Cryptocurrency: Opportunity Or Disaster?

What Is It?

Cryptocurrency, also known as digital or virtual currency, is a form of decentralized digital currency that is based on cryptographic algorithms. It operates independently of any central authority or financial institution, and uses encryption techniques to secure and verify transactions.

The most well-known cryptocurrency is Bitcoin, but there are now thousands of different cryptocurrencies available, each with their own unique features and functions.

The first cryptocurrency, Bitcoin, was created in 2009 by an unknown person or group of people under the pseudonym Satoshi Nakamoto. Since then, thousands of other cryptocurrencies have been created, such as Ethereum, Ripple, Litecoin, and many others.

How Does Cryptocurrency Work?

Cryptocurrency operates on a decentralized network called a blockchain. A blockchain is a public ledger of all transactions that have ever occurred within the network.

Each transaction is verified by a network of computers, and once it is confirmed, it is added to the blockchain. This makes the transaction immutable, meaning it cannot be altered or deleted.

To own cryptocurrency, one must have a digital wallet, which is a software application that stores and manages the private keys that allow access to the currency. Transactions are made between digital wallets, and the blockchain network ensures that the transaction is secure and valid.

The Pros

One of the main advantages of cryptocurrency is that it is decentralized, meaning it is not controlled by any central authority or government. This makes it more flexible and accessible than traditional currency, as anyone can use it as long as they have access to the internet and a digital wallet.

Another advantage of cryptocurrency is that it is more secure than traditional currency. Cryptography ensures that transactions are secure and resistant to hacking and fraud. This makes it an attractive option for online transactions, as it is less vulnerable to fraud and cybercrime.

In addition, cryptocurrency is faster and more efficient than traditional currency. Transactions can be completed in a matter of seconds or minutes, compared to traditional currency transactions that can take several days to complete.

As of March 2023, the current status of crypto is mixed. On the one hand, cryptocurrency adoption and investment continue to grow at a rapid pace, with more and more individuals and businesses embracing the technology. Major companies such as Tesla, Microsoft, and PayPal have either invested in cryptocurrency or accept it as a form of payment. Additionally, there has been an increase in the number of crypto-related services and products, such as crypto wallets, exchanges, and trading platforms.

The Cons

Cryptocurrency is highly volatile, it depends highly on speculation and a lack of a controlling agency makes it anonymous but difficult to regulate. Unlike traditional currencies, which are regulated by governments and financial institutions, cryptocurrencies are decentralized and operate on a peer-to- peer basis. While this lack of regulation can be appealing to some, it also presents significant risks. For example, without regulation, there is a risk of fraud, hacking, and theft. Additionally, there is no legal recourse for investors who lose money due to fraudulent or criminal activity.

Hence governments are finding it difficult to make legislation for it. Some countries like China, Bangladesh have completely banned it use whereas in some nations, including Saudi Arabia and Canada, its use in banking is prohibited. In India, the government is considering to implement the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” which aims to outlaw private cryptocurrencies with few exceptions, promote cryptocurrency trade and its underlying technology while developing an official digital currency issued by the Reserve Bank of India.

The Rise and Fall of UST & LUNA – A $300 billion Issue

Cryptocurrencies are not tied to any physical asset or entity, meaning that its value can fluctuate rapidly and is impossible to predict. This has led to significant losses to investors.

For example TerraUST (UST) and LUNA were a blockchain network and token created by Terraform Labs. Terraform Labs created the UST coin to be an algorithmic stablecoin on the Terra network.

Stablecoins are tokens that are meant to have a fixed value of $1 in order to have a stable rate unlike other cryptocurrencies. To create UST you have to use Luna. So, for example, when Luna token’s price was $85, you could trade one token for 85 UST. This deflationary protocol was designed to ensure there was long-term growth for LUNA.

LUNA went from being $0.80 in early 2021 to $119 in April 2022, a 14000% increase! But it suddenly crashed in May 2022. Over $2 billion worth of UST was taken off and millions were being liquidated hence lowering the value of UST to $0.91.

This led to a panic where investors rushed to sell off the UST therefore creating more LUNA tokens therefore reducing the price of a LUNA token. Due to this the value of LUNA dropped to less than ten cents, leading to LUNA and UST being delisted from the market.

This crash is estimated to cause a loss of $300 billion in value across the cryptocurrency space. Many people lost their life savings and suffered financial hardships due to the Luna crypto crash. This also caused the instability in Bitcoin.

The value of Bitcoin increased from $18,000 in Nov 2020 to $36,000 in Jan 2021; in Nov 2021 was $64,400 but in Dec 2021 it fell to $35,000 in Jan 2022 then to a low of $18,000 in June 2022.

FTX: A Cryptocurrency Giant Gone Too Soon

Another major incident is the Bankruptcy of FTX. FTX was a company which operated a cryptocurrency exchange and hedge fund founded by Sam Bankman-Fried who also was its CEO and Gary Wang. At its peak it was the third largest cryptocurrency exchange by volume.

In November 2022 an article stated that FTX’s partner firm Alameda Research held a significant portion of its assets in FTX’s native token (FTT).

Another crypto exchange company, Binance, had a large no of FTT tokens in exchange for equity in FTX. Binance’s CEO Changpeng Zhao and Sam were known to have tensions between them. After the article, Binance announced would sell its holdings of the token, which was quickly followed by a spike in customer withdrawals from FTX. This caused a massive drop in the value of FTT leading to FTX filing for bankruptcy.

All these events combined was dubbed as the “Great Crypto Crash”.

Pump and Dump

The relative easiness in creating a new cryptocurrency has also lead to a large no of scams in the space. A Common scam is a “pump and dump scheme”. Here an organizer gathers influencers privately and would coordinate in buying the target crypto asset to avoid price spikes (this is generally a new crypto asset).

The influencers then share information about the trade with their social media followers, resulting in the public investing in the asset. The organizers will then coordinate the sale in order to get everyone paid, leaving the public investors in loss.

For example, influencers from FaZe Clan, an Esports and influencer organisation, promoted a new cryptocurrency called SaveTheKids. They lured in people by promising that investing in the coin would help children around the world. The organizers and influencers made off with tens of thousands of dollars, leaving their followers with a worthless crypto token. Needless to say, no kids were helped!

Conclusion

Despite these challenges, many experts believe that cryptocurrency has a bright future. As more people become familiar with the technology and its potential uses, the demand for cryptocurrency is likely to continue to grow.

Furthermore, advancements in blockchain technology could lead to new and innovative uses for cryptocurrency beyond its use as a digital currency.

Ultimately, the future of crypto is uncertain, but its potential for innovation and disruption in various industries is undeniable.

If you do want to invest in cryptocurrencies, make sure to check the risks and do your research thoroughly.