Is cryptocurrency on the path to boom or bust?

It has been reported that, as of January 2021, there are more than 4,000 cryptocurrencies in existence

A PayDepot Bitcoin ATM machine is pictured in a shop in Union City, New Jersey, U.S., May 19, 2021.

A PayDepot Bitcoin ATM machine is pictured in a shop in Union City, New Jersey, U.S., May 19, 2021.

Reuters/Mike Segar

Elon Musk, CEO of electric carmaker Tesla, tweeted that his company has “suspended vehicle purchases using Bitcoin due to its concern about its rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.”

He further said that “cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”

It has been reported that, as of January 2021, there are more than 4,000 cryptocurrencies in existence. However, while many of them have little to no following or trading volume, some enjoy immense popularity among dedicated communities of bankers and investors.

Bitcoin as a cryptocurrency was founded in 2008 by an unknown person or group using the name Satoshi Nakamoto Bitcoin. It became the most popular cryptocurrency in 2009 when it was first released as an open-source software. The currency’s popularity as a decentralized digital currency is based on many factors. Among these factors is the fact it can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries, such as a central bank or single administrator. Also, the transactions can be verified by network nodes through cryptography and recorded in a public distributed ledger.

Bitcoin provides many benefits to its users, which is reflected in the lower cost of the transaction and also in the speed of moving the money. There are many drawbacks, though. Among these is the fact the total number of Bitcoins is capped at 21 million, and the currency has been always exposed to significant fluctuations in value, which usually result in huge losses of money for investors.

Another concern with Bitcoin is that its transactions are registered in a public log, but the names of buyers and sellers are never revealed, which makes the transactions untraceable and the currency of choice for people online buying drugs or other illicit activities.

Also, since Bitcoins are stored in a digital wallet — which either exists in the cloud or on a user’s computer — and not in bank accounts, they are not insured by any means such as the Federal Deposit Insurance Corp. in the US.

Finally, Bitcoin wallets can be exploited by hackers who are able to steal private keys from public digital spaces, such as the cloud or a public repository.

BBC News and technology correspondent Roy Cellan-Jones tweeted: “Right now, it shows that the process of mining the cryptocurrency — which involves using vast amounts of computer processing power — uses more electricity each year than Malaysia or Sweden and is closing in on the annual consumption of Egypt.”

I believe this is why Elon Musk said that Tesla would not sell any of its Bitcoin and intends to use it instead for transactions as soon as mining processes transition to using more sustainable forms of energy.

Despite the pros and cons of cryptocurrencies, especially Bitcoin, I believe that a promising future awaits these currencies. This is based on the assumption that it will soon be widely regulated by a number of countries around the world.

For example, it has been reported that, following moves by Japan to regulate digital currencies, Australia is attempting to crack down on money laundering and terrorism financing and plans to regulate bitcoin exchanges.

China’s central bank has recently decided to ban financial institutions and payment companies from providing services related to cryptocurrency transactions and warned investors against speculative crypto trading. The bank has banned crypto exchanges and initial coin offerings but has not barred individuals from holding cryptocurrencies. Governments are also concerned about taxation related to the transactions made by bitcoin and their lack of control over the currency.

However, until such time, and before cryptocurrencies become legal currencies, I believe it is a highly risky investment, due to its volatility and the suspicions surrounding it related to criminal operations, such as money laundering.

• Talat Zaki Hafiz is an economist, financial analyst. Twitter: @TalatHafiz

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