Cryptocurrency: What It Is and Why You Should Care

Sophie Silva, Apr 26, 2022

During the 2022 Super Bowl, millions of Americans watched as a colorful QR code bounced around their black TV screens. Interests piqued, over 20 million people scanned the QR code which led them to Coinbase, a cryptocurrency company urging viewers to join their exchange platform by offering $15 in free bitcoin to those who sign up for an account [1]. However, the excitement did not stop there. Super Bowl fans witnessed not one, but four commercials featuring cryptocurrency exchange companies: Coinbase, eToro, FTX Trading, and eToro illustrated crypto investors as a large cloud of joyful people, flying through the city, picking up new investors to come “fly” with them and join the celebration. FTX made viewers laugh as one man continually scorns various crucial historical advancements, such as the wheel, lightbulb, and even the US Constitution. In the end, he passes up on cryptocurrency and FTX airs the statement: “don’t miss out on the next big thing,” thus equating the importance of cryptocurrency to that of other world-changing inventions. Finally, features a sports fan-favorite, Lebron James, who pushes forward the message that “fortune favors the brave,” implying that “the brave” are those who enter into the world of cryptocurrency.


These loaded statements attempt to reel in the general public, many of whom hardly know what cryptocurrency is, nonetheless how it works. These ads are the first line of response towards skeptics’ age-old question: Why should I care? In line with the commercials, the quick answer is that cryptocurrency is projected to change the world. Proponents of cryptocurrency even claim that crypto is the most revolutionary technology to be seen since the wide-scale adoption of the internet. Thus, if the Super Bowl ads have not overstated this enough: cryptocurrency is a big deal. The rise of an entirely new transaction method has the potential to drastically alter financial systems around the world and in time, the power to shift the international economy as a whole. However, before jumping directly into cryptocurrency, it is pivotal that readers understand the political, social, and economic nuances behind cryptocurrency, alongside the implications that such a technology has on our future.


In order to see the full picture of cryptocurrency’s impact, one must understand the basics of what it is and how it works. First, begin with the concept of currency. Currency is essentially a communication tool– it allows people to agree on the value of something and to transfer that value. Because of this standardized form of value, human beings are incentivized and coordinated by money [2]. Therefore, our lives revolve around transactions: borrowing money, spending money, signing contracts, and investing, and to make such transactions, we rely on centralized financial systems such as banks, treasuries, and loan companies. These institutions, who serve as middlemen, rely on the trust we give them. However, our current financial system does not come without its faults. Enter: the 2008 Financial Crisis. In the wake of a global economic fallout, as citizens around the world stood disillusioned with financial institutions, a mysterious online figure under the alias of “Satoshi Nakamoto” rose from the ashes. On October 31st, 2008, Nakamoto published a whitepaper document explaining the concept of a “peer-to-peer electronic cash system,” the blockchain, in what would now be known as the founding of Bitcoin, the first cryptocurrency [3]. It is no coincidence that Nakamoto released this new technology directly after the worldwide failure of banks; in his whitepaper, he laments that our current financial system “still suffers from the inherent weaknesses of the trust-based model” and offers cryptocurrency as a much more reliable alternative [4]. Since the release of Bitcoin, nearly 10,000 new forms of cryptocurrency have been created such as Ethereum, Tether, XRP, and the infamous Dogecoin that’s based on an internet meme. A majority of these other cryptocurrencies use the same blockchain technology as Bitcoin; however, for the sake of economic impact, only the top cryptocurrencies, such as Bitcoin and Ethereum, will be discussed in this article.


Next, it is crucial to also understand how cryptocurrency works. In simplest terms, cryptocurrency allows for a direct transaction between sender and recipient. This is what Satoshi Nakamoto is referencing when he uses the phrase “peer-to-peer.” Although users are exchanging currency with genuine value, they no longer need a middleman to moderate the exchange; essentially, it is a digital payment system that does not depend on banks to verify all transactions [5]. In order to eliminate the need for a middleman, cryptocurrencies utilize something called blockchain technology. When people refer to “the blockchain,” they are talking about a database that records and stores transaction information on a decentralized ledger that is shared across millions of computers worldwide [5]. In basic terms, everyone has their own personal copy of a universal record book that keeps track of any and all transactions taking place across the globe. The blockchain uses encryption and an intricate hash function called SHA-256 to record transactions and identify fraudulent ledgers [6]. When people refer to bitcoin “miners,” they are talking about people who work with this hash function to add new blocks to the blockchain, which simply means they are updating the ledger with a new list of recent transactions. Adding a new block to the blockchain is also referred to as “proof-of-work,” which is how transactions are verified to be legitimate [6]. When a bitcoin miner adds a new block to the blockchain, new bitcoins are created and the miner gets to keep these bitcoins for personal use as a reward. And thus, miners are the core of what keeps the blockchain running; their incentive to earn more bitcoin drives them to verify thousands of transactions per day.


For those new to the world of digital currency, cryptocurrency may seem like a mere stock investment. However, proponents of crypto urge the general public to begin using cryptocurrency as a method of payment in their everyday lives. For example, most people do not think twice when swiping a credit card to pay for their goods at a grocery store. Despite the fact that credit card approvals seem instantaneous to the consumer at checkout, the transaction actually goes through a lengthy ten-step process before being completed. The bank, merchant, and credit card company all have to communicate with one another on authorization and approval [7]. The use of cryptocurrency eliminates the need for any of this. A Coinbase representative explains that “this technology makes us richer and wealthier because you need less time, or less money, or less effort to get things done” [2]. The principle is simple: efficiency is power. Additionally, the elimination of a middleman returns financial agency to the people, rather than giving institutions excessive control and oversight. This can otherwise be stated as “returning power to the hands of the people.” Tapscott Group CEO, Don Tapscott, has spent years vouching for cryptocurrency and its applications as a widespread form of payment, as he believes that “the technology could offer genuine privacy protection and ‘a platform for truth and trust’” [8].


While the decentralized, trust-based nature of cryptocurrency creates a haven for the efficient movement of money and resources, banks and other financial institutions are scrambling to find their place in a new digital economy. Marco Streng, co-founder of Genesis Mining, makes the powerful claim that due to cryptocurrency, central entities will cease to exist [9]. However, it is widely debated about whether this is beneficial or detrimental for society. What would our future economy look like without any oversight or regulations? Governments around the world are wary about bitcoin and other cryptocurrencies, arguing that institutions and rules are put into place for a reason. Finance expert James McWhinney denounces bitcoin, writing that “the chain of trust underpinning the current financial infrastructure becomes an algorithmic construct in Bitcoin’s network” [10], thus proving that a financial system relying solely on supercomputers and complex algorithms presents a dystopian future for many. Consumers rely on the government and real people to moderate investments and keep their money safe; largely because this is all we have ever known. And despite its faults, the modern US financial system has stood its ground for over two centuries. Many people feel reassured by its longevity and thus have no problem trusting a central entity. However, strong trust in one’s government and its ability to keep your assets safe is a luxury for those living in the US and other well-developed, democratic nations. For others around the globe, this is not the case.


In October 2020, the Nigerian government froze the bank accounts of 20 citizens for protesting police brutality, as the demonstrations were one of the country’s largest social upheavals in 20 years [11]. These protesters were then unable to access any of their personal assets, as their financial agency was completely stripped away by the Nigerian central bank. However, some of the protestors received donations in the form of bitcoin because the government had no power to freeze cryptocurrency [12]. The Nigerian government’s actions are a precise example of what can happen when institutions take advantage of their financial power. A decentralized, uncontrollable currency such as bitcoin can be a solution for this. Moreover, experts claim that “bitcoin enables the citizens of a country to undermine government authority by circumventing capital controls imposed by it” [10], which can be advantageous or detrimental depending on the agenda of the government in control. According to the Human Rights Foundation, “54% of the world’s population — 4,203,724,799 people — are living under some form of authoritarian regime” [17]. Thus, for the masses of citizens living under oppressive leadership, bitcoin may very well be the key to achieving full financial independence.


Another application for cryptocurrency may be observed in Venezuela, where citizens attempt to combat hyperinflation with bitcoin. Due to harsh US sanctions and mismanaged economic policies, Venezuela’s currency, the bolívar, has depreciated so much that it is nearly worthless. Street vendors are selling handbags crafted from bolívar bills, while others are forced to flee to nearby countries like Colombia, Ecuador, or Peru and adopt a new currency [13]. In response to this collapse, many Venezuelans have transitioned to cryptocurrency. Crypto users in Venezuela explain that bitcoin “has become a tool to send remittances, protect wages from inflation, and help businesses manage cash flow” [14]. Nonetheless, skeptics may question: can’t bitcoin face inflation as well? This is a reasonable concern given the currency’s growing popularity and the rise of bitcoin miners who create new bitcoins. However, it is important for users to know that bitcoin undergoes a process called “halving,” similar to what we think of as a half-life. With every 210,000 blocks mined, the bitcoin reward given to miners for processing transactions is cut in half. This means there is a finite supply of bitcoin and the value won’t greatly depreciate [15]. Unlike government issued currency, you can not “print” more bitcoin. As Bitcoin can provide stability and resist inflation, more struggling nations may move to adopt bitcoin as an official currency in the near future. In fact, it is already happening. In late 2021, El Salvador president Nayib Bukele announced the country’s official adoption of bitcoin as a legal tender, which means that all businesses in El Salvador are required to accept bitcoin as a form of payment [16]. Despite heavy criticism from the IMF, this has huge implications for the future of cryptocurrency. Cryptocurrency as a widely-used form of payment yields the possibility of a global currency, which would have significant effects on both people and financial systems around the world.


Because of its decentralized, peer-to-peer nature, cryptocurrency can serve as a democratizing force for everyone using it. We live in a global economy where nations around the world are deeply intertwined by economic exchanges: the movement of goods, labor, services, and technology. The next step in enhancing this interconnectedness would be a global currency… correction: a global digital currency, cryptocurrency. Cryptocurrency fosters economic growth by seamlessly connecting investors to foreign markets, eliminating the burden of exchange rates and currency volatility. Furthermore, Coinbase representatives explain that cryptocurrency can “level the playing field” by allowing anyone to contribute to the global economy; all they need is a mobile phone and an internet connection. One expert explains in simple terms that “a global economy is important because there is talent everywhere, but opportunity is not evenly distributed” [2]. With the possibility of bitcoin being adopted on a widespread scale, it will not matter where you are born or what financial system your country operates under. Nonetheless, if something sounds too good to be true, then it probably is. A utopia of a democratized global economy theoretically sounds great, but there will always be people and institutions willing to take advantage of the system. A timely and noteworthy example is a case involving Russia. In the current Russia-Ukraine conflict, the US has imposed harsh sanctions on Russia while urging other North Atlantic Treaty Organization (NATO) countries to do the same. Sanctions are known to be one of the most powerful negotiation tools used by the US and other economic superpowers; sanctions allow them to influence another country’s behavior without the use of risky military force. However, NATO countries are scrambling for alternate solutions after finding out the Russian government aims to use cryptocurrency to evade such sanctions. The New York Times elaborates on this, explaining that “the Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries [who are] willing to accept it without first converting it into dollars.” Moreover, “hacking techniques like ransomware could help Russians steal digital currencies and make up revenue lost to sanctions” [18]. This is an extremely vivid and prominent example of the harmful effects of cryptocurrency. Despite the idea of “returning monetary power to hands of the people”, how can we guarantee that institutions will not manipulate the blockchain’s decentralized trust model for their own self-interest?


This gives rise to the “full circle” problem, where crypto users are yet again, forced to rely on and trust a third-party intermediary. Proponents of cryptocurrency live by the statement that a decentralized digital currency is “accessible to all.” However, how much of the transaction is truly conducted by the users themselves? For instance, the blockchain technology behind bitcoin is inherently difficult to understand for the average person. As explained earlier, bitcoin runs on complex algorithms being processed on complicated mining hardware, and the time it takes to learn the ins-and-outs of such a technology is not something people are willing to easily sacrifice. Furthermore, in order to have direct access to the blockchain one would need to set up their own personal “node” using advanced software that can be difficult to navigate [21]. Even experienced bitcoin miners spend years perfecting their hardware setups. In short, achieving full agency in your cryptocurrency transactions is an extremely technical and inefficient process. In response to this dilemma comes third-parties. In the past year, multiple payment services such as Venmo, Paypal, and Cash App have added features where users can purchase and exchange cryptocurrency. These apps advertise the luxury of “convenience” by bringing a sense of familiarity to the process of using a new currency. Though, this convenience comes at a cost. Not only do these apps include transaction fees when paying with crypto, but they also hold onto your cryptocurrency unless you want to sell it using their own payment services [19]. Thus, we have come full-circle: denouncing banks in order to find financial freedom, transitioning to a “decentralized” digital currency, realizing it is painfully complicated to use this currency, and finally returning back to the need for third-party intermediaries. Yet, rather than putting our trust into government run institutions, the third-parties we are now trusting are corporations. Welcome to the corporatocracy. It is no coincidence that the CEOs of PayPal and Cash App, Dan Schulman and Jack Dorsey, have personally invested millions into bitcoin and are now championing it to users of their apps [20]. Thus, it is difficult to find reliable information and services that are not tainted by the self-interests of tech giants. Journalist Johnny Harris warns the general public that “most of the commentary around crypto comes from those who have a direct financial stake in getting more people to buy their coin of choice” [12]. As illustrated by the captivating Super Bowl ads, large tech and financial service companies know how to sway the interests of millions, and as a result, investment in cryptocurrency has expanded exponentially since its creation in 2008.


As investment has increased, crypto miners are working harder than ever. Transactions are constantly being added to the blockchain and in order to keep adding new blocks, miners set up supercomputers that run day and night plugging numbers into an intricate hash function. Hence, these supercomputers take up a massive amount of energy. This gives rise to cryptocurrency’s unexpected consequence: climate change. A majority of people hardly bat an eye on their environmental impact when swiping a credit card because the impact of our current payment methods are miniscule compared to that of cryptocurrency. To put this into perspective, it is projected that the energy used to spend one bitcoin is equivalent to 330,000 Visa card transactions [22]. A study from the UK looks at the same issue from a different perspective, explaining that “every single Bitcoin transaction—even buying a latte—consumes over $100 in electricity” [23]. The fact that a simple daily ritual, such as buying a beverage, holds such a heavy consequence can make it unappealing to even use the currency in the first place. Moreover, Cambridge University’s Bitcoin Electricity Consumption Index estimates that global bitcoin mining operations consume around 130 terawatt-hours of electricity per year, which is the same amount of electricity needed to power all of Sweden for a year [24]. In total, bitcoin mining consumes 0.5% of all energy consumption worldwide, which is an enormous proportion exceeding that of Google [25]. These numbers are undeniably shocking to the general public, but large mining companies continue to accelerate global warming by using cheap energy sources, knowing very well the harmful impact of their actions. Mining companies operate under the basic notion that the cheaper the energy they consume, the more profit they make from each bitcoin mined. Bypassing environmental regulations, leading data mining companies are known to be heavily reliant on coal plants to generate their electricity [22]. However, not all mining efforts rely on fossil fuels. According to The New York Times, “Bitcoin’s use of renewables [ranges] from about 40 percent to almost 75 percent.” Though, because of the decentralized nature of cryptocurrency, mining operations are scattered throughout the world, which makes it difficult to track their energy usage [26].


In a more positive alternative, bitcoin mining can be used to reduce gas flaring, which occurs when companies get rid of their unused natural gas by burning it. Lionel Ribeiro, manager of sustainability at Global Unconventionals, identifies setbacks in both industries: bitcoin miners need an excessive amount of energy, whereas some energy companies have more natural gas than they need. Ribeiro then crafts a solution: “by connecting these inverse pains, we can satisfy both needs with no cost to market expense” [27]. Essentially, energy companies can provide cryptocurrency miners with their surplus gas and in turn, miners burn the gas more effectively by using it to power their electrical generators. This exchange is already underway, spearheaded by multiple energy companies, such as Wesco Operating and petroleum multinational, Equinor [28]. In this “win-win” scenario however, cryptocurrency mining operations are still ultimately using non-renewable sources of energy that are harmful to the planet. Thus, proponents of crypto must take its environmental impact into account before pushing forward the fantasy of a global currency. If bitcoin continues its rapid spread, negative climate effects may increase at an even quicker rate.


Consequently, cryptocurrency is a remarkably controversial technology. Will it live up to its promise as a democratizing global currency? Or is it simply the by-product of profit hungry tech giants? Finance experts occupy both ends of the spectrum. Economist Graham Shaw, who refers to himself as an “old school finance guy,” states that traditional markets are much more reliable than new “fads” such as bitcoin. He reduces the ‘hype’ behind cryptocurrency to that of an economic bubble destined to burst [29]. In response, proponents of cryptocurrency argue that it is simply “too big to crash”, as the global cryptocurrency market is currently valued at a whopping $3 trillion [30]. Russian banker Sergey Gorkov makes a powerful claim that “those who don’t deal with blockchain [technology] today will end up in the Stone Age in 20-30 years” [29]. The cryptocurrency market thrives off of robust statements such as these. Investors are constantly driven by the market’s casino psychology: winners are loud, losers are quiet. It is easy to feel like you are missing out on the next big thing when The New York Times publishes a cryptocurrency article titled, “Everyone Is Getting Hilariously Rich and You’re Not” [31]. It is human nature to follow the slew of success stories and promises of a bright future.


Thus, talks of cryptocurrency surround us everywhere: the iconic Los Angeles Staples Center is now named Arena, Tesla recently announced its 1.5 billion dollar investment in bitcoin, and CEOs of major corporations tweet about cryptocurrency on the daily. Nationwide excitement is certainly warranted. The idea of a decentralized digital currency is truly phenomenal– it is unlike anything ever seen before. By providing citizens in all nations with seamless access to the global economy, cryptocurrency is poised to revolutionize the world. This could bolster international human rights and completely transform how we interact with one another. Nonetheless, cryptocurrency’s notion of “accessibility for all” is an anomaly of sorts. The concept of using cryptocurrency in our everyday lives seems so simple, yet the intricacy of blockchain technology often stands as a barrier for the average user. Overcoming this barrier and raising general awareness will be necessary for long-term adoption and meaningful transition into a new digital era.


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