Cryptocurrency is an up-and-coming currency globally. Cryptocurrency describes a means of exchange that is fully decentralized. In an economical sense, this currency is congruent to a socialist take on a capitalistic ideal. Subsequently, there has been a lot of praise and pushback regarding this new way to invest. Cryptocurrency is appealing due to its high returns and the multitude of facets in the realm of investment. As this seems like a new facet of future technology, this has provoked questions regarding the security of a currency without a governing body. Due to the shortness of this essay and the complexity of cryptocurrency, I wish to focus on the benefits and problems of cryptocurrency specifically through a cybersecurity lens. Although cryptocurrency is a popular vehicle used to invest due to aspects of anonymity, long-term adaptation is impossible without proper regulations, especially in a global capacity. Investors must understand the potential downside risks associated with cryptocurrencies before committing capital to an investment.
Before there was any sort of centralized currency, there was bartering. This was the first way that buying and selling was used in our society. For example, “If you are exchanging an ax as part of an agreement in which the other party is supposed to kill a woolly mammoth, you have to find someone who thinks an ax is a fair trade for having to face down the 12-foot tusks of a mammoth. If this doesn't work, you would have to alter the deal until someone agreed to the terms.”(Beattie) This was the first type of economical action between two parties. Next, humans began using currency to place numerical values on tangible items. Trading of cryptocurrency is no different than what we are used to seeing in the scope of economics. One uses tangible currency to buy electronic currency. Cryptocurrency is essentially inverted conventional bartering as we are exchanging an item that contains monetary value, cryptocurrency, for modern currency, dollars.
The volatility of cryptocurrency is high. According to Lapin, “Crypto currency is an incredibly topsy-turvy investment; all cryptocurrencies experience huge fluctuation in their valuation—a quality known on Wall Street as volatility.”(Lapin) The volatility of cryptocurrency is the primary aspect to consider before investing as it can drastically affect the returns on one’s principal investment in a very short time frame. This is different from traditional investment strategies such as placing money into index funds, a relatively secure investment that carries lower volatility than investing in individual stocks. With the lack of predictable return on investment with cryptocurrency it brings up questions of trust and security.
For the sake of the argument, as of April 18, 2022, let’s assume that a specific crypto token is implemented as the sole currency in Africa. This would allow for citizens of each country to travel freely without having to worry about exchange prices and differing economic stand points therefore uniting the African continent economically. Although this seems logical in theory, looking at past cases of unified currency implementation cast doubt on this strategy. For example, in 1999, the European Union was formed into a currency, called the Euro. (European Central Bank) This currency included eleven European countries at the time of installment. (European Central Bank) This helped to unify Europe by opening opportunities for convenience in trade and allowing the countries to have a common voice. It’s been nearly 25 years since the initial implementation of the Euro, but this desire for unity is still quite prevalent. This shift in global currency was based on the Optimal Currency Area theory. “The OCA theory determines the conditions that countries should satisfy to make a monetary union attractive, i.e. to ensure that the benefits of the monetary union exceed its costs'' (De Grauwe). This backbone allowed for this union to succeed as it follows three major points of symmetry, flexibility, and integration. De Grauwe explains a perfect world hypothetical scenario: “Countries in a monetary union should experience macroeconomic shocks that are sufficiently correlated with those experiences in the rest of the union(symmetry). These countries should have sufficient flexibility in the labour markets to be able to adjust to asymmetric shocks once they are in the union. Finally, they should have a sufficient degree of trade integration with the members of the union to generate benefits of using the same currency.'' De Grauwe’s utopian scenario does not consider the extreme volatility of a crypto token.
The volatility of the currency would allow for a symmetrical shock to occur amongst the African countries. Therefore, tying these countries' economic prosperity together. These countries would be able to trade with one another and in hopes both receive gains. Trading for dual gain would not be possible in the modern market with cryptocurrency due to the volatility the currency carries. For example, if South Africa were to strike a deal with South Sudan, a third world country with a troubling economy (The World Bank), to receive a natural resource in exchange for Bitcoin, the exchange would be fully dependent on the price that Bitcoin is currently trading. If the price of bitcoin were to plummet directly following the transaction, this would create an uproar. South Sudan would be left with a value that was significantly less than the price agreed upon for said natural resource. Ultimately, the lack of insurance in a transaction is a barrier regarding the widespread implementation of cryptocurrency in large international transaction between governments or institutions.
Through previous actions, a nation using cryptocurrency as a modern gold standard is far from worth-while. We can see this through the actions of El Salvador. In June 2021, El Salvadorian President Nayib Bukele announced that El Salvador would tie its currency to Bitcoin (Brigida). This did not help the economic turmoil in El Salvador. In fact, it agitated the problem. Citizens are clearly frustrated that the country has been forced to now only accept cash in El Salvadorian marketplaces, “We were losing money because of the way the currency loses value…It was difficult to maintain our business like that.” (Brigida) Without a governing body, cryptocurrency is not a macroeconomic solution to economic unification of the globe.
In addition to the macroeconomic side, cryptocurrency on a microeconomic level is questionable in and of itself. The limitations regarding cryptocurrency are slim to none. One can invest in Non-Fungible Tokens (NFTs), wager cryptocurrency on sports or join a lottery in which they do not pay an entry fee. This can all legally be done under a pseudonym as well. The potential for economic gain is vast. With all these benefits of cryptocurrency, it is inevitable that there will be downsides that come along with it. Cryptocurrency is difficult to trust as there is no policing in this online realm. In cryptocurrency, one must sign up for a crypto wallet. According to Coinbase, “Crypto wallets store your private keys, keeping your crypto safe and accessible. They also allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum.” (Coinbase) These wallets are the hub for each transaction and as well aim to protect your assets. There are unlimited amounts of wallets, and each wallet has its benefits. From personal experience, the biggest problem is liquidating one's cryptocurrency assets. There are few crypto wallets that allow one to directly deposit investments into one’s bank account. The limitlessness of cryptocurrency is halted when trying to connect the economic worlds of standard banking to cryptocurrency. When attempting to deposit liquidated cryptocurrency, one must jump through multiple hoops to prove one’s identity. The biggest hurdle is providing permanent residence. Being that I am a college student, I am unable to deposit my investments because I do not have any documents or mail that show a secondary identification or permanent year-round residence.
Hacking is a relevant issue in cryptocurrency: “A total of 1.1 million bitcoins were stolen in the 2013-2017 period. Noting that the average price for a Bitcoin in 2018 was $7572 the corresponding monetary equivalent of losses is $8.9 billion highlighting the societal impact of this criminal activity” (Grobys). It has become clear that this was due to the lack of infrastructure regarding security, “In contrast to stock exchanges, which facilitate trading but do not actually hold securities on behalf of clients, cryptocurrency exchanges typically charge fees for trading and store virtual currencies for their clients, which makes cryptocurrency exchanges vulnerable.” (Grobys) In a perspective analysis of the banking system of cryptocurrency, this is similar to saying that banks are not secure and are deliberately trying to profit while taking advantage of the consumer.
Regardless of its drawbacks, cryptocurrency is here to stay. For cryptocurrency to make a significant long-term impact on our society, there is a needed governing body. The governing body does not necessarily need to be a traditional system like the Federal Reserve. Cryptocurrency is similar to professional soccer and the governing body needs to be similar to FIFA, the governing body of professional soccer. Professional soccer is similar to cryptocurrency in the sense that it has reached every corner of the globe. There are multiple leagues per country and these leagues are ruled by their local federations. For example, in the United States there are four tiers of professional soccer from Major League Soccer all the way down to summer leagues for collegiate athletes. In crypto, There are many different kinds of digital assets (Bitcoin, Ethereum, Fusion etc…) (Cooper). FIFA governs all of these leagues and creates regulations and rules to follow. For example, Atlanta United, which competes in the highest tier of soccer in the United States is considered to be a part of FIFA. FIFA takes a hands-off approach as they do not make the schedule for each Atlanta United soccer game. This is the approach that this hypothetical governing body should take on cryptocurrency. To maintain the essential aspect of decentralization, this governing body must have very limited power in day-to-day crypto transactions, but it should still have a proper backing to ensure cybersecurity before we can continue to advance the technology globally.
As cryptocurrency is a socialistic take on a capitalistic ideal, the governors should have aspects of the United Nations. A committee should be formed from representatives from a multitude of countries to draft a set of laws regarding cryptocurrency while still allowing the freedom the platforms entail currently. This will allow for faster transactions, a secure way to store cryptocurrency, as well as a potentially heightened global economic environment.
To take a look into the aspects that make cryptocurrency so appealing, one can look to an academic journal written by Flamur Bunjaku, Olivera Gjorgieva-Trajkovaska, and Emilija Miteva-Kacarski, called “CryptoCurrencies- Advantages and Disadvantages.” This article comments on the benefits and disadvantages of cryptocurrency. As inflation plagues national economies globally, cryptocurrency takes a different approach. According to, “CryptoCurrencies- Advantages and Disadvantages” Bitcoin is not subject to inflation, “No inflation – the maximum number of coins is strictly limited by 21 million Bitcoin. As there are neither political forces nor corporations able to change this order, there is no possibility for development of inflation in the system.”(Bunjaku 7) One of the key distinctions between Bitcoin and fiat currency is the limited supply. The Fed can print more money whenever they please, but when all 21 million Bitcoin have been mined (we are already at 19 million), each Bitcoin will have an added level of scarcity. In this sense, Bitcoin is far more similar to gold than the US Dollar. By viewing cryptocurrencies as an inflation-protected asset, investors feel as if they are protected from the economic fluctuation that the country is currently experiencing. However, one must still take volatility into account, as that has the potential to drastically alter the monetary value of the decentralized currency.
Another potential benefit of cryptocurrency is transparency. “The BTC stores the history of transactions that have ever taken place. It is called sequential chain of blocks or blockchain…So if the company has publicly used the BTC address, then anyone can see how much BTC is owned.”(Bunjaku 8) This is one of the core security benefits of cryptocurrency. Every transaction is recorded for public record, even if the company were to release their address. Cryptocurrency transactions being stored on the blockchain allows for a loose account of engagement in specific cryptocurrencies. An important benefit of cryptocurrency is that personal information is impossible to trace with the use of cryptocurrency, unlike any other traditional form of payment, “BTC transactions do not require disclosure of any personal data. Instead, it uses two keys: public and private.” The use of two keys allows for anonymity in transactions and therefore allows for security against electronic threats and hacking of personal data.
Cryptocurrency has potential to be a breakthrough for past, present, and future investors. Due to the infancy of this electronic currency, there are still aspects that need to be altered in order for this currency to reach its full potential. To keep the founding aspect of decentralization, cryptocurrency needs an overarching structured governing body with libertarian values. This power structure will allow cryptocurrency’s versatility to become heightened and increase the potential for cryptocurrency to be successful on the macroeconomic scale. In addition, cryptocurrency’s user interfaces regarding the ability for crypto wallets to deposit investments need to become more feasible for public use. Cryptocurrency is on a positive track with its protection against inflation and security in its exchange of payment. In conclusion, the maturity of this decentralized currency will open doors for future investment strategies on the macroeconomic scale.
Citations
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Brigida, Anna-Cat, et al. “Six Months in, El Salvador's Bitcoin Gamble Is Crumbling.” Rest of World, 15 Mar. 2022, https://restofworld.org/2022/el-salvador-bitcoin/.
Bunjaku, Flamur, et al. “CRYPTOCURRENCIES –ADVANTAGES AND DISADVANTAGES.” View of Cryptocurrencies – Advantages and Disadvantages, https://js.ugd.edu.mk/index.php/JE/article/view/1933/1706.
“Crypto Basics - What Is a Crypto Wallet? - Coinbase.” Www.coinbase.com, https://www.coinbase.com/learn/crypto-basics/what-is-a-crypto-wallet.
European Central Bank. “The Euro: Birth of a New Currency.” European Central Bank, 12 June 2018, https://www.ecb.europa.eu/press/pr/wfs/2018/html/ecb.fs180612.en.html.
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Klaus Grobys. “When the Blockchain Does Not Block: On Hackings and Uncertainty in the Cryptocurrency Market.” Taylor & Francis, https://www.investopedia.com/articles/07/roots_of_money.asp.
Lapin, Nicole. “Explaining Crypto's Volatility.” Forbes, Forbes Magazine, 27 Dec. 2021, https://www.forbes.com/sites/nicolelapin/2021/12/23/explaining-cryptos-volatility/?sh=4b07d8e67b54.
Team, The Investopedia. “Optimal Currency Area (OCA) Definition.” Investopedia, Investopedia, 8 Feb. 2022, https://www.investopedia.com/terms/o/optimal-currency-area.asp.
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“The World Bank in South Sudan.” World Bank, https://www.worldbank.org/en/country/southsudan/overview.
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