The Evolution of Cryptocurrencies

In Backgrounder
November 17, 2021
Fatima Nawaz
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Cryptocurrency today is on the rise, gradually rising to the forefronts of global economic discussions. Many of us may be familiar with the idea, however with its sudden rise to popularity one has to think about where it first started and came about. Its emergence as a currency is a very recent development, 2009 saw

Cryptocurrency today is on the rise, gradually rising to the forefronts of global economic discussions. Many of us may be familiar with the idea, however with its sudden rise to popularity one has to think about where it first started and came about. Its emergence as a currency is a very recent development, 2009 saw the advent of the first ever decentralized digital currency called Bitcoin. Satoshi Nakamoto was the one who first proposed the idea of Bitcoin in 2008, in a publication. The essential idea behind the currency was to create a way of conducting secure and peer to peer transactions. It is a virtual monetary system, which enables users to carry out normal day to day payments, whilst avoiding the fees and waiting times of traditional banking.

Since then, Bitcoin’s value has soared so much that it has also been defined as ‘digital gold’ amongst the users. Bitcoin was also the one that captured media as well as investor attention in 2013. Over time with the increase of its value it gained more and more popularity, however soon after saw a 50% drop. That has since then raised serious concerns and debates over the unpredictable values. Other than Bitcoin, competing currencies started to emerge in 2011, namely Litecoin, Namecoin, Swiftcoin etc. Which is to be expected as the market value of Bitcoin today is $61,493.40. People continue to invest in and develop new cryptocurrencies, hoping to financially flourish or for their currency to become the next Bitcoin. Today there are nearly over 6,000 cryptocurrencies, which is a great increase since 2013.

Quite recently, the US federal office expressed their concerns that nations would be unable to project their power over other states via sanctions. However, in September El Salvador, allowed cryptocurrency to be used for payments, giving it a legal go-ahead. In light of Afghanistan’s economic turmoil there is also discussion surrounding the topic of Bitcoin becoming a medium of exchange within Afghanistan. This shows that with time countries are warming up to the idea of cryptocurrency as a means of payment. Cryptocurrency is also said to have made its entrance in mainstream finance; a Bitcoin exchange trade fund was introduced on the New York Stock Exchange. Those who do not own it, can now speculate Bitcoin rates and previous owners of Bitcoin have gathered fortunes.

Despite the increasing popularity of cryptocurrency, it is often an investment rather than a means of payment. Although Bitcoin has seen its biggest spikes in 2017, it is yet to enter our everyday lives. There is only a small percentage of people who own the currency, and that too is for investments only. This is due to the fact that the cryptocurrency itself has a volatile nature and is subject to frequent changes in prices. With the constantly fluctuating prices, people are hesitant to invest and less likely to use it as a means of payment.

Along with the constantly changing prices, people have also expressed concerns of environmental damage from cryptocurrency. There are doubts about the impacts of cryptocurrency if it is widely accepted. Environmentalists have raised the issue of increased carbon emissions from cryptocurrency mining which consumes a lot of energy. The system required for mining cryptocurrency can consume as much energy as a country annually, an example is Bitcoin which consumes the same amount of energy as the entire country of Argentina.

There is also a debate surrounding the topic of energy resources for crypto mining. China, which generates most of its energy from coal, is also home to nearly 65% of the crypto miners. Advocates for bitcoin argue that renewable sources of energy are used to cover almost 74% of energy consumed by Bitcoin. Figures regarding this debate are more or less disputed, hence there is no clear-cut evidence of how much energy used by Bitcoin comes from renewable sources. What is known is that Bitcoin alone contributes to nearly 11.5 kilotons of e-waste (electronic waste, discarded electronic devices) every year.

Concerns regarding crypto raise the question; what the future holds for cryptocurrency as a medium of exchange? There is no straight forward answer to this. The monopoly that paper money and banks hold can hardly be toppled over by a constantly fluctuating, volatile digital currency. The currency faces many fundamental issues within itself, which are obstacles in its way of becoming a mainstream way for exchange. The technology involved is modern, however, the transactions are time consuming and costly. And the network is unable to carry out large transactions. Pairing that with the unreliable nature of the currency, the future does not seem very bright.

Governments would have to play a key role in integrating the network of cryptocurrency into their financial system, if they want crypto to become a mainstream medium. However, as the world moves towards accepting crypto there are also countries which have completely banned the use of it like China. If there is no overall global acceptance of the currency, that again stands in the way of users being able to conduct worldwide online payments. Hence, crypto can only become an alternative to money if it is able to overcome all the concerns raised by individuals as well as its own internal shortcomings