The gigantically colossal crypto debate

Trying to separate the myth and the reality of crypto

There’s a lot of froth and bubble about cryptocurrencies at the moment. Can an asset really have a value if it isn’t backed by anything other people’s perceptions of value? How do you get around the accusation that it simply a way for criminals to launder money? Isn’t it environmental vandalism? Aren’t we just witnessing the inflation of another investment bubble that is bound to pop and devastate consumer confidence just as the world is struggling to recover from the devastating economic impact of Covid-19?

The discussions go around and around. The problem is that there are a group of very vocal crypto evangelists who are facing off with a group of equally vocal traditionalists. Some people on both sides are trying to have a rational debate but some are merrily flinging facts and slinging mud in equal measure.

For those of us that are only loosely associated with the space, let’s have a quick run through some of the main arguments.

It has no intrinsic value

The value of a cryptocurrency is based purely on what someone else is willing to pay, but it’s worth remembering that the financial markets are full of trades that aren’t based on anything other than the turn that can be made on the trade itself.

Take the foreign exchange markets. According to the Bank for International Settlement’s triannual survey in 2019, around US$6.6 trillion of FX trades are done each day. Meanwhile, the World Bank estimates that the annual global gross domestic product was around US$80 trillion in 2017.

While a certain amount of this is comparing apples and pears, it suggests that basically by around mid-January each year, the FX market has done what it needs to do from the perspective of trading goods and services around the globe. Beyond that, every trade is trade for trade’s sake. Trading represents a fair proportion of most banks’ balance sheets and most people accept that in normal times it keeps the global economy rumbling along, so surely crypto should enjoy similar treatment?

It’s used by criminals

The response to this is that crypto is unregulated and is often used by criminals. And this can be a fair point, but gold is also used by criminals. And so are banks. And cars. And houses. And fire. Rather than ban crypto and miss out on its value as a tool for global trade, it might be better for governments to create of a regulatory framework that offers protection to consumers and makes it difficult for criminals to use crypto as a way to launder money, evade taxes and create Ponzi schemes.

Because crypto has the potential to massively enhance the efficiency of world economy, making it possible for people to work internationally far more easily. Cryptocurrencies are built on blockchains that are intrinsically transparent and regulators could take advantage of this fact to create a framework that will make the global economy work more efficiently and reduce the opportunity for criminals and tax evaders to take advantage of the current system. Which they sometimes do.

It is wrecking the environment

But then there is the suggestion that crypto is environmentally irresponsible. That the servers used to manage the global information about a cryptocurrencies have a voracious appetite for power which adds colossal amounts of carbon dioxide to the atmosphere, and their frenetic upgrade cycle chews through vast amounts of rare earth minerals. And that they are doing it right at the point when the 7 billion humans on the Earth need to become a bit more sensible about the way they treat their home.

There are a couple of points in response to this. The first is that comparisons between crypto and traditional banking transactions tend to be comparing the power consumption of an entire crypto transaction from one owner to another with only a single part of the banking process. That they don’t take into account clearing, settlement or any of the other processes that make up an international banking transaction.

It is also worth pointing out that the way that many governments have responded to the emergence of crypto has driven the physical activity of crypto mining to countries where environmental controls are not as stringent, making their servers more likely to be powered by coal.

Equally, there are different types of cryptocurrency. Bitcoin has been the most successful so far and as a result has had the most focus, but it was also basically the first, and was developed on the assumption that the crypto-mining process could be carried out on a reasonable home set-up at a moderate, self-regulating cost. When the cost of bitcoin rose, more people would support it by mining to the point where supply outstripped demand and the price of the coin fell to the point that miners were discouraged.

Bitcoin’s phenomenal success (as of March 2021) and the fact that mining has had to become professional to keep up was not anticipated.

Without getting into debates about the nitty-gritty of how cryptocurrencies work (you can look into proof-of-work versus proof-of-stake on your own time), currencies that came after bitcoin have been able to work with more efficient processes.

Comparing emissions data for the Model-T Ford automobile engine with its modern equivalents is more complicated than I expected (thanks the internet) but the point is that we are in an unusual situation where the first attempt to create a cryptocurrency has become a wild success. Bitcoin has become synonymous with cryptocurrency and as a result the environmental issues are baked in, for now at least. If governments take the opportunity to play a pro-active role in the development of cryptocurrencies, it may be that this will become less of an issue as we progress because some form of alternative could come to the fore.

It’s a bubble. Bubbles pop

Bitcoin’s 12-month rise from US$3,000 to US$50,000 is both impressive and concerning. It’s great if you have bitcoins in your portfolio, but it does have the look of an economic bubble that’s just waiting to burst.

History echoes with the sound of swords clashing, parliaments debating and economic bubbles popping. Tulips, railways, gold, dot coms, they have all had their bubbles, but once the bubble has burst, the product or service they grew around still tends to have a value. The crypto bubble could burst, but the reason investors have been attracted to the sector is that it has a value and will continue to have value when the economy moves on to the next big thing.

Many of the world’s richest and most entertaining eccentrics have publicly and loudly invested in crypto over the last few months, but they have also been joined by a range of traditional companies that have CEOs that are subject to boards and shareholders. They are less likely to risk their reputations but are investigating the crypto space, which suggests that crypto has legs.

Ultimately, amid the sound and fury, there’s an important point that needs to be repeated: Crypto has the potential to change the way that business is done. The reason why bitcoin is doing so well is that there is a demand for it. For some people it’s because they enjoy trading, but there are plenty of others that want to use it for completely legitimate business.

Its value as a tradable asset and its potential to be used as a tool for criminal elements are both important. So is its environmental impact and the risk of damage to a fragile global economy if the bubble bursts. But it looks like crypto in some form or other is here to stay. It would be better if governments played a proactive rather than reactive role.

I’m a freelance communications specialist (basically, I write stuff). Follow me on Twitter at @zatag1234.