Cryptocurrency: A success story?
As India has now legalized Cryptocurrency, its popularity is ever increasing. But what is cryptocurrency? How does it work? How has it changed the world?
Cryptocurrency is a virtual currency that is based on cryptography, and it uses complicated encryption methods. This makes it nearly impossible to counterfeit or double-spend. A lot of these cryptocurrencies are decentralized, implying that they are not under any government control or central authority, thus making it hard for governments to control them, and making cryptocurrency so volatile.
Cryptocurrency and Bitcoin
Bitcoin is the most well-known cryptocurrency around the world. It was created in 2009 by Satoshi Nakamoto (that name is a pseudonym, his identity is unknown). As of now, 1 Bitcoin is equal to 34 lakh rupees. Bitcoin is similar to a commodity, and its price is determined by the market in which it is traded; in other words, it depends on the forces of demand and supply. For example, when China banned all Bitcoin mining and trading, the value of bitcoin took a detrimental hit as supply decreased and the price fell.
Central Bank-issued currencies use third parties like intermediaries (agents) who oversee every transaction with fiat currencies. However, transactions conducted by intermediaries often take more time.
Bitcoin and the Economy
Cryptocurrency has had a huge impact not just on the economies of nations but also on the global economy. Cryptocurrency has various ups and downs that impact the economy in its own ways.
Since cryptocurrencies are decentralized, governments cannot control them. Therefore, cryptocurrencies aren’t restricted to a specific geographical area and therefore can be traded around the world. Hence, Bitcoin can be used to provide low-cost money transfers, mainly for those seeking small amounts internationally such as remittance payments. This can then be transferred for cheaper with central bank-issued currencies as the need for an intermediary is eliminated. This creates a closer global economy.
However, these broader negative trades have downsides. It is easy to transfer money involving illegal activities without any government monitoring or intervention. This is why cryptocurrency has also gained popularity in the black market as it protects them. Not only that but the names of the users who conduct transactions are recorded as a pseudonym.
Therefore, in order to build up trust and security, more financial institutions have started to use Blockchain technology. Blockchain is a system of recording information that minimizes the ability to change, hack, or cheat the system. In the context of Cryptocurrency, a blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain itself.
Image Adapted from Investopedia: An explanation of the Blockchain System
A Success Story for El Salvador and Bitcoin
Just recently, El Salvador adopted Bitcoin as one of its official currencies. This decision was taken as cryptocurrency would enable people to send in money without paying most of the cost, collectively saving Salvadorans $400 Million. Salvadorans sent $6 Billion in remittances from abroad, equalling 23% of the country’s GDP. Since they’re saving such large amounts, more Salvadorans would be encouraged to create a bank account (30% of Salvadorans have bank accounts).
This legalization also means that capital gains will not be taxed, and taxes would be paid in bitcoin; this would attract a lot of foreign inflows of bitcoin to El Salvador. This will also increase the chance of proceeds from illegal activities to pass through the country’s financial system. The International Monetary Fund has cited concerns about Bitcoin’s adoption.
Cryptocurrency and the Environment
However, Bitcoin mining has had terrible consequences on the environment. For example, the legalization of cryptocurrency in El Salvador is set to increase CO2 emissions by 60 million tons. Bitcoin mining requires a lot of energy due to the computations needed to mine them. The bitcoin network uses as much energy in one year as the country of Argentina.
The Bitcoin network annually generates 11,500 tons of e-waste. However, not all cryptocurrencies have such detrimental effects on the environment; some cryptocurrencies don’t involve mining at all. These include cryptocurrencies such as EOS and Cardano.
In my opinion, there are several long-term consequences of cryptocurrency, and thus we may discourage people from mining it. To cater to this problem, we can implement mining restrictions while looking for green solutions to the issue. As individuals, we can spread awareness about the problems associated with cryptocurrency. Cryptocurrency is beneficial to us but also poses a threat to the environment.
Now, whether cryptocurrencies are a success story or a threat relies on perspective. This is because while there are success stories like that of El Salvador, there are failures and other demerits of cryptocurrency. Thus, it may be too early to predict the extent to which cryptocurrency will play a role in the world in the future.
Written By: Sumer Gupta
Edited By: Aarushi Bansal
Designed By: Myra Jain
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