Cryptocurrency: The Bloodstained Advancement and Collapse of Modern Finance
Despite repeated crashes and volatility, Bitcoin has remained a buzzword that mesmerizes, tempts, and confuses. When Satoshi Nakamoto, the anonymous inventor of Bitcoin, created the exchange, it was simply cutting-edge technology, highly public and decentralized. This was unlike regular banking, which was centralized, regulated by the government, and secretive.
Bitcoin relies on a complicated series of encryption in order to verify transactions. In regular banking, people verify their identities through a public key and a private key. However, if this is the case, we need to question whether or not we are able to trust banks and the bankers that come along with the whole system. Bitcoin solves this dilemma. With simple pure math, cryptography, and computer science, it allowed us, ordinary people, to make transactions in safer, math-proven ways. For the majority, this rather seemed like a more accountable way of transacting.
However, before we make any assumptions that regular banking is unsafe, understanding how it operates may somewhat clear up the comparison that is taking place between the methods of finance that we have gotten our hands into. Firstly, banks are privately owned. They usually accept things called deposits and loans. A deposit is money that people leave in the institution knowing that they can get it back at any time or at an agreed future-time. A loan is money let out of the borrower to be generally paid back with interest. These two actions are often called financial intermediation. Well, if these are the two roles of the banks, how do they actually profit? If we want to answer this question, we need to know what interest is.
Usually, when customers lend money from the bank, a certain amount is charged as what is called interest. Credit cards, loans, and mortgages are all included. With this, the banks are able to maintain a stable profit and rarely go bankrupt. Rarely—but not always. Why does this not happen regularly? Other than interest, banks also have other astute methods to preserve their money. Banks make money by “spread”: the difference between the interest they pay for deposits and the interest rate they receive on the loans. We also need to acknowledge that banks are customer service institutions, meaning that they also profit off from checking accounts, financial counseling, loan servicing and the sales of other financial products.
All of these things mentioned above may rather sound quite confusing and too intricate. Yet, these institutions prevailed ever since the 18th century. If these systems are complicated, sometimes we ask ourselves. “How complicated is modern finance?”
To truly understand the systematics of modern finance and transactions, and the birth of Bitcoin, we need to go back to 2007. With the global financial crisis, distrust of banks and central government were at its peak. With a large decline in US home prices after the collapse of a housing bubble, there were mortgage delinquencies, foreclosures, and the devolution of housing-related securities. This was known as the subprime mortgage crisis, which eventually led to a global economic meltdown in 2008. This caused the US investment bank Lehman Brothers Holdings filing for bankruptcy in 2008, heralding a potential collapse of traditional banking. These conditions were perfect for the next generation of finance to settle down; everyone could sense a hint of novelty in the air.
In November 2008, the pseudonym Satoshi Nakamoto wrote to a cryptography mailing list. The email acted as a description of a new form of currency: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” Soon enough, Bitcoin or broadly cryptocurrency was created. The birth of this so-called cryptocurrency was rather chaotic: we still don’t know who the people are, and the exact date of origin is still unknown. These factors may make cryptocurrency seem rather suspect, but the result was quite the contrary. Although the exact specifications weren’t mentioned at all, there was a special point that made Bitcoin trustworthy and “idealistic”: blockchain. Before knowing what a blockchain really is, knowing how Bitcoin runs is vital. Bitcoin is a decentralized digital currency that runs without the needs of governments. Bitcoin utilizes person-to-person transfers on digital networks that record all transactions that have gone through.
Then, where does blockchain come in? It is quite simple. Blockchain powers all of these networks that are going through in the digital transaction world, by implementing open source codes that groups blocks of transaction histories to prevent manipulation. When we dive deeper into these open source codes, Bitcoin shows us the true complications of modern finance and mathematics. For a source code to be open, anyone can be able to access, edit, and manipulate it. However, not all of these changes go through to the Bitcoin Core, the main programmed code that allows the currency to run smoothly. The entire community reviews the new proposed code and then decides whether to make the change or not. Because the currency is not centralized, everyone can participate in the discussion, and the decision is based on consensus instead of votes.
Once the proposed code is added into Bitcoin Core, the maintainers integrate the change, catching every possible error that might occur. Who really are the maintainers behind all this? Ever since Satoshi Nakamoto invented the currency, the maintainer position was taken by him. However, due to his sudden disappearance in 2010, now the role is voluntary but once discredibility is shown, their positions can be withdrawn.
Bitcoin soon became a ubiquitous part of the financial world. Soon, as the currency became well known, not only professionals, but ordinary people like us were able to experience the world of cryptocurrency. As credible some people may believe Bitcoin is today, it wasn’t always like this. As mentioned, the start of Bitcoin was chaotic. The notion of a decentralized financial system seemed perfect; however, Bitcoin was slow and too expensive to handle regular commerce, essentially only useful for buying drugs: the high fees and rapid fluctuations made the two perfectly compatible. While exacerbating the problem of drug sales, Bitcoin also didn’t solve what it was trying to solve. Bitcoin never solved the actual problems caused by the banking industry, and only became the new medium through which they operated. People who accumulated wealth through traditional means were the ones who profited from cryptocurrency first. This so-called novelty was only an illusion. However, as Bitcoin settled into the financial world longer and longer, it became normalized as just another financial asset.
Although the majority knew about the term “Bitcoin '', still, despite these suspicions, not all of them knew the operations and computations running behind their screens. Yet, with the persuasion of fellow peers, the confidence of investing skyrocketed. The apex of Bitcoin drew nigh. Alongside the coronavirus shutting down the economy and stirred up the fear of USD inflating, Bitcoin skyrocketed in parallel. With a peak around $68,500 in early 2021, some prospected the currency to soar to $100,000. Yet, the unexpected happened out of nowhere. It’s peak didn’t last long as expected. Going into late 2021, the coin struggled, with rising rates and lower investor confidence. Now 2023, Bitcoin doesn’t show any signs of surging, and hovers around the $20,000 and $30,000 mark. This isn’t just Bitcoin, but other cryptocurrencies widely used are in a rut.
With this massive collapse came waves of suicides. A man in Taiwan committed suicide after investing two million dollars on tokens. The currency collapsed, and he had no other choice. An Indian man also took his life after overstretching his investments with lent money, on a cryptocurrency app. However, due to the fall, the people who he lent money from pressured him to give the money back. With even his car taken away, he was helpless.
Another problem that arose was pollution and energy use. Since the birth of Bitcoin, the problem of crypto mining has never halted. People would run transactions on numerous computers and would start creating “new” Bitcoin on their own. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining operations worldwide now use energy at the rate of nearly hundred twenty terawatts-hours per year. The energy use has never been this high in the financial world, and is reported to be about the annual domestic electricity consumption of the entire nation of Sweden. Can we still consider Bitcoin as a “novel” idea? Or are we only painting over the fundamental problems of banking, simply changing the “guards” of the so-called antiquated banking system?
The blood and energy waste stained on these currencies have tainted their legitimacy, perhaps forever. Now we have begun to question the fragility of these cryptocurrencies, especially Bitcoin. Can the fall affect people, and is it better to stick to the methods that we used for centuries? The transition of finance is surely thrilling yet bitter.