoin Come From?

Each version of cryptocurrency has its own code (known as “digital architecture”). Because of this, there are differing methods for creating each version. For our purposes, we looked at the standard, Bitcoin, which is “mined”. Essentially, mining is a process where networks of specialized computers compete to solve mathematical puzzles called algorithms. The first computer to solve the algorithm “wins” bitcoin. (Sidenote: I learned that the symbolic idea “Bitcoin” is capitalized, but the actual currency unit itself is not capitalized when writing.)

You might ask, “How do they keep track of how much bitcoin is being mined, and who it belongs to? Can someone “fake” bitcoin?” This is where another central feature of cryptocurrency mining comes into play- the blockchain. The blockchain is basically an ever-growing list of records (“blocks”). They are linked and secured using cryptography. Each block has a timestamp and transaction data. These blocks cannot be altered without the majority of the network agreeing to the alteration. This is extremely difficult to do, which is why it is incredibly difficult to fake or hack at this point in the process. The blockchain acts as an open ledger that records transactions in a permanent way.

In order to mine bitcoin, you need to connect a computer to the cryptocurrency network. Each computer that is connected is referred to as a “node”. The more nodes you link to the network and control, the better you are at mining bitcoin. Nodes are responsible for contributing to the blockchain, working together globally to accurately record transactions. When people say “decentralization,” this is what they mean. No one central power is responsible for record-keeping and data tracking. Instead, the global network is constantly communicating information to track cryptocurrency.

Who Decides What Cryptocurrency is Worth?

The value of world currencies is a constantly shifting landscape, affected by a huge number of factors. Cryptocurrency is not immune to these shifts. However, cryptocurrency, unlike “traditional” currencies, does not have the backing of a central bank or physical assets. To further complicate matters, cryptocurrency is both a unit of currency and an investment opportunity. Essentially, crypto’s value is purely “faith-based”. Investors hope that more and more people will continue to want digital currency that is (relatively) free from government oversight. Ideally, the more people invest in crypto, the more valuable it becomes.

Due to all these factors, cryptocurrency is a far more volatile market when compared to assets like company stocks. In May 2022, Bitcoin alone lost 20% of its value after warnings about inflation. This also affected other altcoin values. We are beginning to see some wealth managers offer cryptocurrency as an option for portfolio diversification. As recently as June 2021, however, these options are still considered “extremely volatile assets,” if offered at all. For these and other reasons, governments across the globe are beginning to assess whether cryptocurrency requires more regulation to protect its users.

Cryptocurrency Across the Globe

The first country to legally recognize cryptocurrency as legal tender was El Salvador in September of 2021. Central African Republic followed suit in April of 2022. Other countries have chosen to wait on this decision, instead focusing on regulating crypto. In 2021, 17 states in the US passed laws and resolutions about crypto. Other countries to put regulations in place include South Africa, South Korea, and the United Kingdom.

On the other hand, some countries have taken the opposite action by banning cryptocurrency as a form of tender, presumably because they cannot control it. In May of 2021 China banned their financial institutions and payment companies from providing cryptocurrency related transactions. Turkey has also banned crypto due to “significant transaction risks.” Other countries that have banned cryptocurrency include: Algeria, Bolivia, Colombia, Egypt, Indonesia, and Vietnam.

The Future of Crypto

Despite its deviation from the norms of traditional currencies, it’s safe to say that cryptocurrency is quickly gaining traction and popularity. Based on current trends, the crypto market size could reach $2.2 billion USD by 2026. For those willing to put in the time, money, and effort, cryptocurrency mining has the potential to see some enormous returns. Kanai Danial (author of Cryptocurrency Investing for Dummies) says “What I expect from Bitcoin is volatility short-term and growth long-term.” 

This potential for growth is part of the reason why so many are so keen to invest, or even actively set up mining farms. The exciting thought of essentially generating money out of nothing is enough to balance the risks of the unknown. Many experts have weighed in, but in reality no one can predict what will happen because there is no history on which to base these predictions. For investors, investing now makes sense to many because the more “buy-in” crypto has, the more likely it will be that demand and value increase. Cryptocurrency has the potential to be a “belief-manifested” success if enough people get behind it.

Next week, the JCL Energy Journal will take a closer look at the physical components necessary to mine bitcoin. Stay tuned!

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Sources

Ashford, Kate. “What Is Cryptocurrency? – Forbes Advisor.” Forbes Advisor, Forbes, 6 June 2022, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/.

Contributors to Wikimedia projects. “Cryptocurrency.” Wikipedia, Wikimedia Foundation, Inc., 8 Aug. 2012, https://en.wikipedia.org/wiki/Cryptocurrency#History.

Haar, Ryan. “Future Of Cryptocurrency in 2022 and Beyond | NextAdvisor with TIME.” NextAdvisor with TIME, https://www.facebook.com/NextAdvisor, 19 Aug. 2021, https://time.com/nextadvisor/investing/cryptocurrency/future-of-cryptocurrency/.

Hong, Euny. “How Does Bitcoin Mining Work?” Investopedia, Investopedia, 17 Oct. 2017, https://www.investopedia.com/tech/how-does-bitcoin-mining-work/.

Vigna, Paul. “What Is Cryptocurrency, and How Does It Work? – WSJ.” Wall Street Journal, The Wall Street Journal, 2 Dec. 2021, https://www.wsj.com/articles/what-is-cryptocurrency-how-does-it-work-11638386626.

“What Are Cryptocurrencies, and How Do They Work? – CBS News.” CBS News Money Watch, CBS News, 22 Apr. 2022, https://www.cbsnews.com/news/what-is-cryptocurrency-bitcoin-ethereum-blockchain/.