Cryptocurrencies are on the rise, though their future may be unpredictable. Hackers and computer scientists have created a new unit of exchange; this currency is completely digitized, and it is not monitored by any governing institution or organization. Although lack of accountability sounds like it would make cryptocurrencies too unpredictable, volatile, and risky for any investor or consumer, their use is on the rise. Currencies such as Bitcoin are becoming more popular and accepted in the private sector. However, the future of cryptocurrencies is unclear, due to the problems that unregulated currencies often pose, mainly in how governments respond to them. The anonymity of cryptocurrencies may create a market for predominantly illegal transactions, especially if governments outlaw them in the future; however, growth in the private sector shows that cryptocurrencies may adapt in the future for widespread use, even if there are adjustments to be made.
Of all the cryptocurrencies, Bitcoin has the greatest demand and most media attention. A person or group, under the alias of Satoshi Nakamoto, started the currency in 2008; to give some context regarding the massive growth of Bitcoin, the currency was originally valued at seven cents. It grew steadily; however, towards the end of 2013, Bitcoin jumped from $125 to about $980 per coin in nearly two months (1). Bitcoin is becoming increasingly popular, but it is a good representation of how volatile and unpredictable these currencies are, as their value can be highly arbitrary.
The way in which bitcoins are produced is not what one would normally assume, considering how most modern currency is manufactured. The coins are mined by supercomputers; mining is the discovery of new bitcoins, as the founding group has maintained that there will be a finite number of bitcoins released. Coins are discovered by groups of computers writing code to solve highly complex algorithms. The Bitcoin network is designed to have the algorithms become more complex as time goes on. Whoever completes an algorithm first gains the block of bitcoins. Today, approximately 12 bitcoins are discovered and released approximately every 10 minutes. The maximum amount of bitcoins that will be produced is 21 million; currently, there are 15.7 million in circulation (2). Because of this process, competing for bitcoins has become a huge industry.
When Bitcoin was originally released, computer desktops could mine bitcoins; however, because of the increasing value of bitcoins since their release, the technology quickly evolved. Now, application-specific integrated circuits (ATIC) do most of the mining, due to how competitive mining has become (3). The key to mining bitcoins, besides getting enough powerful computers to quickly solve the algorithms, is keeping energy costs down. Today, mining requires so much energy that using CPUs or old technology would make the energy costs so great that they would outweigh the revenues gained from obtaining bitcoins. To provide context for how powerful computers must be now, companies created huge ASICs in areas where it is cold, in order to keep the computers cool, and where energy is cheap, such as in Iceland. For example, one facility in Iceland dedicated to mining bitcoins generated $4 million in just a few months, and that was in 2013 (4). To give further context to how powerful the Bitcoin network is, in 2013, the entire network was reported to be 256 times more powerful than the top 500 supercomputers in the world combined (5). That is an astonishing amount of computing power; what’s more impressive is just how fast the power of the network grew. The phenomenon of Bitcoin’s rise to prominence shows that when there is demand, the private sector will produce results, even when there is huge uncertainty, as there often is for cryptocurrencies.
Although there has been tremendous development in the cryptocurrency industry, there are major issues to consider. The first big issue with these currencies is that they can be used for illegal activity, due to their anonymity. Because cryptocurrencies are untraceable, it is easy for criminals to use them as a means of exchange, especially when it comes to the dark web. For instance, until the federal government closed it, bitcoins were used on the infamous “Silk Road”, in which drugs were sold and openly traded through the dark web. Cryptocurrencies can also be used to as a means of exchange for arms trade, which is especially worrying when it comes to terrorism. Instead of requiring large amounts of cash or an elaborate financial management system, cryptocurrencies provide an easy way for criminals or terrorists to carry out illegal activity. Governments in the future may look to regulate or eliminate cryptocurrencies, if they prove supplemental to criminal and terrorist activity.
Beyond cryptocurrencies and criminal activity, there are large financial and consumer risks. First, these unregulated currencies are not backed or insured by any institutions. This means that if a hacker gains access to a holder’s bitcoin stash, their entire fortune could be stolen, with virtually no opportunity of getting it back. This also implies that cryptocurrency holders must know what they are doing, and must find the right computer software to protect their wealth. It is unlikely that the average consumer will engage in maintaining cryptocurrencies in the near future, due to the dangers of maintaining them.
In addition to the threat of hackers and lack of insurance policies, cryptocurrencies are volatile—specifically Bitcoin. Because there is no government regulation or physical backing to the currency, bitcoin value is based completely on perceived value. This means that if Bitcoin receives bad media coverage, or government regulations indicating a shaky future for Bitcoin, then the perceived value can drop drastically. In the past, Bitcoin has grown and fallen dramatically within just a few days. During these time periods, Bitcoin’s 30 day volatility index has reached upwards of 14-15%. Cryptocurrencies will likely steer risk-averse investors away from the currency.
Government regulation of cryptocurrencies could be a risk to their future, but it could also be a great asset, depending on the ruling of the governing body. Regulation is risky for cryptocurrencies, as restrictions could be so aggressive that they inhibit the freedom of the currency, reducing its value. In addition, there is always the risk that governments may look to outlaw the currencies outright, if they can prove they are being used predominantly for illegal activity, or if the currency is perceived as a threat to the government’s financial system. At the same time, many proponents of cryptocurrencies see regulation as a positive step for their future. This is due the fact that if cryptocurrencies are properly regulated, they could be fully integrated into the marketplace and investors’ portfolios.
Although there are a lot of obstacles in the future, it is hard to argue with the increase in demand for cryptocurrencies and their continued growth. For the Bitcoin network to grow into what it is today shows that when there is demand, there is often growth. Even though Bitcoin is the largest and most popular cryptocurrency, it is not the only one. There are other, such as Litecoin and Ripple, to name a few. Litecoin is similar to Bitcoin; however, the coins can be mined from regular computers, the volume is 84 million coins, and the currency is worth less than Bitcoin (6).
Based on the demand, it is unlikely that bitcoins will be outlawed. However, there may be some adjustments to the industry, in order to gain more consumer trust. The likelihood of continued growth of the industry is high, as major companies such as Expedia and Amazon have started accepting Bitcoin. The private industry is a powerful tool to keep cryptocurrency alive and growing; just don’t expect cryptocurrency to overtake government-backed currency any time soon.
(1) "Bitcoin Price Index - Real-time Bitcoin Price Charts." CoinDesk RSS. N.p., n.d. Web. 13 July 2016. <http://www.coindesk.com/price/>.
(2) "Bitcoin Block Reward Halving Countdown." Bitcoin Block Reward Halving Countdown. N.p., n.d. Web. 13 July 2016. <http://www.bitcoinblockhalf.com/>.
(3) "Bitcoin Mining Definition." Investopedia. N.p., 21 Apr. 2014. Web. 13 July 2016. <http://www.investopedia.com/terms/b/bitcoin-mining.asp>.
(4) Popper, Nathaniel. "Into the Bitcoin Mines." New York Times. New York Times, 21 Dec. 2013. Web. 13 July 2016. <http://dealbook.nytimes.com/2013/12/21/into-the-bitcoin-mines/?_r=0>.
(5) Cohen, Reuven. "Global Bitcoin Computing Power Now 256 Times Faster Than Top 500 Supercomputers, Combined!" Forbes. Forbes Magazine, 28 Nov. 2013. Web. 13 July 2016. <http://www.forbes.com/sites/reuvencohen/2013/11/28/global-bitcoin-computing-power-now-256-times-faster-than-top-500-supercomputers-combined/#e6e3f7b28b76>.
(6) "The Future Of Cryptocurrency." Investopedia. N.p., 10 Sept. 2013. Web. 13 July 2016. <http://www.investopedia.com/articles/forex/091013/future-cryptocurrency.asp>.
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Chadd Dunn is a senior at the University of Southern California double majoring in business administration and international relations. He focuses mainly on international economics,