Amidst rapidly expanding global digitalisation, one of the commonly asked questions is, “Do you invest in cryptocurrencies?”. Now you may ask, what is cryptocurrency?
A cryptocurrency is a type of digital asset based on a network that is widely distributed across computers. This decentralised structure allows them to exist outside the control of governments and central authorities. For better understanding, the word “crypto” is derived from the encryption techniques which are used to secure the network while currency means money, hence why cryptocurrency means digital assets. There is confidence among some in the viability of cryptocurrencies in this era due to their portability, divisibility, inflation resistance, and transparency.
Blockchain and cryptocurrency are usually correlated; Blockchains can be described as “cryptocurrency police”. They are organisational methods used to ensure transactional data integrity, making them essential components of many cryptocurrencies heavily involved in decentralised transactions. The blockchain works when someone requests a transaction; the requested transaction will then be broadcasted to a P2P network consisting of computers, known as nodes. The network of nodes will validate the transaction and the user’s status using a known algorithm. Once the transaction is verified, it is combined with other trades to create a new block of data for the ledger. The new block will be added to the existing blockchain in a permanent and unalterable way. A verified transaction can include cryptocurrency, contracts, records or any other information.
The benefit of blockchain is that it provides a way to record and transfer data in a transparent, safe, and auditable way while also being resistant to outages. This technology can make the organisations that use it transparent, democratic, decentralised, efficient, and secure. It is widely believed that blockchain and its related technologies will disrupt many industries such as finance and law due to the advantages that it provides.
Bitcoin is the first-ever blockchain-based cryptocurrency and remains the most popular and valuable one to date. Today, there are thousands of alternate cryptocurrencies, such as Ethereum, Ripple, and Litecoin, which have various functions and specifications. Some of these are inspired by Bitcoin, while others are new currencies that were built from scratch. As of March 2021, there were over 18.6 million bitcoins in circulation, with a total market cap of around US$927 Billion.
It is also of interest to look at cryptocurrency from a banking perspective. A useful model for illustrating this would be to look at Bitcoin.. Bitcoin allows anyone to send money across borders with relatively low transaction fees instantly. Blockchain is so influential that some say it can be used to give access to financial services to people worldwide, including those in third world countries who do not have access to traditional banking. In this ever-changing world that we live in, even conventional banks like Barclay are working on adopting blockchain technology to increase the efficiency and security of their business operations. However, it is essential to understand that banks are adopting this technology because of its safety and efficiency; it does not indicate that banks accept cryptocurrency transactions. Banks are also increasingly investing in blockchain startups and projects to date.
Bitcoin Mining
The value of cryptocurrency is purely dependent on the demand and supply mechanism of the market, where no government bodies have the power to implement policies to regulate the price. This begs the question of how does cryptocurrency handle its supply mechanism? The answer lies in the concept of cryptocurrency mining, and we can take Bitcoin as an example. Cryptocurrency mining is the process of creating new cryptocurrencies by solving a computational puzzle. When Bitcoin transactions occur, computers worldwide will compete to solve the transaction’s database and clump them together, forming a “block” in the blockchain. This system ensures the transactions are accurate by preventing duplication of cryptocurrency, as well as double-spending. When a miner successfully verifies a transaction, they are awarded Bitcoins. They act as an incentive for them to continue mining. When Bitcoin was created in 2009, it was set to be scarce, with 21 million Bitcoins available to be mined, establishing a limited amount of Bitcoin circulating in the market. For every 210,000 blocks added (takes about four years), the awarded BTC will be halved (50 in 2009, 25 in 2013). This slowly reduces the available supply, and like gold with a low supply, it can push the prices up with increased demand. It is projected that all 21 million will be mined in 2140.
Bitcoin is an example of supply and demand theory; its price and worthiness are very volatile over time, and here’s an example. When Bitcoin first started in 2009, it progressed from being worth US$0 to almost US$65,000.00 in March 2021. People nowadays see Bitcoin as an investment instead of an asset that can be used for transactions. Unlike Fixed Deposits (FD), Bitcoin’s return is not guaranteed as Bitcoin is speculative by nature, making it very volatile and dangerous for long term investments. A few reasons for Bitcoin’s rise in price is its growing adoption as a payment method. In February 2021, Elon Musk, the co-founder of Tesla, announced that they bought US$1.5 Billion worth of Bitcoin and were looking into the possibility of accepting Bitcoin as a form of payment for purchasing Tesla’s vehicles. This caused the value of Bitcoin to rise by 5% as people saw the currency as a store of value despite it being a speculative demand. However, two months later, Elon Musk decided that Bitcoin would no longer be accepted as a form of payment as mining Bitcoin is too hard on the environment and would not accept it for EV purchases until the coin’s production becomes more environmentally friendly. When the news broke, the price of Bitcoin dipped by at least 10% as people started losing confidence.
Can cryptocurrency replace flat currency?
In our opinion, it is unlikely that cryptocurrency will ever replace cash. One of the most significant issues of cryptocurrency replacing the legal tender we know as cash, is that it is built on a decentralised system. Without a centralised figure, it will be difficult to control its quantity and maintain a transaction record. Despite the underlying benefits, it comes at the cost of unstable monetary policy and fraud. For example, many real-life firms are being held ransom after cyberattacks, with the hacker requesting to be paid in bitcoins. Other than that, there will be no stimulus for the one in need when another global pandemic happens, as no one can control the quantity of currency in circulation. Though blockchain technology around cryptocurrency is good, it cannot replace the legal tender known to us, but will rather coexist with cash like gold as a commodity.
However, looking at it from a different perspective, the underlying benefits of cryptocurrency seem to suggest that the mass adoption of cryptocurrency will happen, especially with companies such as PayPal accepting transactions in certain cryptocurrencies. Initial backing of crypto projects often comes from ICOs, requiring fiat currency as their primary mode of funding. The decentralised and unregulated nature of the crypto world could lead to financial institutions rejecting the money they have sourced, preventing projects from going further. There are also too many crypto projects with no current concrete methods of governing blockchain technology. These limitations make it hard for the majority to support it. Therefore, we believe a middle ground must be met for regulators to interact with banks without comprising the core principles. Hence, we believe coexistence between the two is the future.
India’s view on cryptocurrency
India’s government has plans to impose a massive ban on the asset class for cryptocurrencies. They would like to ban all activities involving cryptocurrencies including possession, issuance, mining, trading and the transferring of crypto-assets. The rationale of this move is due to their belief of cryptocurrencies possessing the ability to undermine the stability of financial markets, which could result in huge negative impacts on society due to its tendency to fund unlawful activities and even Ponzi schemes.
China’s view on cryptocurrency
The Chinese government has also displayed a strong stance against cryptocurrencies. About 3 years ago, China was the first country to ban initial coin offerings (ICOs) and called it “illegal fundraising”. Since then, the Chinese government has accelerated efforts to champ down all businesses involved in cryptocurrencies operations including Bitcoin miners. According to China’s government, their stance is based on investor protection, money laundering concerns and unnecessary consumption of energy due to crypto mining activities. Multiple cryptocurrency mining projects faced the prospect of being banned and some existing ones in China’s Inner Mongolia region were even forced to shut down. Despite not being supportive of cryptocurrencies, China is still looking into the possibility of adopting blockchain technology for monetary control.
Malaysia’s view on cryptocurrency
Malaysia’s regulators view digital assets as assets that are not legal tender and with great suspicion, even going so far as to warn investors to be cautious when dealing with cryptocurrencies. Investors in Malaysia are told to understand that unregulated, offshore investments are not protected under Malaysian securities law and hence, Malaysians who conduct crypto-related activities do so at their own risk. Malaysia’s central bank, Bank Negara Malaysia (BNM) echoes a similar view, explaining that digital assets lack the characteristics of money and suffer from several limitations such as price volatility and risks of cyber threats and other immoral activities. Apart from that, in 2019, BNM mentioned that digital asset activities are also subject to anti-money laundering and counter-terrorism financing regulations administered by the respective authorities.
Feature image credit: immediate.net
