The rightful place for crypto money in the scheme of things
BITCOIN is the most dominant of all cryptocurrencies, holding approximately 50% of the aggregate share in distribution. It was developed in 2009 by a pseudonymous, Satoshi Nakamoto.
Just as money, it serves as a medium of exchange, although it is not legal tender, except in a very few states such as El Salvador. The currency has grown in value, from less than US$1 per bitcoin, at its launch, to the current US$27 000 (The prices of bitcoin in this article are rounded off).
This price growth and the frequent mentioning of it in the news, provides an opportunity for filling a knowledge gap about it, which is still pervasive in the market.
Other viable digital "coins" and tokens (cryptocurrencies) were created pursuant to it and also acquired a decent market presence. These include Ethereum, Binance coin, Cardano, Terra, etc.
Since the subsequent design on, which the newer coins were established, is based on bitcoin technologies, those coins are referred to as "Alt coins" as a short for, alternative coins.
It is also standard practice to use the term "crypto" as a short for cryptocurrency. The crypto market has peaked in value to a market capitalisation of around U$3 trillion, in November 2021.
This is equivalent to the size of the United Kingdom (UK) economy, for instance, proving the importance of understanding the present and future of this financial technology.
At their introduction, cryptocurrencies were competing for market share mainly with fiat currencies. However, they have become havens for speculators, tax-evaders, authentic investors, etc.
As a result, crypto now competes with various tools in the financial markets, such as gold, government treasuries, pension funds and so forth.
To be clear, some pension funds in Canada and the United States, have been assigning investments to crypto as a viable avenue of growing and preserving value for their clients.
When the average person needs to purchase cryptocurrency, they typically register on a crypto exchange such as Binance, eToro, or Coinbase, for instance, and then transfer funds from their bank account, to make purchases at the prevailing price.
Crypto exchanges also offer an option for swapping different cryptocurrencies from different companies. The comprehensive nature and influence of crypto has left many policy makers, investors and standard people, not certain of where the status of bitcoin should lie, within their economies, investment alternatives, and day-today lives.
For anyone willing to invest in crypto, the volatility of prices in the market should be appreciated, in its historical and present nature.
Unlike the generally stable fiat currencies, crypto has an extremely capricious price fluidity. Known as cryptocurrency bubbles, these price changes, have made the sharpest swings through the years, 2011, 2013-2015, 2017-2018, and more recently, the 2020-2023 bubble.
From an original price of a few cents per bitcoin, it has meandered up and down around, US$29, US$2, US$4 000, US$20 000, US$11 000, US$67 000, US$30 000 and US$16 000, through the passage of time.
The price changes are due to various factors such as regulations, interest rate changes, pure speculation, etc.
To bring more scope on the changes, the 2020 to 2023 bitcoin bubble can be explained in greater detail. In 2020, during the covid pandemic, banks around the world began to cut interest rates so as to stimulate demand in their economies.
Resultantly, a section of bitcoin customers started to use the cheap credit for purchases in the crypto market. The price of bitcoin grew from around US$7 000 at the beginning of 2020, before the pandemic, closing the same year at around US$29 000.
During 2021, the upward movement firmed until it reached the spectacular price of US$68 000 per coin, in November. Various news channels and adverts were filled with crypto success stories.
The run was so successful that, in the next year, four major crypto companies bought prime advertising space in at the NFL Superbowl playoffs, in the United States.
However, trouble began brewing for the industry, after the covid pandemic. There were sudden macroeconomic shifts which led to high inflation, globally.
In order to attend to the rise in prices of goods and services, central banks began to raise interest rates. In the United States market, for example, rates rose from less than 1% during the pandemic, to the current 5,25%.
The rise in crypto prices could not continue, as less and less people were now able to assign credit towards purchasing cryptocurrencies. In April, 2022, the US Securities and Exchange Commission (Sec) began considering regulations for the crypto market, as it was largely unregulated.
The announcement by the Sec set off the initial collapses of crypto exchanges (companies, which provide crypto for fiat and crypto swaps).
Prices tumbled more, and BlockFi, eToro, and Bitmex, amongst others, began laying-off substantial proportions of their workforce. Other exchanges began to freeze withdrawals, as people began to liquidate their tokens during the price crash.
These include, SkyBridge, Zipmex, Vauld, Coinflex, etc. In the same period, more crypto firms began to file for bankruptcy, and yet others were failing to repay their debts to other crypto lenders in their industry.
Marketing budgets, which underpinned the robust price growth in previous years, were trimmed. FTX's main token (FTT) had a price crash.
Impeccable Stablecoins, which were pegged to the US dollar lost their peg.
Other cryptocurrencies were proven fraudulent as well. Arrests and warrants were issued for owners of exchanges. These tumultuous events in the crypto market, led bitcoin to fall from a height of US$67 000 in November 2021, to US$23 000, by January 2023.
As bitcoin plunged, "alt coins" crashed together with it. Ethereum fell from a peak of around US$4 600 to US$650, in the same period.
Apart from price volatility, there has also been acute theft occurring in the crypto market. The distributed ledgers on which cryptos are run, compromise security, unlike if they were operated on a central ledger.
In 2014, a crypto exchange named Mt. Gox, lost 750 000 bitcoins, about 7% of total in circulation, at the time, to hackers. Their clients lost some of their investments and the firm declared bankruptcy.
Tether, an issuer of US dollar pegged stablecoins, lost US$31 million of tokens, to hackers, in November, 2017. Another bitcoin hack happened in December 2017, when Nicehash, lost US$70 million dollars to online criminals.
In 2018, Coincheck reported a heist of US$530 million in tokens from their exchange. In 2021, a pair of South African brothers, designed a crypto scam were they eventually vanished with US$3,8 billion of bitcoin through their fraudulent crypto exchange called, Africrypt.
More thefts occurred at other exchanges, thereafter, although the 2022 collapse of FTX, has had the most significant recent impact.
FTX was highly regarded in the crypto industry, as it was one of the biggest exchanges. Before its demise, it was reported that they were fraudulently selling a token, which they had created themselves, but were presenting it to the market, as though it was not theirs.
This sparked a broad sell-off until the company froze withdrawals. Sam Bankman-Fried, who was the owner, and a top donor to Democrats, in the 2022, US midterm elections, was accused of mishandling customer funds and embezzlement.
He was later arrested in the Bahamas and extradited to his native country, the US. He is accused of using billions of assets for personal investment and as donations to the Democratic party, of the United States.
Having been largely unregulated, crypto drew the attention of mindful policy-makers across the world.
Since its introduction into mainstream commerce, a number of countries have taken a position to have it comply with their laws. In most countries, however, law makers are still to initiate discussions and decide on regulations.
In China, Initial Coin Offerings (ICOs) were banned in 2017. This means new developers of crypto could not legally raise funds for their new crypto tokens anywhere in the country.
By mid-2018, financial institutions and payments companies such as Alipay and WeChat Pay, were prohibited from handling crypto transactions.
Ultimately, towards the end of 2021, all cryptocurrency businesses and transactions were banned. This led to an emigration of Chinese crypto companies, such as Binance, for example, which moved some of its operations to Canada.
The situation is different for El Salvador, which made bitcoin legal tender.
In the US, the largest crypto exchange, Binance, is banned. There are, however, firms in the crypto business, which are still operational, such as ProShares, with their bitcoin-linked Exchange Traded Fund (ETF).
Additionally, a National Cryptocurrency Enforcement Team (NCET) has been created to manage the industry. The presidency, also issued an executive order, which provides legal guidelines for firms and customers involved in crypto and other digital assets.
As for Zimbabwe, financial institutions were prohibited from dealing with cryptocurrency transactions, in 2018. The main concerns were that crypto would undermine monetary policy, capital flows and promote illicit activities, if left unchecked.
The UK has established a law which demands that every professional or business participating in crypto, be registered, with the regulator, which is the Financial Conduct Authority.
Binance was also banned.
Having gone through the nature and context, in which bitcoin and other cryptos operate, it is vital for policy-makers, investors and regular people, to find a rightful place for it, within their lived-realities.
Do cryptos provide valid alternatives to traditional assets in financial markets, or, are they, instead, a fad, which will soon disappear? Since such currencies do not have intrinsic value, some experts argue that they are a farcical.
For instance, at one time, Jamie Dimon, CEO of JP MorganChase, stated that bitcoin is a dangerous decentralised Ponzi scheme. Billionaire investor, Warren Buffet, maintains that crypto is largely built on speculation, having very little to no, fundamental virtues.
Should governments continue regulating it, and to what extent? There have been indictments of money-laundering charges, directed at some owners of crypto and crypto exchanges.
In the US, the Sec eventually regulated that all movement of funds exceeding US$10 000, be reported to the Internal Revenue Services (IRS), with the aim of addressing tax evasion by crypto traders.
Since some pension funds began using crypto as an investment option, must such a practice continue? The volatility of crypto prices and lack of security on distributed ledgers, does leave a huge vulnerability gap.
The size of the total crypto market, running into trillions of dollars, has proven the impact of this financial technology, in the world. Ignoring its presence, would be ungainly.
Whichever place one decides to create for crypto, it is judicious to blend one's perspective, in the right scheme or context.
—