tag:theconversation.com,2011:/ca/topics/bitcoin-1358/articlesBitcoin – The Conversation2024-03-12T14:39:27Ztag:theconversation.com,2011:article/2255912024-03-12T14:39:27Z2024-03-12T14:39:27ZWith bitcoin hitting new highs, it’ll likely reach the US$100,000 milestone before 2024 is out<p>Cryptocurrencies are surging again. Bitcoin has just hit an all-time high of more than US$72,000 (£56,300), pushing past the level of circa US$69,000 where it turned back during its last bull phase in late 2021. </p>
<p>Other top cryptocurrencies like ethereum and solana have reached their highest prices in three years, on the back of a run that has been going since the autumn. The value of the whole cryptocurrency market has raced up to US$2.6 trillion, triple what it was worth at the beginning of 2023 and not far off its previous US$3 trillion peak. </p>
<p>Much of this run has occurred at a time when the US dollar has been strengthening against other currencies (though it has fallen in the past couple of weeks). This can often be a time when cryptocurrencies get weaker, so it shows how strong they have been lately. </p>
<p>Many other fiat currencies around the world have been losing value against the US dollar during this period, so bitcoin reached <a href="https://twitter.com/balajis/status/1762802897518215405?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1762802897518215405%7Ctwgr%5E6debfb13283d2ec2221fc72013fb2560076013a7%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.coindesk.com%2Fmarkets%2F2024%2F02%2F29%2Fbitcoin-is-hitting-all-time-highs-around-the-world%2F">all-time highs</a> in many of them long before it finally took out its high in the US currency. </p>
<p>So what has contributed to this explosion in prices and where is the market going for the rest of 2024?</p>
<h2>Bitcoin ETFs</h2>
<p>A major driver for this appreciation in prices has been the <a href="https://theconversation.com/bitcoin-four-reasons-why-the-price-should-surge-in-2024-220557">US authorities’ approval</a> in January of an investment vehicle known as an exchange-traded fund or ETF for the general or “spot” bitcoin market. An ETF is an easy way for the average saver to get exposure to an asset, since they buy shares in the vehicle, usually through their financial advisor, rather than having to go to the trouble of buying the underlying asset. </p>
<p>A total of 11 bitcoin ETFs were approved in the US, and their daily trading volume has now <a href="https://news.bitcoin.com/bitcoin-etfs-break-trading-volume-record-blackrocks-ibit-now-holds-over-170k-btc/">exceeded US$10 billion</a> – driven by frontrunners <a href="https://twitter.com/RexVIII/status/1767381095820022148">Blackrock and Fidelity Investments</a>. This demonstrates the large interest from traditional market participants, and as the spot ETFs become more mature, their providers will offer more promotional material and education to get more customers onboard.</p>
<p><strong>Bitcoin/US$ price</strong></p>
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<a href="https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bitcoin price chart showing fall from previous high in 2022 and sharp climb to new record peak in 2024." src="https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/581314/original/file-20240312-24-ee1c8v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The cryptocurrency market is always adapting and innovating, and one possible future innovation is the offer of option contracts on the new spot ETFs. Options allow traders to hedge their bets on whether the crypto market will go up or down, and would likely attract even more new money into the space. </p>
<p>However, US regulator the Securities and Exchange Commission (SEC) has <a href="https://cointelegraph.com/news/sec-delays-spot-bitcoin-etf-options-trading-decision">just postponed</a> a decision on this innovation until late April. Some <a href="https://www.reuters.com/technology/regulatory-nod-us-spot-bitcoin-etf-options-may-take-months-sources-2024-02-01/">experts think</a> approval may take longer than that as it is unclear which regulatory body would be responsible for policing this new class of derivative contracts. </p>
<h2>The bitcoin halving</h2>
<p><a href="https://www.investopedia.com/bitcoin-halving-4843769#:%7E:text=A%20Bitcoin%20halving%20event%20occurs,block%20reward%20of%206.25%20BTC.">One feature</a> of the bitcoin system which was built in at the beginning is that, roughly every four years, the rewards to companies using arrays of computers to create or “mine” bitcoin get cut in half.</p>
<p>The last halving <a href="https://theconversation.com/bitcoin-halving-qanda-what-its-all-about-and-what-it-means-for-the-cryptocurrency-138570">took place</a> in May 2020, where miners went from receiving 12.5 bitcoin for each unit of work they do to 6.25 bitcoin. The next is due to take place <a href="https://www.nicehash.com/countdown/btc-halving-2024-05-10-12-00">on April 19</a>, cutting the reward down to 3.125 bitcoin. </p>
<p>Because each halving means less new bitcoin coming on to the market, they have <a href="https://qz.com/bitcoin-halving-event-explained-price-1851300020">coincided with</a> strong price appreciation in the cryptocurrency. What isn’t clear is whether this is already priced in and therefore not actually the reason price is going up. </p>
<p><a href="https://www.cnbc.com/2024/02/29/what-bitcoin-being-halved-means-for-its-price.html">One theory</a> is that the institutions behind the spot ETFs are buying aggressively now because they know there will be less bitcoin on the open market once the halving takes place. </p>
<h2>Ethereum prospects</h2>
<p>Meanwhile, the crypto market could also be boosted by spot ETFs for the ethereum cryptocurrency system in the coming months. At least ten firms, including Blackrock and Fidelity, have applied to launch them and the SEC has until May to make a decision. </p>
<p>Whereas the online ledger that underpins bitcoin, known as its blockchain, has been seen largely as a store of value, ethereum has become the leading blockchain for developers to write applications using this technology.</p>
<p>SEC Chair <a href="https://www.coindesk.com/policy/2023/03/15/sec-chairman-gensler-suggests-again-that-proof-of-stake-tokens-are-securities-report/#:%7E:text=Gensler%20has%20said%20that%20bitcoin,of%20existing%20cryptocurrencies%20are%20securities.">Gary Gensler believes</a> that most cryptocurrencies should be treated differently to bitcoin, as financial instruments known as securities rather than as more straightforward commodities. This adds complexity to the ethereum ETF approval process. If the US authorities were to decide it was the case, <a href="https://www.coindesk.com/policy/2023/03/09/what-happens-if-ethereum-is-a-security/">it would mean</a> that ETFs couldn’t buy ethereum from crypto exchanges until those exchanges had received approval to trade it as a security. </p>
<p>While that uncertainty continues, ethereum could be boosted by the so-called <a href="https://www.coindesk.com/tech/2024/02/08/ethereum-developers-target-march-13-for-milestone-dencun-upgrade-on-mainnet/">Dencun upgrade</a> (also known as Duncan or EIP-4844). Ethereum has competition from other blockchains such as solana and avalanche due to its relatively slow transaction speed and high costs. </p>
<p>It already completed its first major step in a long-term plan to reduce costs and cope with many more users (known as scalability) when it transitioned in 2023 to a different system for verifying transactions known as <a href="https://www.investopedia.com/terms/p/proof-stake-pos.asp#:%7E:text=Proof%2Dof%2DStake%20(POS)%20uses%20randomly%20selected%20validators,new%20blocks%20to%20the%20blockchain.">proof of stake</a>. The Dencun upgrade, which goes live on March 13, will further improve scalability by making data storage more efficient on the network, while also lowering transaction fees. </p>
<h2>Where next</h2>
<p>Predicting cryptocurrency prices is not for the faint-hearted. The market is very volatile, and often exceeds expectations when it goes up or down. The behaviour of individuals determines market prices and, as <a href="https://www.amazon.com/Intelligent-Investor-Definitive-Investing-Essentials/dp/0060555661/ref=as_li_ss_tl?ie=UTF8&linkCode=sl1&tag=smithsonianco-20&linkId=25e3e053f80d4575dc0bbe8e86cdda59">Isaac Newton put it</a>, you can “calculate the motions of heavenly bodies, but not the madness of the people”. </p>
<p>However, the <a href="https://www.forbes.com/uk/advisor/investing/cryptocurrency/bitcoin-price-prediction-2024/">majority of commentators</a> expect crypto prices to keep rising over the coming months. <a href="https://advisor.morganstanley.com/the-ernie-garcia-group/documents/field/e/er/ernie-garcia-group/S%26P%20500%20in%20Presidential%20Election%20years.pdf">Election years tend</a> to be good for investments in general, while a <a href="https://www.politico.com/news/2024/01/08/donald-trump-crypto-savior-00132417">second Trump administration</a> would probably create a <a href="https://www.cnbc.com/2024/03/11/trump-suggests-he-would-not-oppose-bitcoin.html">more favourable</a> regulatory environment for crypto assets (as would a <a href="https://www.coindesk.com/policy/2023/12/20/uk-to-cooperate-with-crypto-industry-on-legislation-for-digital-securities/">Rishi Sunak victory</a> in the UK, however unlikely that seems at present). </p>
<p>As bitcoin becomes more and more mainstream and integrated with traditional assets, it isn’t inconceivable that it could hit US$100,000 in 2024 – an extraordinary feat for a invention that was worth nothing as recently as 2009.</p><img src="https://counter.theconversation.com/content/225591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p>Often dismissed as a libertarian ponzi scheme, why has crypto bounced back yet again?Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2205572024-01-05T17:12:11Z2024-01-05T17:12:11ZBitcoin: four reasons why the price should surge in 2024<figure><img src="https://images.theconversation.com/files/568019/original/file-20240105-21-pulhq0.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bitcoin back?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/crypto-currency-bounces-back-after-fall-2308602413">FAHM198</a></span></figcaption></figure><p>The year 2023 will be remembered as turbulent for cryptocurrencies, with numerous important developments that ultimately helped to “clean up” the space to potentially make it more attractive to mainstream investors. Notably there was <a href="https://theconversation.com/sam-bankman-fried-was-convicted-of-fraud-following-the-collapse-of-the-cryptocurrency-exchange-ftx-heres-what-investors-need-to-know-217026">the conviction</a> of FTX CEO Sam Bankman-Fried for fraud. </p>
<p>Top exchange Binance also reached a <a href="https://www.wsj.com/finance/regulation/binance-copped-a-4-billion-plea-but-is-still-fighting-the-sec-44a4e5a5">US$4 billion settlement</a> (£3.1 billion) with the US treasury department over money-laundering charges, which saw CEO Changpeng “CZ” Zhao agreeing to <a href="https://www.coindesk.com/policy/2023/11/28/changpeng-cz-zhao-steps-down-from-binanceus-board/">step down</a> and pay a US$50 million fine. </p>
<p>Meanwhile, regulators continued <a href="https://theconversation.com/us-regulators-continue-crypto-crackdown-but-heres-why-the-latest-charges-are-different-207332">cracking down</a> on other operators, but potentially lost one of their key cases against the industry after a <a href="https://www.coindesk.com/consensus-magazine/2023/10/20/ripple-is-on-a-winning-streak-but-the-game-isnt-yet-won/">US court ruled</a> that the XRP token, one of the top ten cryptocurrencies, was not a security (meaning a tradeable financial asset like shares or bonds). </p>
<p>This means its creator, Ripple, did not break the law by selling it on exchanges. Viewed as a test case for the majority of cryptocurrencies, the US Securities Exchange Commission (SEC) is <a href="https://www.reuters.com/legal/legalindustry/ripple-effects-developments-following-groundbreaking-decision-sec-v-ripple-labs-2023-12-05/">currently appealing</a>. </p>
<p>While all this was happening, the bitcoin price rose away from the lows of late 2022. It started the year at US$16,000 and ended comfortably above the US$40,000 threshold. </p>
<p>So what does 2024 look like for this sector and what key events are on the horizon?</p>
<h2>1. ETFs</h2>
<p>The SEC may finally be about to greenlight a type of investment vehicle known as an exchange traded fund (ETF) for the general or “spot” bitcoin market. ETFs already exist for everything from oil to the FTSE 100 to even regions and countries. They track the underlying asset, creating an easy way for people to invest without having to buy the asset directly. </p>
<p>Until now, the only ETFs permitted for crypto in the US have been for the <a href="https://www.forbes.com/advisor/investing/cryptocurrency/best-bitcoin-etfs/">futures markets</a>. These niche markets are concerned with where investors think crypto prices are heading in future. </p>
<p><strong>Bitcoin price 2021-24</strong></p>
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<a href="https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing bitcoin price since 2021" src="https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568015/original/file-20240105-25-220p44.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.tradingview.com/">Trading View</a></span>
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<p>A spot bitcoin ETF would likely encourage mainstream investors to buy exposure to this market, while potentially attracting banks to actively participate too. Bitcoin could be offered by financial advisors and there would no longer be a need for investors to hold the asset itself or <a href="https://en.bitcoin.it/wiki/Storing_bitcoins">face difficulties</a> like crypto exchanges, coin storage and so on. </p>
<p>There are various reasons why many commentators think the SEC may now end its opposition to such an ETF. For one thing, the list of applicants <a href="https://blockworks.co/tag/blackrock">includes Blackrock</a>, the biggest investment house in the world, along with various other <a href="https://www.coindesk.com/policy/2023/10/23/all-spot-bitcoin-etf-applications-may-be-approved-together-crypto-etf-expert-predicts/#:%7E:text=The%2012%20spot%2Dbitcoin%20ETF,Global%20X%2C%20Hashdex%20and%20Franklin.">major players</a>. </p>
<p>Also, digital asset group Grayscale won an important case against the SEC in 2023, which had been blocking its attempt to convert its US$17 billion bitcoin futures ETF, GBTC, into a spot version. This has forced the SEC to reconsider Grayscale’s application too. </p>
<p>Further, Hong Kong’s regulatory authority has announced it is open to spot bitcoin ETF applications and has <a href="https://www.forbes.com/sites/digital-assets/2023/12/31/hong-kong-spot-bitcoin-etf-signals-bullish-market-shift-more-than-us/?sh=209365697465">laid down guidelines</a> permitting several varieties. As well as the basic model that we may soon see in the US, where investors would buy into bitcoin ETFs with dollars, Hong Kong is open to a second variety known as “in-kind”. </p>
<p>This would make it possible to convert shares in a bitcoin ETF into bitcoin and vice versa, allowing more flexibility and potentially attracting more institutional investors into the space.</p>
<h2>2. Interest rates</h2>
<p>Jerome Powell, chair of US central bank the Federal Reserve, <a href="https://www.theguardian.com/business/2023/dec/13/federal-interest-rates-us-inflation">has indicated</a> that interest rates may have peaked, and that the Fed is likely to cut them during 2024. Similarly in the UK, leading mortgage lender Halifax has cut its <a href="https://www.bbc.com/news/business-67873017">lending rate</a> in expectation of a Bank of England rate cut. </p>
<p>If interest rates are cut or even stabilise in 2024, it could make bitcoin (and other digital assets) more attractive to investors, since its <a href="https://www.blockchain-council.org/cryptocurrency/how-many-bitcoins-are-left/#:%7E:text=December%206%2C%202023-,Summary,million%20left%20to%20be%20mined.">limited supply</a> makes it a hedge against traditional currencies <a href="https://kinesis.money/case-studies/paper-money-eventually-returns-to-its-intrinsic-value-zero/">losing value</a> over time. </p>
<p>More generally, rate cuts prompt investors to look for higher investment returns, and cryptocurrencies have delivered here too. </p>
<p><strong>Asset class returns since 2011</strong></p>
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<a href="https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Table showing asset class returns since 2011" src="https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=320&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=320&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=320&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=402&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=402&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568003/original/file-20240105-15-labr38.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=402&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://twitter.com/charliebilello/status/1741888124031037686">Charlie Bilello</a></span>
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<p>In addition, the US and other economies may enter <a href="https://www.statista.com/statistics/1239080/us-monthly-projected-recession-probability/">a recession</a> in the later half of 2024 due to the lagged effects of the interest rate hikes. </p>
<p>Equally, we saw a number of <a href="https://www.fdic.gov/bank/historical/bank/bfb2023.html">bank failures</a> in 2023, predominantly in the US. In the event of a recession or more bank problems, governments may be forced to provide stimulus packages and print more money. This would further devalue currencies and make bitcoin still more attractive. </p>
<h2>3. The halving</h2>
<p>A big event for bitcoin in 2024 is the so-called “halving”. Bitcoin runs on an online ledger known as a blockchain, in which entries are validated by “miners” using arrays of computers to solve complex mathematical puzzles. Miners are paid in bitcoin for completing a set of transactions known as a block, and the protocol stipulates that their <a href="https://theconversation.com/bitcoin-halving-qanda-what-its-all-about-and-what-it-means-for-the-cryptocurrency-138570">reward per block</a> halves every 210,000 “blocks” (roughly every four years). </p>
<p>The reward began at 50 bitcoin in 2009 and is <a href="https://www.nicehash.com/countdown/btc-halving-2024-05-10-12-00">expected to fall</a> from 6.25 bitcoin to 3.125 bitcoin around the middle of April 2024. </p>
<p>This decrease entails fewer bitcoin sold on the market, which tightens supply and may squeeze out the least efficient miners, significantly reducing the computer power used by the network. The three previous halvings have prompted dramatic bull runs, while also driving up the prices of digital assets more generally as investors take more risks in the space. </p>
<p><strong>Halving effects</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing how bitcoin halvings have affected price" src="https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568014/original/file-20240105-17-xer6zm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.tradingview.com/">Trading View</a></span>
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<h2>4. Blockchain developments</h2>
<p>The bitcoin network saw a number of technological advancements in 2023. This has included enabling a new and <a href="https://forkast.news/bitcoin-nfts-raise-unique-legal-issues/">a unique</a> form of NFTs (non-fungible tokens) known as ordinals, and also a new standard called BRC-20 that makes it possible to create new cryptocurrencies on the network. Until now, NFTs and new cryptocurrencies have mostly been issued on other blockchains such as ethereum. </p>
<p>We are also seeing <a href="https://beincrypto.com/bitcoin-lightning-network-transactions-research/">growing adoption</a> of the Lightning network, a layer above the bitcoin blockchain that enables much faster transactions. All these changes are resulting in <a href="https://www.blockchain.com/explorer/charts/avg-block-size">increased demand</a> for bitcoin, which in turn may lead to higher prices.</p>
<p>In sum, there’s a strong case for being bullish about bitcoin’s price in the year ahead. <a href="https://www.cnbc.com/2024/01/01/bitcoin-btc-price-predicitions-for-2024.html">Commentators’ predictions</a> range from US$60,000 to US$500,000 by year end. Our own belief is that though the road may be bumpy, 2024 could well see increased adoption of cryptocurrencies, which will drive prices beyond the current US$40,000 mark.</p><img src="https://counter.theconversation.com/content/220557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p><p class="fine-print"><em><span>Hossein Jahanshahloo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Twelve months ago, bitcoin looked dead in the water. Now it could be heading to all-time highs.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingHossein Jahanshahloo, Assistant Professor in Finance, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2169912023-11-03T04:18:06Z2023-11-03T04:18:06ZSam Bankman-Fried convicted for massive FTX fraud, in stark reminder of risks of crypto trading<p>It is not just crypto tokens that have spectacular downfalls. So can crypto personalities. </p>
<p>Sam Bankman-Fried founded FTX, one of the world’s largest exchanges for so-called cryptocurrencies, which collapsed last year owing billions of dollars. Now he has gone from being hailed as potentially the <a href="https://www.newyorker.com/magazine/2023/10/02/inside-sam-bankman-frieds-family-bubble">world’s first trillionaire</a> to a lengthy term in prison.</p>
<p>After a month-long trial, a New York jury took less than five hours to <a href="https://www.theverge.com/policy/2023/11/2/23943236/sam-bankman-fried-trial-sbf-fraud-guilty">find him guilty</a> on seven counts of fraud and money laundering. </p>
<p>Bankman-Fried’s conviction highlights the risks of crypto markets, where people trade tokens with no fundamental value via hugely complex and poorly regulated financial machinery.</p>
<p>The Australian government is currently considering how to protect consumers in such markets. Treasury has commenced a <a href="https://treasury.gov.au/consultation/c2023-427004">consultation process</a>. But it will not be an easy task when so much of the activity occurs overseas or in cyberspace.</p>
<h2>FTX was not fine</h2>
<p>Bankman-Fried chose to testify in his own defence. But he failed to convince the jury he was merely a <a href="https://www.reuters.com/legal/sam-bankman-frieds-trial-ftx-fraud-charges-heads-closing-arguments-2023-11-01/">maths nerd</a> with a poor memory who was unaware of what his friends and colleagues were doing with the companies in which he was the largest stakeholder.</p>
<p>In FTX’s final days, as concerned customers started withdrawing their deposits, Bankman-Fried tweeted “<a href="https://www.ft.com/content/eef6d795-3442-44e1-bab4-05863094d9b9">FTX is fine. Assets are fine</a>”. It appears the jury did not accept he truly believed this at the time.</p>
<p>The verdict is a salutary warning about the dangers of unregulated financial markets such as crypto. As the former chair of the United Kingdom’s Financial Conduct Authority put it, fraud is “<a href="https://www.ft.com/content/723b5753-06e1-4cd8-a629-dd795f9068f2">a feature, not a bug</a>” for much of the industry.</p>
<p>Crypto tokens such as Bitcoin have no underlying assets to give them some fundamental value. They only generate a return if the owner can sell at a higher price, to someone who expects the price to go even higher. This makes them one of the purest examples of a speculative bubble.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/almost-no-one-uses-bitcoin-as-currency-new-data-proves-its-actually-more-like-gambling-207909">Almost no one uses Bitcoin as currency, new data proves. It's actually more like gambling</a>
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<h2>No government</h2>
<p>One of the ironies of the crypto market is that cryptocurrency is sold as a way to avoid having to trust governments or banks, as one does with traditional currency. But in practice, crypto trading often relies on trusting individuals – some of them charlatans such as Bankman-Fried.</p>
<p>Punters thought they could trust FTX to mind their funds for them while they switched between speculative crypto tokens such as Bitcoin and Dogecoin. They were not investing in FTX, or even lending their money to it. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-spectacular-collapse-of-a-30-billion-crypto-exchange-should-come-as-no-surprise-194442">The spectacular collapse of a $30 billion crypto exchange should come as no surprise</a>
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<p>But instead of letting customers’ funds sit around waiting to be withdrawn, FTX transferred a lot of them to another company, Alameda Research. This was an investment fund, poorly run by Bankman-Fried and his cronies. </p>
<p>It is still not clear what happened to all the missing billions. Some of the money was frittered away on extravagant living. Some went to pay celebrities for advertisements and endorsements, such as the famous Super Bowl clip starring comedian Larry David. At least David can say he was warning people against “getting into crypto”.</p>
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<p>Some of the missing cash went on large political donations. Much was lost on poor bets by Alameda which failed to hedge against the risk that the price of crypto tokens could quickly plummet.</p>
<p>FTX was essentially a casino. But Bankman-Fried both owned the casino and was gambling in it – and gambling with other people’s chips. </p>
<h2>Prison looms</h2>
<p>Bankman-Fried is still <a href="https://www.reuters.com/legal/ftx-founder-sam-bankman-fried-thought-rules-did-not-apply-him-prosecutor-says-2023-11-02">proclaiming his innocence</a>. But he looks likely to be in prison for decades. </p>
<p>He will find out how long on March 28 2024. It <a href="https://www.ft.com/content/24d153b0-0c28-4946-acbe-2e93329bca52">could be more than a century</a> if he receives the maximum penalty on all the counts on which he has been convicted. And he may yet face further charges. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fallen-crypto-king-sam-bankman-fried-was-perfectly-positioned-to-make-a-religion-of-himself-213893">Fallen crypto king Sam Bankman-Fried was 'perfectly positioned to make a religion of himself'</a>
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<img src="https://counter.theconversation.com/content/216991/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cryptocurrency tycoon Sam Bankman-Fried may face a jail term of more than a century after conviction on seven counts of fraud and money laundering.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2090252023-07-24T03:01:23Z2023-07-24T03:01:23ZThe future of money is digital – but NZ needs a careful framework to prevent the pitfalls of cryptocurrency<figure><img src="https://images.theconversation.com/files/538682/original/file-20230721-23-hklbnt.jpg?ixlib=rb-1.1.0&rect=15%2C15%2C3537%2C2349&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>New Zealand’s central bank is preparing for a future that includes the mainstream use of cryptocurrency. </p>
<p>At the end of last year, the Reserve Bank of New Zealand (RBNZ) published an issues paper, <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations/future-of-money/fom-private-innovation.pdf">Private Innovation: Te Auahatanga</a>, on digital currencies. The paper sparked a wide-ranging discussion on the development of the <a href="https://www.ird.govt.nz/cryptoassets/what-cryptoassets-are">cryptoasset</a> market and how to respond to the challenges it presents. </p>
<p>The RBNZ received 50 submissions on its paper, with consultation ending in April. A <a href="https://www.rbnz.govt.nz/hub/news/2023/06/rbnz-ramps-up-monitoring-of-stablecoins-and-cryptoassets">summary of the submissions</a> was recently published. </p>
<p>We took a look at the key concerns held by those who participated in the consultation and what these concerns could mean for the uptake of cryptocurrencies in New Zealand.</p>
<h2>The future of money in NZ</h2>
<p>The RBNZ has mapped out a near future where businesses could accept digital currencies for payments, reducing currency conversion issues for international customers. Cryptocurrencies could also be used to streamline payments to suppliers or employees, particularly those based overseas. </p>
<p>And by leveraging the <a href="https://www.ibm.com/blog/how-transparency-through-blockchain-helps-the-cybersecurity-community/">transparency of blockchain</a>, businesses could improve trust by efficiently tracking transactions and supply chains. </p>
<p>But businesses will need to improve their security measures to protect against online threats as well as manage the potential market volatility associated with cryptocurrencies.</p>
<p>While outlining a path for cryptocurrencies, the RBNZ noted the challenges of regulating organisations that are entirely digital and decentralised. The bank also raised the question of how New Zealand’s existing rules on money laundering and the financing of terrorism would apply to cryptocurrencies.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1674818387732578311"}"></div></p>
<h2>The key hurdles for cryptocurrency</h2>
<p>Five key themes emerged out of the submissions received by the RBNZ. These core themes highlighted the concerns held by regulators, businesses and everyday New Zealanders.</p>
<ul>
<li><strong>A clear but flexible regulatory framework</strong> </li>
</ul>
<p><a href="https://www2.deloitte.com/us/en/insights/industry/public-sector/future-of-regulation/regulating-emerging-technology.html">Research</a> on other markets has shown that regulations cannot be static. The rules need to evolve with the technology. That said, regulations need to initially be quite prescriptive. </p>
<p>The New Zealand Financial Markets Authority (NZFMA) could establish a regulatory “sandbox” for cryptoassets, allowing businesses to test their crypto-related technologies in a controlled environment under close supervision. This would encourage innovation as well as help shape effective regulations, balancing the growth of the sector with risk management and consumer protection. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/welsh-mining-towns-had-alternative-currencies-200-years-ago-heres-what-the-crypto-world-could-learn-from-them-205511">Welsh mining towns had alternative currencies 200 years ago – here's what the crypto world could learn from them</a>
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<p>The NZFMA could also demand that New Zealand residents transact their cryptoassets through exchanges that are based in New Zealand and thus under the country’s regulations in order to develop trust. These can be relaxed once the market matures. </p>
<ul>
<li><strong>Information and accessibility</strong> </li>
</ul>
<p>The submissions also highlighted the need for clear, accurate and accessible information on cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.</p>
<p>The lesson from the collapse of the <a href="https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know">digital trading platform FTX</a> is that New Zealand investors have to be protected, or at least made aware of, the risks of transactions through exchanges in more lenient jurisdictions. </p>
<ul>
<li><strong>Risks and opportunities</strong></li>
</ul>
<p>Risk and opportunities were also points of discussion. Respondents to the RBNZ paper acknowledged the risks associated with cryptocurrencies, such as financial crime and the risk to the wider financial system. </p>
<p>At the same time, they saw a significant opportunity to enhance competition and further innovation in New Zealand.</p>
<ul>
<li><strong>A monitoring approach</strong></li>
</ul>
<p>Respondents supported the RBNZ’s proposed monitoring approach which underscored a “same-risk, same-regulation” principle. This holds that if a cryptoasset presents similar risks to an existing financial product, it should be regulated in a similar manner. </p>
<p>This implies a flexible regulatory stance that evolves based on the risk profile of the asset, thereby creating a fair and balanced regulatory environment for all financial instruments, traditional or digital. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/scams-and-cryptocurrency-can-go-hand-in-hand-heres-how-they-work-and-what-to-watch-out-for-182033">Scams and cryptocurrency can go hand in hand – here's how they work and what to watch out for</a>
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</em>
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<p>The RBNZ has proposed working closely with international regulators and private sector information providers – companies or organisations that provide data, analysis and insights about the crypto market. This could include blockchain analytics firms, crypto exchange platforms, research institutions and financial technology companies.</p>
<p>Our own <a href="https://link.springer.com/book/10.1007/978-3-030-78873-5">earlier research</a> supports the belief that external regulations are not enough. It is essential that financial intermediaries dealing in cryptoassets develop a corporate culture of “performance with integrity”, one in which each member of the organisation is centred on the best interest of the client. </p>
<p>We need to monitor cryptoasset businesses and ensure they have robust corporate governance. Another lesson from the FTX failure is that exchanges themselves can not be custodians of customers’ assets – this must be done by regulated third party institutions.</p>
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<ul>
<li><strong>Stablecoins</strong></li>
</ul>
<p>Stablecoins, a type of cryptocurrency with value pegged to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, drew interest during consultations. Participants saw their stability as beneficial. Stablecoins were seen as combining the benefits of cryptocurrencies with the stability of traditional currencies. </p>
<p>However, it must be noted that stablecoins differ in risk exposure according to the collateral they use; the <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612322005359">crash of the Terra stablecoin</a> in May 2022 versus the <a href="https://www.cnbc.com/2023/02/09/stablecoin-giant-tether-records-surprise-700-million-profit.html">resilience of Tether</a> is testament to this. Regulations must be very clear on the reserve assets demanded, and market supervisors must monitor these reserves very closely. </p>
<h2>The future is digital</h2>
<p>Although promising, the future of cryptocurrency in New Zealand is not without its challenges. The RBNZ will need to keep a close eye on things. The central bank will need to walk a fine line between encouraging new ideas and managing the risks. </p>
<p>For the moment, the RBNZ is taking a cautious approach. While there won’t be any immediate policy changes, the RBNZ will be enhancing its monitoring of the financial ecosystem, tracking global regulatory trends and collaborating with financial organisations to address data gaps.</p>
<p>The goal should be to make sure people understand cryptocurrencies, manage the risks and promote innovation. As one respondent put it: </p>
<blockquote>
<p>The future is digital. Let’s embrace it, understand it, and make it work for us.</p>
</blockquote><img src="https://counter.theconversation.com/content/209025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand’s central bank is taking a long, hard look at cryptocurrencies and the role they will play in future business. Here’s what businesses had to say about our digital future.Abhishek Mukherjee, Lecturer in Accounting and Finance., University of WaikatoParesha Sinha, Associate Professor, University of WaikatoPaul David Richard Griffiths, Professor of Finance; (Banking, Fintech, Corporate Governance, Intangible Assets), EM NormandieLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2054242023-06-27T16:00:56Z2023-06-27T16:00:56ZDyma beth allai'r byd crypto ei ddysgu o'r arian cyfredol oedd yn cael ei dalu i weithwyr yng Nghymru ganrifoedd yn ôl<figure><img src="https://images.theconversation.com/files/532687/original/file-20230619-29-b0fhpx.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C2400%2C1200&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tocyn hanner ceiniog gan Gwmni Mwyngloddio Parys o Fôn yn 1788. Defnyddiwyd cynllun yn dangos derwydd am flynyddoedd lawer. </span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Conder_Token_1788_Anglesey_Halfpenny_DH275_composite.jpg">BrandonBigheart/Wikimedia</a></span></figcaption></figure><p>Mae'r farchnad cryptoarian wedi gweld nifer o rwystrau diweddar: o gwymp y system <a href="https://www.ft.com/content/c10bc6f7-abbe-45dc-9367-042186c3336f">Terra/Luna ym mis Mai 2022</a> i fethiant un o gyfnewidfeydd crypto mwya'r byd <a href="https://www.ft.com/content/913ff750-d1f4-486a-9801-e05be20041c1">(FTX) fis Tachwedd diwethaf</a>. </p>
<p>Oherwydd hyn, a phryderon ynghylch <a href="https://ccaf.io/cbnsi/cbeci/ghg">allyriadau carbon cryptoarian</a>, fe gwympodd yr asedau'n llym yn 2022, <a href="https://www.bloomberg.com/news/articles/2022-09-30/does-crypto-owe-anyone-an-apology-after-2-trillion-of-losses">gan golli gwerth $2 triliwn</a> (£1.5 triliwn).</p>
<p>Ond er bod cryptoarian yn aml yn cael sylw, nid syniad newydd yw hwn. Roedd gweithwyr yng Nghymru canrifoedd yn ôl yn aml yn cael eu talu mewn ffyrdd oedd yn wahanol i arian cyffredin. Tocynnau materol oedd yr arian cyfredol hynny, oedd yn cynrychioli ac yn gysylltiedig â gwerth arian go iawn.</p>
<p>Toceiddio yw’r broses o gynrychioli ased sy’n bodoli eisoes ar gyfriflyfr drwy gysylltu’r gwerth economaidd neu’r hawliau sy’n deillio o’r asedau â <a href="https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets-HIGHLIGHTS.pdf">“thocyn”</a>. Gall tocynnau o'r fath fod yn ddigidol neu yn faterol.</p>
<p>Mae arian digidol wedi'i gynllunio i weithredu fel cyfrwng cyfnewid fesul <a href="https://www.bbc.co.uk/newsround/57115261">rhwydwaith cyfrifiadurol</a>. Dydy'r dechnoleg ddim yn ddibynnol ar unrhyw awdurdod unigol, fel <a href="https://www.bloomberg.com/opinion/articles/2021-03-15/cryptocurrencies-are-rising-so-are-the-stakes-for-governments">llywodraeth neu fanc</a>, i gynnal y rhwydwaith. Eto, mae hyn yn debyg i sut y defnyddiwyd tocynnau materol gan gwmnïau mwyngloddio Cymru.</p>
<h2>Argyfwng arian</h2>
<p>Tua diwedd y 18fed ganrif, roedd darnau arian Prydain mewn cyflwr truenus oherwydd <a href="https://coinsandhistoryfoundation.org/2021/07/13/eighteenth-century-britain-coinage-in-crisis">prinder darnau arian a chopr</a>. Yn ystod y Chwyldro Diwydiannol, bu ymfudiad o bobl o gefn gwlad i ganolfannau mwyngloddio a gweithgynhyrchu. Roedd byw mewn trefi yn golygu bod angen arian. Ond roedd y gallu i dalu cyflogau yn amhosibl i fusnesau heb newid bach. </p>
<p>Gyda'r mewnlifiad o weithwyr newydd yn defnyddio arian, agorwyd siopau newydd i ateb y galw, gan greu mwy o swyddi a oedd angen cael eu talu mewn darnau arian. Er bod cynhyrchu darnau arian ffug yn anghyfreithlon, ac yn <a href="https://www.jstor.org/stable/4091719">gosbadwy trwy farwolaeth</a>, nid oedd yn anghyfreithlon i gynhyrchu tocynnau y gellid eu defnyddio yn lle darnau arian.</p>
<p>Dechreuodd y cyfnod mawr cyntaf o gynhyrchu tocynnau yn ystod y <a href="https://education.nationalgeographic.org/resource/industrial-revolution-and-technology/">Chwyldro Diwydiannol cyntaf</a> yn 1787 pan gafodd tocyn <a href="https://www.britishmuseum.org/collection/term/BIOG214134">Cwmni Mwyngloddio Parys</a> ei gynhyrchu. Roedd y cwmni hwn yn cloddio copr ar Fynydd Parys ar Ynys Môn. </p>
<figure class="align-center ">
<img alt="Chwarel brown a oren." src="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Dyma sut mae Mynydd Parys yn edrych erbyn heddiw.</span>
<span class="attribution"><a class="source" href="https://pixabay.com/photos/anglesey-parys-mountain-wales-3816220/">rhianjane/Pixabay</a></span>
</figcaption>
</figure>
<p>Defnyddiodd y cwmni fwyn copr Parys i gynhyrchu tocynnau y gellid eu cyfnewid am geiniogau swyddogol yn unrhyw un o siopau neu swyddfeydd y cwmni. Cwmni Mwyngloddio Parys oedd y cyntaf yn y byd i ddosbarthu tocynnau. Roedd y tocynnau yn cael eu hystyried fel “<a href="https://www.baldwin.co.uk/product/wales-parys-mines-company-penny-token-1787/">tocynnau blaenllaw</a>” yr 18fed ganrif gan arbenigwyr arian y cyfnod. </p>
<p>Yn fuan, roedd bron pob tref ym Mhrydain yn cynhyrchu'r fath docynnau. Cafodd hyn ei ysgogi’n rhannol gan brinder arian y llywodraeth a gwelliannau mewn gweithgynhyrchu darnau arian gan <a href="https://globalcapitalism.history.ox.ac.uk/files/case28-matthewboultonscoinspdf">fathdy Soho Matthew Boulton yn Birmingham</a>, oedd hefyd yn cynhyrchu tocynnau. </p>
<p>Erbyn troad y 19eg ganrif, mae'n debyg bod cyfanswm cyflenwad a chyflymder cylchrediad y tocynnau, darnau arian tramor ac amnewidion eraill yn fwy na rhai o <a href="http://projects.exeter.ac.uk/RDavies/arian/welsh.html">ddarnau arian swyddogol y wlad</a>.</p>
<p>Gwelwyd y broses toceiddio mewn gwledydd eraill, yn enwedig yn yr Unol Daleithiau. Roedd gwersylloedd mwyngloddio a thorri coed yn y 19eg ganrif fel arfer yn eiddo i un cwmni. Roeddent yn cael eu rhedeg mewn lleoliadau go anghysbell, lle yr oedd y cyfle i gael gafael ar <a href="https://www.jstor.org/stable/1992612">arian parod</a> yn wael. </p>
<p>Byddai'r fath gwmnïau yn aml yn talu eu gweithwyr mewn “sgrip”, hynny yw, tocynnau. Doedd gan y gweithwyr ddim fawr o ddewis ond prynu nwyddau mewn siopau a oedd yn eiddo i'r cwmni. Trwy ychwanegu at bris nwyddau, gallai'r cwmni <a href="https://rethinkq.adp.com/artifact-coal-company-scrip-miners/">gynyddu eu helw a gorfodi teyrngarwch gweithwyr</a>.</p>
<figure class="align-left ">
<img alt="Ceiniog arian wedi ei osod ar fwrdd gwyrdd." src="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=576&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=576&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=576&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=724&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=724&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=724&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ceiniog arian wedi ei gynhyrchu gan Gwmni Mwyngloddio Parys.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Parys_Penny.jpg">Obscurasky/Wikimedia</a></span>
</figcaption>
</figure>
<p>Tra bod cynhyrchu tocynnau gan Gwmni Mwyngloddio Parys wedi’i sbarduno gan y Chwyldro Diwydiannol cyntaf, mae poblogrwydd Bitcoin a chryptoarian arall wedi’i gyflymu gan y <a href="https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/">pedwerydd Chwyldro Diwydiannol</a>. </p>
<p>Er bod mwy na 200 mlynedd rhwng y ddau gyfnod, mae gan brofiad y tocynnau gwreiddiol wersi pwysig ar gyfer cryptoarian heddiw. Yn gyntaf, er mwyn i gryptoarian lwyddo, mae angen ecosystem gref arnynt. Bydd ecosystem effeithiol yn cynnwys dau brif beth – ffyrdd i unigolion gronni'r crypto/tocynnau, galw a defnydd am y crypto sy'n trwytho â gwerth, ac amgylcheddau lle gellir cyfnewid am nwyddau a gwasanaethau.</p>
<p>Yn ail, er mwyn i cryptoarian fod yn llwyddiannus ac yn gynaliadwy yn y tymor hir, rhaid iddynt gynnal eu pwrpas gwreiddiol o gael ecosystem sy'n parhau i fod yn annibynnol o un cwmni neu lywodraeth. </p>
<p>Mae ymdrechion i gloi cryptoarian i un sefydliad yn sicr o fethu. Cymerwch, er enghraifft, fethiant Facebook i <a href="https://www.coindesk.com/layer2/2022/01/28/reflecting-on-facebooks-hilarious-well-deserved-crypto-failure/">lansio cryptoarian</a> rhai blynyddoedd yn ôl. </p>
<p>Fe fethodd tocynnau cwmnïau mwyngloddio Cymru pan gaeodd y pyllau, y chwareli neu’r siopau. Arweiniodd hynny at fethiant un neu fwy o dair cydran allweddol yr ecosystem. Fe gollodd y pobl gyda'r tocynnau eu harian, sy'n wers i ni heddiw.</p><img src="https://counter.theconversation.com/content/205424/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cwmni mwyngloddio o Gymru oedd y cyntaf i roi tocynnau i weithwyr fel dull arall o dalu.Edward Thomas Jones, Senior Lecturer in Economics / Director of the Institute of European Finance, Bangor UniversityLaurence Jones, Lecturer in Finance, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055112023-06-27T16:00:54Z2023-06-27T16:00:54ZWelsh mining towns had alternative currencies 200 years ago – here’s what the crypto world could learn from them<figure><img src="https://images.theconversation.com/files/532005/original/file-20230614-21-yyoovi.jpg?ixlib=rb-1.1.0&rect=0%2C28%2C2400%2C1156&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A halfpenny token issued by the Parys Mining Company of Anglesey in 1788. The hooded druid design was used for many years and was the first of hundreds of token designs.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Conder_Token_1788_Anglesey_Halfpenny_DH275_composite.jpg">BrandonBigheart/Wikimedia</a></span></figcaption></figure><p><em>You can also read this article <a href="https://theconversation.com/dyma-beth-allair-byd-crypto-ei-ddysgu-or-arian-cyfredol-oedd-yn-cael-ei-dalu-i-weithwyr-yng-nghymru-canrifoedd-yn-ol-205424">in Welsh</a>.</em></p>
<p>The global cryptocurrency market has seen a number of recent setbacks: from the collapse of the <a href="https://www.ft.com/content/c10bc6f7-abbe-45dc-9367-042186c3336f">Terra/Luna system in May 2022</a> to the failure of <a href="https://www.ft.com/content/913ff750-d1f4-486a-9801-e05be20041c1">FTX</a>, one of the largest crypto exchanges in the world. </p>
<p>Because of these factors, and other concerns over cryptocurrencies’ <a href="https://ccaf.io/cbnsi/cbeci/ghg">carbon emissions</a>, these assets <a href="https://www.bloomberg.com/news/articles/2022-09-30/does-crypto-owe-anyone-an-apology-after-2-trillion-of-losses">lost US$2 trillion in value</a> (£1.5 trillion) in 2022.</p>
<p>But while cryptocurrencies get a lot of attention today, in some ways they are not a revolutionary concept. Hundreds of years ago, workers in Wales were often paid with alternative currencies instead of money.</p>
<p>These currencies were physical tokens that represented and were linked to the value of real money. Many cryptocurrencies work in a similar way, acting as digital tokens that <a href="https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets-HIGHLIGHTS.pdf">represent a ledger of financial assets</a> (this is known as “tokenisation”).</p>
<p>Digital currencies are also not reliant on any central authority, such as a <a href="https://www.bloomberg.com/opinion/articles/2021-03-15/cryptocurrencies-are-rising-so-are-the-stakes-for-governments">government or bank</a>, to uphold or maintain their network of exchange. Again, this is similar to how physical tokens were used by Welsh mining companies. </p>
<h2>Currency crisis</h2>
<p>Towards the end of the 18th century the coinage of Britain was in a deplorable state due to the severe <a href="https://coinsandhistoryfoundation.org/2021/07/13/eighteenth-century-britain-coinage-in-crisis/#:%7E:text=The%20production%20of%20silver%20coins,of%20coins%20made%20from%20it.">shortages</a> of silver and copper coins. During the Industrial Revolution people migrated from the countryside into mining and manufacturing centres. But living in towns required money, and the ability to pay wages was impossible for businesses without small change. </p>
<p>With an influx of new workers using money, new shops were opened to meet demand, creating more jobs that required payment in coins. Although the production of counterfeit coins was illegal and <a href="https://www.jstor.org/stable/4091719">punishable by death</a>, it was not illegal to produce tokens with other designs which could be used instead of coins. </p>
<p>The first great era of token production during the <a href="https://education.nationalgeographic.org/resource/industrial-revolution-and-technology/">first Industrial Revolution</a> began in 1787 with the issue of the <a href="https://www.britishmuseum.org/collection/term/BIOG214134">Parys Mining Company</a> token. This company mined at Parys Mountain on the Welsh island of Anglesey. It briefly produced more copper than any other mine in the world during the Industrial Revolution. </p>
<figure class="align-center ">
<img alt="A quarried landscape of brown and orange earth." src="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What Parys mountain on Anglesey looks like today.</span>
<span class="attribution"><a class="source" href="https://pixabay.com/photos/anglesey-parys-mountain-wales-3816220/">rhianjane/Pixabay</a></span>
</figcaption>
</figure>
<p>It also used the high-quality ore from its mine to produce tokens which could be exchanged for official coin at full value at any one of its shops or offices. This made the Parys Mining Company the first company in the world to issue tokens. These were described as the “<a href="http://provincialtokencoinage.weebly.com">premier tokens</a>” of the 18th century by that era’s coin experts.</p>
<p>Soon, practically every town in Britain was producing its own tokens. This was driven in part by a shortage of government coinage and improvements in coin manufacturing by <a href="https://globalcapitalism.history.ox.ac.uk/files/case28-matthewboultonscoinspdf">Matthew Boulton’s Soho Mint</a> in Birmingham, who also turned his hand to tokens. </p>
<p>By the turn of the 19th century, the total supply and fast circulation of tokens, foreign coins and other substitutes probably <a href="http://projects.exeter.ac.uk/RDavies/arian/welsh.html">exceeded</a> those of the official coin of the country.</p>
<p>The process of tokenisation was subsequently seen in other countries, in particular the United States. Mining and logging camps in the 19th century US were typically owned and operated by a single company, often <a href="https://www.jstor.org/stable/1992612">in remote</a> locations with poor access to cash. </p>
<p>These companies would often pay their workers in “scrip”, or tokens. The workers, given the limited places they could spend scrips, had little choice but to purchase goods at company-owned stores. By placing large mark ups on goods, the <a href="https://rethinkq.adp.com/artifact-coal-company-scrip-miners/">company</a> could increase their profits and enforce employee loyalty. </p>
<figure class="align-left ">
<img alt="A close up of a silver coin on a green background." src="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=576&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=576&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=576&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=724&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=724&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=724&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A Parys penny produced by the Parys Mining Company.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Parys_Penny.jpg">Obscurasky/Wikimedia</a></span>
</figcaption>
</figure>
<p>While the production of tokens by the Parys Mining Company were spurred on by the first Industrial Revolution, the adoption and popularity of Bitcoin and other cryptocurrencies has been hastened by the <a href="https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/">fourth Industrial Revolution</a>.</p>
<p>Although they are more than 200 years apart, the history of these tokens have important lessons for today’s cryptocurrencies. First, for cryptocurrencies to succeed there needs to be various ways for individuals to accumulate the crypto/tokens, plus a demand and use for the crypto that means it holds its value, and trusted environments where exchange for goods and services can take place.</p>
<p>And second, for cryptocurrencies to be successful and sustainable in the long term they must uphold their original purpose of having an ecosystem that remains independent of a single company or government. Efforts to lock cryptocurrencies to a single organisation do not look positive, for example Facebook’s failed attempt to <a href="https://www.coindesk.com/layer2/2022/01/28/reflecting-on-facebooks-hilarious-well-deserved-crypto-failure/">launch a cryptocurrency</a>, announced in 2019. </p>
<p>The tokens of Welsh mining companies inherently failed when the closures of the mine or shops led to the removal of one or more of the three components of the ecosystem. And then people left with the tokens lost their money, a lesson for us today.</p><img src="https://counter.theconversation.com/content/205511/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A Welsh mining company was the first to issue tokens to workers as an alternative form of payment.Edward Thomas Jones, Senior Lecturer in Economics / Director of the Institute of European Finance, Bangor UniversityLaurence Jones, Lecturer in Finance, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2079092023-06-22T20:06:40Z2023-06-22T20:06:40ZAlmost no one uses Bitcoin as currency, new data proves. It’s actually more like gambling<figure><img src="https://images.theconversation.com/files/533329/original/file-20230622-30-asaf73.jpg?ixlib=rb-1.1.0&rect=0%2C147%2C6134%2C3081&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Bitcoin boosters like to <a href="https://cointelegraph.com/explained/crypto-is-going-mainstream-heres-how-the-future-founders-will-build-on-it">claim</a> Bitcoin, and other <a href="https://www.rba.gov.au/publications/bulletin/2019/jun/cryptocurrency-ten-years-on.html">cryptocurrencies</a>, are becoming mainstream. There’s a good reason to want people to believe this. </p>
<p>The only way the average punter will profit from crypto is to sell it for <a href="https://www.scienceabc.com/social-science/greater-fool-theory-bitcoin-definition-examples.html">more than they bought it</a>. So it’s important to talk up the prospects to build a “fear of missing out”. </p>
<p>There are <a href="https://www.rba.gov.au/speeches/2021/sp-so-2021-11-18.html">loose claims</a> that a large proportion of the population – generally in the range of <a href="https://cointelegraph.com/news/world-population-reaches-8-billion-but-how-many-are-in-crypto">10% to 20%</a> – now hold crypto. Sometimes these numbers are based on <a href="https://www.grandviewresearch.com/industry-analysis/crypto-wallet-market-report">counting crypto wallets</a>, or on <a href="https://apnews.com/article/technology-business-bitcoin-f6d7ba724bf156fd5d603661c99fd5c2">surveying wealthy people</a>.</p>
<p>But the hard data on Bitcoin use shows it is rarely bought for the purpose it ostensibly exists: to buy things. </p>
<h2>Little use for payments</h2>
<p>The whole point of Bitcoin, as its creator “<a href="https://markets.businessinsider.com/news/currencies/who-is-satoshi-nakamoto-bitcoin-inventor-crypto-steve-jobs-apple-2023-4">Satoshi Nakamoto</a>” stated in the opening sentence of the 2008 <a href="https://bitcoin.org/bitcoin.pdf">white paper</a> outlining the concept, was that: </p>
<blockquote>
<p>A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.</p>
</blockquote>
<p>The latest data demolishing this idea comes from Australia’s central bank. </p>
<p>Every three years the Reserve Bank of Australia surveys a representative sample of 1,000 adults about how they <a href="https://www.rba.gov.au/publications/bulletin/2023/jun/consumer-payment-behaviour-in-australia.html">pay for things</a>. As the following graph shows, cryptocurrency is making almost no impression as a payments instrument, being used by no more than 2% of adults. </p>
<hr>
<p><strong>Payment methods being used by Australians</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Alternative payment methods, share of all respondents, 2022" src="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Reserve Bank calculations of Australians' awareness vs use of different payment methods, based on Ipsos data.</span></span>
</figcaption>
</figure>
<hr>
<p>By contrast more recent innovations, such as “<a href="https://www.rba.gov.au/publications/bulletin/2021/mar/developments-in-the-buy-now-pay-later-market.html">buy now, pay later</a>” services and <a href="https://www.rba.gov.au/speeches/2022/pdf/sp-so-2022-05-03.pdf">PayID</a>, are being used by around a third of consumers. </p>
<p>These findings confirm 2022 data from the <a href="https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-banking-credit.htm">US Federal Reserve</a>, showing just 2% of the adult US population made a payment using a cryptocurrrency, and <a href="https://www.riksbank.se/en-gb/statistics/statistics-on-payments-banknotes-and-coins/payment-patterns/">Sweden’s Riksbank</a>, showing less than 1% of Swedes made payments using crypto.</p>
<h2>The problem of price volatility</h2>
<p>One reason for this, and why prices for goods and services are virtually never expressed in crypto, is that most fluctuate wildly in value. A shop or cafe with price labels or a blackboard list of their prices set in Bitcoin could be having to change them every hour. </p>
<p>The following graph from the Bank of International Settlements shows changes in the exchange rate of ten major cryptocurrencies against the US dollar, compared with the Euro and Japan’s Yen, over the past five years. Such volatility negates cryptocurrency’s value as a currency. </p>
<hr>
<p><strong>Cryptocurrency’s volatile ways</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=218&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=218&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=218&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=274&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=274&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=274&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">90-day rolling standard deviation of daily returns for major cryptocurrencies compared with the Euro and Yen.</span>
<span class="attribution"><a class="source" href="https://www.bis.org/publ/work1104.htm">The Crypto Multiplier, BIS Working Papers, No. 1104</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>There have been attempts to solve this problem with so-called “stablecoins”. These promise to maintain steady value (usually against the US dollar). </p>
<p>But the spectacular collapse of one of these ventures, <a href="https://www.nber.org/papers/w31160">Terra</a>, once one of the largest cryptocurrencies, showed <a href="https://www.degruyter.com/document/doi/10.1515/rle-2022-0053/html">the vulnerability</a> of their mechanisms. Even a company with the enormous resources of Facebook owner Meta has <a href="https://www.bbc.com/news/technology-60156682">given up on its stablecoin venture</a>, Libra/Diem.</p>
<p>This helps explain the failed experiments with making Bitcoin legal tender in the two countries that have tried it: El Salvador and the <a href="https://www.bbc.com/news/world-africa-61565485">Central African Republic</a>. The Central African Republic has already <a href="https://www.imf.org/en/Countries/CAF/central-african-republic-qandas#crypto">revoked Bitcoin’s status</a>. In <a href="https://www.nber.org/papers/w29968">El Salvador</a> only a fifth of firms accept Bitcoin, despite the <a href="https://twitter.com/nayibbukele/status/1402446890466217985">law</a> saying they must, and only 5% of sales are paid in it.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/one-year-on-el-salvadors-bitcoin-experiment-has-proven-a-spectacular-failure-190229">One year on, El Salvador's Bitcoin experiment has proven a spectacular failure</a>
</strong>
</em>
</p>
<hr>
<h2>Storing value, hedging against inflation</h2>
<p>If Bitcoin’s isn’t used for payments, what use does it have?</p>
<p>The major attraction – one endorsed by mainstream financial publications – is as a store of value, particularly in times of inflation, because Bitcoin has a hard cap on the number of coins that will ever be “mined”. </p>
<p>As <a href="https://www.forbes.com/advisor/in/investing/cryptocurrency/advantages-of-cryptocurrency/">Forbes writers</a> argued a few weeks ago:</p>
<blockquote>
<p>In terms of quantity, there are only 21 million Bitcoins released as specified by the ASCII computer file. Therefore, because of an increase in demand, the value will rise which might keep up with the market and prevent inflation in the long run. </p>
</blockquote>
<p>The only problem with this argument is recent history. Over the course of 2022 the purchasing power of major currencies (US, the euro and the pound) dropped by about 7-10%. The purchasing power of a Bitcoin dropped by about 65%. </p>
<h2>Speculation or gambling?</h2>
<p>Bitcoin’s price has always been volatile, and always will be. If its price were to stabilise somehow, those holding it as a speculative punt would soon sell it, which would drive down the price. </p>
<p>But most people buying Bitcoin essentially as a speculative token, hoping its price will go up, are likely to be disappointed. A <a href="https://www.bis.org/publ/bisbull69.htm">BIS study</a> has found the majority of Bitcoin buyers globally between August 2015 and December 2022 have made losses.</p>
<p>The “<a href="https://www.statista.com/statistics/730876/cryptocurrency-maket-value/">market value</a>” of all cryptocurrencies peaked at US$3 trillion in November 2021. It is now about US$1 trillion. </p>
<p>Bitcoins’s highest price in 2021 was about US$60,000; in 2022 US$40,000 and so far in 2023 only US$30,000. Google searches show that public interest in Bitcoin also peaked in 2021. In the US, the proportion of adults with internet access holding cryptocurrencies fell from 11% in 2021 to 8% in 2022.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-bitcoins-fundamental-value-thats-a-good-question-171387">What is Bitcoin's fundamental value? That's a good question</a>
</strong>
</em>
</p>
<hr>
<p>UK <a href="https://www.gov.uk/government/publications/individuals-holding-cryptoassets-uptake-and-understanding">government research</a> published in 2022 found that 52% of British crypto holders owned it as a “fun investment”, which sounds like a euphemism for gambling. Another 8% explicitly said it was for gambling. </p>
<p>The UK parliament’s <a href="https://committees.parliament.uk/committee/158/treasury-committee">Treasury Committee</a>, a group of MPs who examine economics and financial issues, has <a href="https://publications.parliament.uk/pa/cm5803/cmselect/cmtreasy/615/summary.html">strongly recommended</a> regulating cryptocurrency as form of gambling rather than as a financial product. They argue that continuing to treat “unbacked crypto assets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not”. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/crypto-trading-politicians-who-say-it-should-be-treated-like-gambling-are-completely-wrong-206121">Crypto trading: politicians who say it should be treated like gambling are completely wrong</a>
</strong>
</em>
</p>
<hr>
<p>Whatever the merits of this proposal, the UK committtee’s underlying point is solid. Buying crypto does have more in common with gambling than investing. Proceed at your own risk, and and don’t “invest” what you can’t afford to lose.</p><img src="https://counter.theconversation.com/content/207909/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist at the Reserve Bank of Australia and the Bank for International Settlements.
He has neither a long nor short position in any cryptocurrency.</span></em></p>Barely 2% of Australians or Americans use Bitcoin for its intended purpose: to buy things. Should we even call it a cryptocurrency?John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2061212023-05-23T14:10:57Z2023-05-23T14:10:57ZCrypto trading: politicians who say it should be treated like gambling are completely wrong<figure><img src="https://images.theconversation.com/files/527509/original/file-20230522-25-fn6rwh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">No ifs or bits. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/crypto-trader-investor-analyst-broker-using-2066562593">Ground Picture</a></span></figcaption></figure><p>Cryptocurrency trading should be regulated in the same way as gambling, <a href="https://committees.parliament.uk/committee/158/treasury-committee/news/195246/consumer-cryptocurrency-trading-should-be-regulated-as-gambling-treasury-committee-says-in-new-report/">according to</a> the UK parliamentary select committee in charge of scrutinising finance. The committee <a href="https://publications.parliament.uk/pa/cm5803/cmselect/cmtreasy/615/summary.html">published a report</a> arguing that this was necessary because digital assets such as bitcoin have “no intrinsic value, huge price volatility and no discernible social good”. </p>
<p>Such statements remind many crypto enthusiasts that they are still early to this space despite it being nearly 15 years since the publication of bitcoin’s original <a href="https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf">white paper</a>, which laid out the technological vision in the first place. </p>
<p>If crypto trading <a href="https://www.pinsentmasons.com/out-law/news/cryptoassets-should-be-regulated-as-gambling">was designated</a> as gambling, platforms would need to follow additional regulatory measures such as licensing rules and customer due diligence requirements to protect vulnerable users. There might also be protections akin to <a href="https://www.reuters.com/world/uk/uk-government-set-out-tougher-gambling-rules-2023-04-26/">recently proposed changes</a> to traditional gambling, such as stake limits, as well as closer control of advertising and promotion and a mandatory levy on participating firms. </p>
<p>The report, whose lead author is the committee’s chair, Harriett Baldwin, argues that gambling regulations are appropriate for crypto because these assets are “not supported by any underlying asset”. </p>
<p>The comparison would be betting on a roulette wheel, where you are simply playing the odds that a certain number will sometimes come up. Contrast this with buying company shares, which might not always go up but at least there’s an underlying asset such as a customer base or a branch of shops. </p>
<p>But to conclude that cryptocurrencies have no value because they lack a traditional asset base fails to understand that intrinsic value can derive from a network. It’s perfectly normal, for example, for companies to have a gap between the value of their book assets and what they are worth on the stock market overall. </p>
<p>For example, <a href="https://investor.fb.com/financials/default.aspx">Meta’s</a> total assets are presently valued on its balance sheet at US$184 billion (£148 billion), whereas the company’s valuation on the stock market <a href="https://finance.yahoo.com/quote/META/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAFWZHFfCPmhElxT_KJHKjOkk91OjS0rsbGtJJSwPyJzNt8DB9bsesKc_5LikvO-BcrQGJtIhuiLB2rDfawzt11b-zVQAjfQOrY5XYYmFAKE6J0JPAd9KYP4Q6Y2k_GBr7K9uJVtwPYOUAvm-NzPGMFfaFvUJ5g2AQEpAOHOUgWkL">is US$630 billion</a>. One reason why Meta is worth about 3.5 times more than its assets is because the market understands that there is much intangible value in networks such as Facebook and Instagram beyond what is on the company’s balance sheet. </p>
<p>Many alternative valuation methodologies have been developed to value such networks. These use principles such as <a href="https://en.wikipedia.org/wiki/Metcalfe%27s_law">Metcalfe’s law</a>, which says that any network becomes exponentially more valuable the more users that are connected through it. This is because it becomes more useful to them, meaning they’ll use it more often, and will be less likely to defect to a rival that lacks critical mass – witness how Twitter looks entrenched despite lots of people disliking Elon Musk. </p>
<p>You can <a href="https://www.sciencedirect.com/science/article/pii/S1567422317300480">view cryptocurrencies</a> as networks too, even though they are decentralised – meaning they usually have no sole company in charge – in contrast to a centralised network such as Facebook. In short, the networks that underpin cryptocurrencies <em>do</em> have underlying assets of value. </p>
<h2>Tortoises and hares</h2>
<p>Treating crypto trading as gambling would also mean taking a risk-based approach that focuses on mitigating downside risks. This is understandable, but it might be at the expense of potential upside opportunities. The UK <a href="https://www.gov.uk/government/news/government-sets-out-plan-to-make-uk-a-global-cryptoasset-technology-hub">aspires to be</a> a leader on digital assets, potentially stealing a march on the US at a time when it seems <a href="https://www.coindesk.com/consensus-magazine/2023/03/31/the-biden-administration-is-politicizing-crypto/">comparatively hostile</a> to the space. Particularly considering that financial services <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiH1aSd24j_AhW8QkEAHXPCAAUQFnoECAkQAw&url=https%3A%2F%2Fwww.economicsobservatory.com%2Fhow-important-is-the-city-to-the-uk-economy&usg=AOvVaw1idW1ogkcN3FtAgOQEm1kL">make up 8%</a> of the UK economy, there is a delicate balance to strike here. </p>
<p>The UK government <a href="https://www.bbc.com/news/technology-65610851">has said</a> that it does not agree with the Treasury select committee that crypto trading should be treated like gambling. Earlier this year, the <a href="https://www.ft.com/content/6f5539f7-19ff-419b-8a64-5ed528de5abf?shareType=nongift">Treasury outlined</a> new principles to regulate crypto trading, which would essentially treat these assets in a similar way to shares or bonds. </p>
<p>This is in stark contrast to, say, <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjYp9X93Yj_AhWVQEEAHdHMAQwQFnoECAcQAQ&url=https%3A%2F%2Fwww.weforum.org%2Fagenda%2F2022%2F01%2Fwhat-s-behind-china-s-cryptocurrency-ban%2F&usg=AOvVaw20xk0IbfQF7a5cEB0emgsy">China</a>, which has banned cryptocurrency to “curtail financial crime and prevent economic instability”. Yet, equally, the UK’s proposed regime will probably be more robust than a country <a href="https://www.pwc.com/gx/en/new-ventures/cryptocurrency-assets/pwc-global-crypto-regulation-report-2023.pdf">such as Switzerland</a>, which is embracing crypto within a largely new framework for financial assets. The Swiss are so progressive that their financial regulator has <a href="https://zg.ch/en/steuern-finanzen/steuern/steuerbezug/steuern-bezahlen-mit-kryptowaehrungen#:%7E:text=As%20of%20February%202021%2C%20individuals,the%20cryptocurrencies%20Bitcoin%20and%20Ether.">even permitted</a> the canton of Zug, near Zurich, to pay certain taxes in crypto. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Lakeside view in Zug, Switzlernad" src="https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=452&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=452&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=452&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=568&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=568&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527593/original/file-20230522-17286-bwz42t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=568&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Welcome to Zug, Switzerland, where you can pay your taxes in crypto.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/hennake/50522263538/in/photolist-2jYtNMh-sQ4Fzh-t5kpFL-2mNKFUT-2mNV36U-XjgWwR-t5kj55-2mWTXjf-2kCtFuw-2nevkYJ-2k78pad-2k8oK41-2drMkuL-2mQRpUT-2kTgSyu-DcJoFy-tYE6hP-2kBTF6z-GQgAH1-2kvPtCn-4Yw5wd-4Yw7PY-Usjf3C-ab586g-27KpVGz-2kCKWmJ-2kBJoyo-2kyPsxo-2i7rCJs-2kCeWkP-2km6JAP-uVuq6T-2jGQhx1-RKrTzq-LCbAN-2kBWSUp-UoBtub-uD2Baa-2kCSJdr-2kUPvsP-2jGAQh1-ocHBFq-2n1je6i-tYE8uV-uCZSaz-uD1oCt-vAEejm-oudsd8-2kh21Bu-uUZYfN">Henna K</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Such disparate views on crypto regulation around the world point to one thing: uncertainty. Not around the technology as it stands today – though a surprising number even of senior policymakers don’t understand it – so much as what it could become. For example, with <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1089224/Individuals_Holding_Cryptoassets_Uptake_and_Understanding.odt">upwards of 4 million</a> people in the UK having owned or used cryptocurrencies, regulators worry that individuals might pivot to a monetary system outside of their traditional currency by transacting in crypto instead. This might make it more difficult for central banks to control the economy. </p>
<p>The risk of this pivot is probably remote, but not impossible. But trying to predict how it will play out is akin to forecasting the aviation industry when the Wright Brothers first flew, or the importance of the internet and smartphones when Steve Jobs <a href="https://www.youtube.com/watch?v=L40B08nWoMk">described the computer</a> in 1990 as a “bicycle for the mind”. </p>
<p>Overall, the UK’s approach to crypto regulation is cautious – perhaps you could spin it as a “fast follower” of the countries that are leading the way, such as Switzerland and <a href="https://www.reuters.com/business/finance/imf-says-el-salvadors-bitcoin-risks-have-not-materialized-should-be-addressed-2023-02-11/">El Salvador</a>. Given the economic existential importance of “what is money” and how it is used within an economy, this seems like the right balance to strike. When the consequences are so difficult to predict, it’s arguably better to take small steps rather than “<a href="https://www.masterclass.com/articles/move-fast-and-break-things">move fast and break things</a>” in the style of Silicon Valley. After all, the UK is a country not a company and the stakes are higher if a policy choice does not pay off. </p>
<p>Nonetheless, it’s surely right not to treat crypto trading like gambling. Let’s hope that future UK governments stick with this approach. Gambling over time is the road to ruin for the player – the house always wins. In crypto this is not true. There is no “house” but rather a value proposition which may or may not come to fruition, but oftentimes is still misunderstood.</p><img src="https://counter.theconversation.com/content/206121/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Brown does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It needs to be treated like the new class of assets that it is.Gavin Brown, Associate Professor in Financial Technology, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2050392023-05-05T17:08:11Z2023-05-05T17:08:11ZCryptocasinos are evolving worryingly fast – here’s how to get to grips with them<figure><img src="https://images.theconversation.com/files/524596/original/file-20230505-25-9mlqb8.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Place your bits. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gold-physical-bitcoin-coin-on-casino-1179867643">Cronislaw</a></span></figcaption></figure><p><a href="https://www.gov.uk/government/publications/high-stakes-gambling-reform-for-the-digital-age/high-stakes-gambling-reform-for-the-digital-age">New gambling rules</a> are being proposed by the UK government for the first time since the invention of the smartphone. But these “reforms for the digital age” are silent on cryptocasinos, where you can bet online using cryptocurrencies. These platforms have seen remarkable and potentially dangerous developments since the government’s consultation for its reforms began in late 2020. </p>
<p>The first <a href="https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0240693">peer-reviewed paper</a> on cryptocasinos was only published in October 2020. The gambling games discussed were laughably simple, such as bets on virtual coin flips or dice rolls. Such activities that might appeal to bored friends on a long journey must have seemed benign compared to the world of in-play sports betting and online slots available using conventional currencies. </p>
<p>But fast-forward a year and cryptocasinos had evolved substantially. In April 2021, Premier League football team Southampton signed a <a href="https://theathletic.com/4217895/2021/04/08/southampton-tie-up-record-breaking-three-year-sponsorship-deal-with-sportsbet-io/">£7.5 million a year</a> sponsorship deal with sportsbet.io, which specialises in allowing gamblers to make sports bets during matches with cryptocurrencies. </p>
<p>Shortly afterwards, the rapper Drake <a href="https://ftw.usatoday.com/2022/03/drake-crypto-betting-stake-partnership-inevitable">announced a partnership</a> with Stake.com, another major cryptocasino, which would see him livestreaming six-figure wagers across sports and online casino games. Stake.com then became Everton FC’s new shirt sponsor in June 2022, causing a <a href="https://www.theguardian.com/society/2022/aug/29/stakecom-told-not-to-use-everton-branding-in-5000-betting-offer">significant backlash</a> among football fans and gambling harm advocates.</p>
<p>However, most of this opposition focused on the rise of gambling shirt sponsors in football, which will be addressed by the Premier League’s <a href="https://www.espn.co.uk/football/english-premier-league/story/4922969/premier-league-clubs-to-drop-gambling-sponsors-from-shirts">recent announcement</a> banning them from the 2026–27 season onwards. Yet it’s not enough to just think of cryptocasinos in the same way as any other online gambling operator; they pose unique risks that have mostly gone unnoticed. </p>
<h2>The risks</h2>
<p>First, cryptocurrencies carry inherent risks. Becoming <a href="https://fee.org/articles/meet-the-teenage-dropout-who-became-a-bitcoin-millionaire/">a crypto millionaire</a> is now a common get-rich-quick dream, but some people get so obsessed with the high-stakes trading that they <a href="https://www.bbc.co.uk/news/world-asia-64245669">end up seeking treatment</a>, just like with gambling addiction. It is also easy for crypto assets to disappear, such as via the collapse of the <a href="https://en.wikipedia.org/wiki/Bankruptcy_of_FTX">crypto exchange FTX</a> in November 2022. </p>
<p>It may be that people are more willing to gamble with crypto than with more tangible forms of money. This would be analagous to the fact that digital deposits at online casinos <a href="https://journals.sagepub.com/doi/pdf/10.1177/1461444814521140">are thought</a> to encourage gambling more than casino chips. </p>
<p>In addition, cryptocasinos tend to be lightly regulated. They often obtain licences from the <a href="https://psyarxiv.com/fgxrb/">Caribbean island of Curaçao</a>, which has a more lax approach than, for example, Great Britain’s Gambling Commission. Platforms operating within Great Britain still have to abide by Gambling Commission rules, but there are workarounds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Street sign saying Curacao in big yellow letters" src="https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=389&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=389&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=389&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=489&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=489&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524599/original/file-20230505-25-vgybjx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=489&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Caribbean island offers a light-touch regime for gambling operators.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/YaDcufLo7mo">Dave Drury/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>For instance, the Gambling Commission does not allow platforms to accept crypto deposits. As a result, cryptocasinos like Stake.com redirect mainland British visitors to a “white label” version of the site that only allows deposits in conventional currencies. </p>
<p>But UK users can easily reach the crypto version of Stake.com (licensed in Curaçao) by using a virtual private network (VPN) to make it appear that they are from a different country, as demonstrated by <a href="https://www.theguardian.com/business/2022/oct/01/uk-gambling-safeguards-no-match-for-online-bookie-stake-com">investigative reporters</a>. Stake.com responded that all operators in the sector experienced users trying to bypass such restrictions using VPNs, and pointed to an example of one user that it had shut down. </p>
<p>We also contributed to <a href="https://psyarxiv.com/fgxrb/">research that</a> found that 22 frequently visited cryptocasinos did not even require a VPN for British users to evade such site restrictions. These sites were also part of a wider group of 37 cryptocasinos (out of 40 surveyed) that didn’t require proof of ID before allowing crypto deposits. </p>
<p>Meanwhile, cryptocasinos are often accessible from <a href="https://dealerslounge.com/bitcoin-casinos-china">countries such as China</a> where online gambling is illegal. The fundamental anonymity of cryptocurrencies makes it harder for law enforcement to intervene in these situations. </p>
<p>The lax regulation in this area is also apparent when you look at the safer gambling messaging. The messaging used by conventional online gambling operators is <a href="https://psyarxiv.com/n5d9h">bad enough</a> – many introduced a very weak “take time to think” message a couple of years ago, for example. But the cryptocasinos are worse, using wholly inappropriate messages emphasising potentially huge winnings. For instance, BetBigDollar.com tells its customers: </p>
<blockquote>
<p>Yes, there is a chance of winning vast amounts of money, but, if not treated as entertainment only and nothing more, irresponsible gaming can have dire consequences for the player.</p>
</blockquote>
<h2>What would help</h2>
<p>Cryptocasinos demonstrate how online gambling will continue to evolve rapidly. The British regulatory approach is much too slow, insisting on evidence that researchers simply don’t have the tools to deliver. The <a href="https://www.gov.uk/government/publications/high-stakes-gambling-reform-for-the-digital-age/high-stakes-gambling-reform-for-the-digital-age">new proposals</a> give the following rationale for not recommending any substantive new restrictions on gambling marketing:</p>
<blockquote>
<p>The limited high-quality evidence we received shows a link between exposure to advertising and gambling participation, but there was little evidence of a causal link with gambling harms or the development of gambling disorder.</p>
</blockquote>
<p>A government that makes policies based on only what is known for certain, and which takes two years to react to evidence, is doomed to repeat the policy failures of the 2000s. Gambling was liberalised at that time, but few realised that smartphones would soon give people access to a casino in their pocket.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A smartphone with dice and cards coming out of it" src="https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524601/original/file-20230505-21-372ed3.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">So the UK liberalised gambling and then this happened.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/creative-background-online-casino-male-hand-2028773756">Marko Aliaksandr</a></span>
</figcaption>
</figure>
<p>The truth is that cryptocasinos are too new, and their future evolution too uncertain, to know for sure how policymakers should respond. Cryptocasinos may ultimately require too great a degree of technical knowledge to become a widespread public health concern. But some danger signals are there. </p>
<p>For example, Gamstop is a service that UK-based gamblers can use to self-exclude from online gambling. Some self-excluded gamblers have <a href="https://www.reddit.com/r/problemgambling/comments/11w0qiu/guys_i_need_help_i_relapsed_bad_today_and_its/">posted on social media</a> that cryptocasinos have allowed them to evade Gamstop and continue gambling again, with terrible consequences.</p>
<p>For now, some broad principles could be used. The trick is not to make decisions based solely on the information available, but to anticipate how things may evolve. New gambling operators are going to use all available tools to gain gamblers’ attention and increase their perceived legitimacy. That will always include marketing, not just on Premier League shirts, but via influencers and social media, so it would make sense to restrict this avenue. </p>
<p>The Gambling Commission’s approach to giving cryptocasinos access to UK markets via white labelling should also be reconsidered. Without question, it is much easier to use cryptocurrencies to gamble than it should be.</p><img src="https://counter.theconversation.com/content/205039/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Newall is a member of the Advisory Board for Safer Gambling – an advisory group of the Gambling Commission in Great Britain, and in 2020 was a special advisor to the House of Lords Select Committee Enquiry on the Social and Economic Impact of the Gambling Industry. In the last three years, Philip has contributed to research projects funded by the Academic Forum for the Study of Gambling, Clean Up Gambling, Gambling Research Australia, NSW Responsible Gambling Fund, and the Victorian Responsible Gambling Foundation. Philip has received travel and accommodation funding from Alberta Gambling Research Institute, and received open access fee funding from Gambling Research Exchange Ontario.
</span></em></p><p class="fine-print"><em><span>Maira Andrade does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new UK white paper reforming the gambling laws for the digital age says nothing about one of the most concerning new developments in this field in the past 20 years.Philip Newall, Lecturer in the School of Psychological Science, University of BristolMaira Andrade, PhD Researcher, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1986822023-01-27T17:04:19Z2023-01-27T17:04:19ZBitcoin has shot up 50% since the new year, but here’s why new lows are probably still ahead<figure><img src="https://images.theconversation.com/files/506823/original/file-20230127-16-4cgk1e.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Up, up and ...</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/golden-bitcoin-digital-currency-futuristic-money-1653739108">CKA</a></span></figcaption></figure><p>To the delight of investors across the cryptosphere, the price of bitcoin (BTC) has rallied over 53% since its low of US$15,476 (£12,519) in November. Now trading around US$23,000, there’s much talk that the bottom has finally been reached for the leading cryptocurrency after a year of painful decline – in November 2021, the price peaked at almost US$70,000. </p>
<p>If so, it’s not only good news for bitcoin but the whole market in cryptocurrencies, since the others broadly move in line with the leader. So is crypto back in business?</p>
<h2>Dotcom lessons</h2>
<p>The past is littered with various periods of market turmoil, from the global financial crisis of 2007-09 to the COVID-19 collapse in 2020. But neither of these is a particularly good comparison for our purposes because they both saw sharp drops and recoveries, as opposed to the slow unwinding of bitcoin. A better comparison would be the dotcom bubble burst in 2000-02, which you can see in the chart below (the Nasdaq is the index that tracks all tech stocks). </p>
<p><strong>Nasdaq 100 index 1995-2005</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Look at the bitcoin chart since it peaked in November 2021 and the price action looks fairly similar: </p>
<p><strong>Bitcoin bear market price chart 2021-23</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Both charts show that bear markets go through various periods where prices rise but don’t reach the same level as the previous peak – known as “lower highs”. If bitcoin is following a similar trajectory to the early 2000s Nasdaq, it would make sense that the current price will be another lower high and that it will be followed by another lower low. </p>
<p>This is partly because like the 2000s Nasdaq, bitcoin seems to be following a pattern known as an <a href="https://www.investopedia.com/terms/e/elliottwavetheory.asp#:%7E:text=The%20Elliott%20Wave%20theory%20is%20a%20form%20of%20technical%20analysis,that%20oppose%20the%20larger%20trend.">Elliott Wave</a>. Named after the renowned American stock market analyst Ralph Nelson Elliott, this essentially argues that during a bear phase, investors shift between different emotional states of disappointment and hope, before they finally despair and decide the market will never turn in their favour. This is a final wave of heavy selling known as capitulation. </p>
<p>You can see this idea on the chart below, where bitcoin is the green and red line and Z is the potential capitulation point at around US$13,000 (click on the chart to make it bigger). The black line is the path that the Nasdaq took in the early 2000s. The blue pointing finger above that line is potentially the equivalent place to where the bitcoin price is now. </p>
<p><strong>Bitcoin now vs Nasdaq in the early 2000s</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span></span>
</figcaption>
</figure>
<p>The one other thing to note on the chart is the wavy line that’s moving horizontally along the bottom. This is the <a href="https://www.investopedia.com/terms/r/rsi.asp">stochRSI or stochastic relative strength index</a>, which is an indication of when the asset looks overbought (when the line is peaking) or oversold (when it’s bottoming).</p>
<p>A sign of a coming shift is when the stochRSI moves in the opposite direction to where the price is heading: so now the stochRSI is coming down but the price has held up around US$23,000. This too suggests a fall could be imminent. </p>
<h2>The game of wealth transfer</h2>
<p>Within markets, there is often a game that investors from institutions such as banks and hedge funds play with amateur (retail) investors. The aim is to transfer retail investors’ wealth to these institutions. </p>
<p>This is particularly easy in an unregulated market like bitcoin, because it is easier for institutions to manipulate prices. They can also talk up (or talk down) prices to stir up retail investors’ emotions, and get them to buy at the top and sell at the bottom. This “traps” the irrational investors who buy at higher prices, transferring wealth by giving the institutions an opportunity to convert their holdings into cash. </p>
<p>It therefore makes sense to compare how the retail and institutional investors have been behaving lately. The following charts compare those crypto wallet addresses that hold 1 BTC or more (mostly retail investors) with those holding upwards of 1,000 BTC (institutional investors). In all three charts, the black line is the bitcoin price and the orange line is the number of wallets in that category. </p>
<p><strong>Retail investor behaviour</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 1</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=349&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=349&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=349&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 1,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 2</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=282&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=282&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=282&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=354&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=354&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=354&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 10,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p>This shows that since the <a href="https://theconversation.com/i-thought-crypto-exchanges-were-safe-the-lesson-in-ftxs-collapse-195800">FTX scandal</a> back in November, which led to the world’s second-largest crypto exchange collapse, retail investors have been buying bitcoin aggressively, resulting in the highest number of addresses holding at least one BTC ever. On the other hand, the biggest institutional investors have been offloading. This suggests that the institutional investors agree with our analysis. </p>
<h2>Where we’re heading</h2>
<p>There are those who argue that bitcoin is a bubble and that ultimately cryptocurrencies are worthless. That’s a separate debate for another day. If we assume there is a future for blockchains, which are the online ledgers that enable cryptocurrencies, the key question is when bitcoin will reach the accumulation phase that typically ends a bear phase in any market.</p>
<p>Known as <a href="https://www.investopedia.com/articles/active-trading/070715/making-money-wyckoff-way.asp">Wyckoff accumulation</a>, this <a href="https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method">is where</a> the price of the asset repeatedly tests two areas: the upper bound where traders previously sold heavily enough for the price to stop rising (known as resistance), and the lower bound where traders bought heavily enough that the price stopped going down (known as support). </p>
<p>At the point where institutional investors decide the lower bound has proved to be sufficiently resilient – in other words, they think the price is cheap at that level – they will start buying the asset again. That moment is only likely to come after there has been a capitulation. </p>
<p>Of course, history does not repeat itself exactly. It may be this is the first time that retail investors have outsmarted the large institutions, and that the only way is now up. </p>
<p>More likely, however, there is more pain on the way. With a recession on the cards, unprecedented job layoffs and weak retail data coming out of the US, it doesn’t point to the kind of optimism that tends to move markets higher. It would therefore make sense to brace yourself for another plunge in the price of bitcoin and the rest of the crypto market.</p><img src="https://counter.theconversation.com/content/198682/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Kinsella works part-time as an investment analyst for Tyndall Asset Management.</span></em></p><p class="fine-print"><em><span>Richard Fairchild does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s much excitement among bitcoiners right now – but are they about to be disappointed?James Kinsella, PhD Researcher in Finance, University of BathRichard Fairchild, Senior Lecturer in Corporate Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1977772023-01-17T20:16:09Z2023-01-17T20:16:09ZCryptocurrencies are in crisis, but they are not going to disappear<figure><img src="https://images.theconversation.com/files/504333/original/file-20230112-22-3byu1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A worker from Hope House, an organization that sponsors the use of cryptocurrencies on El Zonte beach, makes a purchase at a small shop that accepts bitcoins, in Tamanique, El Salvador, June 9, 2021.</span> <span class="attribution"><span class="source">(AP Photo/Salvador Melendez)</span></span></figcaption></figure><p>Cryptocurrencies are experiencing their worst crisis <a href="https://www.investopedia.com/terms/c/cryptocurrency.asp">since the arrival of the first crypto assets and virtual currencies</a> in the 1990s and their democratization in the 2010s. </p>
<p>Bitcoin had an unprecedented tumble in late 2020 and has yet to recover. In addition to this sharp decline, there is much discussion about the worrisome collapse of some so-called <a href="https://www.investopedia.com/terms/s/stablecoin.asp">stablecoins</a>, which are supposed to be less volatile. </p>
<p>This is compounded by the fall of cryptocurrency giants, particularly due to <a href="https://www.investopedia.com/what-went-wrong-with-ftx-6828447">allegations of fraud in cases like the FTX scandal</a>. At its peak, FTX had one million users and was the third-largest cryptocurrency exchange in terms of volume.</p>
<p>Experts agree that the aftershocks of its collapse have hit investors hard and will likely slow the pace of crypto asset adoption <a href="https://www.cnbc.com/2022/12/19/three-ways-the-ftx-disaster-will-reshape-crypto.html">for the next few years</a>. </p>
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<p>
<em>
<strong>
À lire aussi :
<a href="https://theconversation.com/investir-dans-les-cryptoactifs-voici-comment-limiter-le-risque-detre-expose-a-une-fraude-182835">Investir dans les cryptoactifs : voici comment limiter le risque d’être exposé à une fraude</a>
</strong>
</em>
</p>
<hr>
<p>As an expert in the field of cryptocurrencies, I will try to answer the following question: are cryptocurrencies really here to stay, or are they just a fad?</p>
<h2>Speculation and extreme volatility</h2>
<p>Cryptoassets include tokens that can be used for digital currency purposes (i.e. cryptocurrencies such as Bitcoin and Ethereum). They are also used for investment in an entity (a <a href="https://www.bitpanda.com/academy/en/lessons/what-is-the-difference-between-utility-tokens-and-security-tokens">“security token,”</a> which entitles the holder to ownership of a portion of an entity), or for products or services (a <a href="https://www.bitpanda.com/academy/en/lessons/what-is-the-difference-between-utility-tokens-and-security-tokens">“utility token,”</a> which entitles the holder to a product once it has been produced, for example).</p>
<p><a href="https://blog.bitpanda.com/en/what-are-stablecoins">Stablecoins</a>, which are supposed to be associated with lower volatility, are unique in that they are backed by a currency (e.g. the U.S. dollar), a commodity (e.g. gold) or a financial instrument (e.g. a stock or a bond). This is to keep the value of the digital currency stable.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="man shows the screen of his phone on which his cryptocurrency balance can be seen" src="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Erich García, a 33 year-old programmer and YouTuber, poses with his bitcoin wallet, at his home in Havana, Cuba, in March 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Ramon Espinosa)</span></span>
</figcaption>
</figure>
<p>Bitcoin’s plunge is followed in the <a href="https://www.nbcnews.com/tech/crypto/bitcoin-plunge-breaks-24000-200-billion-wipe-crypto-market-weekend-rcna33234">headlines</a> on a daily basis. While this is not the first time it has fallen, it is particularly noteworthy as it is the biggest drop in value <a href="https://www.cnbc.com/2022/05/12/bitcoin-btc-price-falls-below-27000-as-crypto-sell-off-intensifies.html">since late 2020</a>. The collapse is partly due to rising interest rates and the flight of investors from these risky investments. Although it is recovering, Bitcoin is still a long way from the heights it once reached.</p>
<p>This media coverage raises many questions about the sustainability of these cryptoassets. Indeed, the latter are marked by extreme volatility in their <a href="https://news.harvard.edu/gazette/story/2021/09/regulating-the-unregulated-cryptocurrency-market/">unregulated markets</a> in addition to being associated with <a href="https://medium.com/wolverineblockchain/the-surprising-similarities-between-cryptocurrencies-tulips-4c4ab5a1bea1">speculation by many players in the financial world</a>.</p>
<p>Indeed, the BBC recently reported that cryptocurrency laundering <a href="https://www.bbc.com/news/technology-60072195">rose 30 per cent in 2021</a>. The <a href="https://www.ftc.gov">U.S. Federal Trade Commission</a>, which aims to protect U.S. consumers, reported that in 2021, fraud schemes cost investors <a href="https://www.ftc.gov/business-guidance/blog/2022/06/reported-crypto-scam-losses-2021-top-1-billion-says-ftc-data-spotlight">more than $1 billion in cryptocurrencies</a>. Needless to say, very few of the defrauded investors have recovered their money.</p>
<h2>One billion users by 2022</h2>
<p>Yet we are seeing a slow but sure increase in the adoption of cryptocurrencies by companies. In an ongoing study of the impact of cryptocurrency adoption by public companies on their social responsibility, I noted that many of them, such as Starbucks and McDonald’s, have started to accept Bitcoin as a form of payment. This is particularly the case in their branches in El Salvador, following that country’s adoption of <a href="https://globalnews.ca/news/8171521/el-salvador-adopts-bitcoin-legal-tender/">Bitcoin as legal tender</a>.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1487634924865740804"}"></div></p>
<p>Others, such as Japanese online retail giant <a href="https://www.rakuten.ca/">Rakuten</a>, have chosen to accept cryptocurrencies even if their country is not pushing to adopt Bitcoin as a currency. They say they are driven by a desire to offer more payment options to their customers.</p>
<p>The user base for cryptocurrencies is growing year on year. For example, Crypto.com, an exchange platform, estimated that about 295 million people had entered the cryptocurrency market as of <a href="https://assets.ctfassets.net/hfgyig42jimx/5i8TeN1QYJDjn82pSuZB5S/85c7c9393f3ee67e456ec780f9bf11e3/Cryptodotcom_Crypto_Market_Sizing_Jan2022.pdf">December 2021</a>. The platform expected the number of users to cross the one billion mark by December 2022.</p>
<p>Cryptocurrencies also allow people with unreliable or insecure banking systems to access a parallel banking system that is independent of the traditional banking system. Offering a less affluent part of the population access to a different form of banking system is one of the reasons the President of El Salvador gave <a href="https://www.nytimes.com/2022/07/05/world/americas/el-salvador-bitcoin-national-currency.html">for making Bitcoin legal tender in the country</a>.</p>
<h2>A healthy fluctuation</h2>
<p>The growing interest in <a href="https://www.cnbc.com/2021/06/18/whats-defi-crypto-based-decentralized-finance-explained.html">decentralized finance (DeFi)</a>, as well as the development of the metaverse, are also factors that influence the sustainability of cryptocurrencies. Decentralized finance often relies on stablecoins for its operation. Meanwhile, the metaverse, a <a href="https://theconversation.com/what-is-the-metaverse-and-what-can-we-do-there-179200">universe of 3D virtual worlds</a>, also allows the use of cryptocurrencies to purchase goods or services, creating an immersive world.</p>
<p>Experts in the sector believe that, despite the debacle that the cryptoasset market has experienced recently, decentralized finance — particularly via products backed by cryptoassets — <a href="https://www.cnbc.com/2022/06/03/crypto-firms-say-thousands-of-digital-currencies-will-collapse.html">is here to stay</a>. This is because there is a market and players willing to participate.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="person holds a Bitcoin coin in front of a screen" src="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cryptocurrencies can be used for transactional purposes in the metaverse.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Moreover, they argue that while this sharp decline in cryptocurrency-related markets does remove some players, this is a welcome change. By the admission of <a href="https://www.youtube.com/watch?v=H1FYJlaxlOg">Raoul Ullens</a>, co-founder of <a href="https://blockchainweek.be/">Brussels Blockchain Week</a> (an annual conference devoted to blockchain and cryptocurrencies):</p>
<blockquote>
<p>it is healthy, for the adoption, the maturation of these Web3 technologies, to skim, to rebalance the sector. […] An unhealthy ecosystem will not attract the masses.</p>
</blockquote>
<p>According to these players, such a drop in the cryptoasset markets is not only necessary, but also healthy, contributing as it does to rebalancing the valuation of cryptocurrencies.</p>
<h2>Cryptocurrencies are here to stay</h2>
<p>The launch of cryptocurrencies by central banks, via central bank digital currencies (CBDCs), also lends weight to the argument that cryptoassets are here to stay. Indeed, the Bank of Canada is currently working on the <a href="https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/central-bank-digital-currency/">creation of a CBDC</a>. According to the institution, a CBDC issued by the Bank of Canada would be an “official digital currency (that) would retain its face value in Canadian dollars because it is issued by the <a href="https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/central-bank-digital-currency/?_gl=1*11n5guo*_ga*NTA4MDM3MDQwLjE2NzM1NTYyOTg.*_ga_D0WRRH3RZH*MTY3MzU1NjI5Ny4xLjAuMTY3MzU1NjI5Ny4wLjAuMA..&_ga=2.93130141.106029617.1673556298-508037040.1673556298">Bank of Canada</a>, just like bank notes.”</p>
<p>Other nations in the world have already issued such a currency, including the <a href="https://www.ndtv.com/business/here-are-the-timelines-and-status-of-central-bank-digital-currencies-in-some-countries-2820164">Bahamas (Sand Dollar) and Nigeria (eNaira)</a>. One reason CBDCs are different from privately issued digital currencies (such as Bitcoin or Ethereum) is that their intended use is for transaction purposes only, not for investment or speculation. They offer the same possibilities of use as cash. </p>
<p>CBDCs also aim to promote the financial inclusion of a part of the population that has little or no access to the traditional banking system, and to simplify the implementation of monetary and fiscal policy in the issuing countries.</p>
<p>Developments in the world of digital currencies, whether in the metaverse or with the arrival of the CBDC, and the craze that they continue to generate, mean cryptocurrency is here to stay.</p>
<p>This durability means the form of cryptoassets take will continue to evolve and transform with the technologies that support them (notably, blockchains) and the variation in demand from users and/or investors.</p><img src="https://counter.theconversation.com/content/197777/count.gif" alt="La Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Annie Lecompte has received funding from the Fondation des CPA du Québec.</span></em></p>An expert in the field of cryptocurrencies answers the question: Is crypto really here to stay or is it just a fad?Annie Lecompte, Assistant prof - Audit, Université du Québec à Montréal (UQAM)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1963612022-12-12T19:03:16Z2022-12-12T19:03:16ZHow FTX Australia was able to claim it was ‘ASIC-licenced’<p>When cryptocurrency exchange <a href="https://www.abc.net.au/news/science/2022-11-12/cryptocurrency-ftx-exchange-collapse-australian-investors/101640914">FTX Group</a> collapsed in the Bahamas last month, its local subsidiaries <a href="https://kordamentha.com/insights/kordamentha-voluntary-administrators-ftx-express">FTX Australia</a> Pty Ltd and <a href="https://kordamentha.com/insights/kordamentha-voluntary-administrators-ftx-express">FTX Express</a> Pty Ltd fell over too. </p>
<p>The Australian companies were placed into administration on November 11 and within days the Australian Securities and Investments Commission (ASIC) had <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-316mr-asic-suspends-ftx-australia-s-afs-licence/">suspended</a> the Australian financial service licence FTX Australia had held since March 2022.</p>
<p>The fact that FTX Australia had an Australian financial service came as a surprise to some people, who had wrongly assumed everything crypto-related was beyond the reach of Australia’s regulators. </p>
<p>It also raised questions – including for <a href="https://www.afr.com/companies/financial-services/asic-had-extensive-powers-to-suspend-or-cancel-ftx-s-licence-20221206-p5c452">Assistant Treasurer Stephen Jones</a> – about how FTX Australia managed to acquire its Australian financial services licence, and how ASIC seemed to have missed the chance to intervene sooner.</p>
<p>And it draws wider attention to the 20-year-old licensing system and what an Australian financial service actually means for the firms that have them.</p>
<h2>Licensed to do what, precisely?</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1064&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1064&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1064&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1337&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1337&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1337&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.prnewswire.com/news-releases/ftx-establishes-local-presence-in-australia-301506261.html">FTX Trading Limited</a></span>
</figcaption>
</figure>
<p>When FTX commenced operations in Australia this year, its media release was headed: “<a href="https://www.prnewswire.com/news-releases/ftx-establishes-local-presence-in-australia-301506261.html">FTX launches fully registered and licensed Australian operations</a>”. </p>
<p>But what exactly was it licensed to do?</p>
<p>The Australian financial service (AFS) licensing regime in place since the late 1990s authorises each firm to do specified things, in relation to specified financial products, for specified clients.</p>
<p>Each firm’s licence is different, and what is required by ASIC is different depending on what the firm is authorised to do.</p>
<p>FTX Australia’s licence authorised it to deal in, make a market for, and provide general advice relating to derivatives and foreign exchange contracts to retail and wholesale clients. That’s it. </p>
<p>Note that crypto-assets are not specified, nor is running a crypto-asset exchange.</p>
<p>The <a href="https://www.ft.com/content/e8df6ea4-e9fb-4058-9a36-cef9c12f4726">jury is still out globally</a> on whether crypto-assets (as distinct from investments derived from crypto-assets) are financial products at all. </p>
<p>It is possible to think of them as like gold bullion or fine art – or <a href="https://www.afr.com/markets/currencies/jpmorgan-ceo-calls-crypto-tokens-pet-rocks-20221207-p5c496">pet rocks</a> – where the asset itself is not a financial product, but a financial product might be constructed from it. </p>
<p>If a cryptocurrency is not a financial product, then licensing laws can’t apply, which might explain why one of the two firms set up in Australia – FTX Express, which operated the crypto-exchange – was not AFS licensed.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/i-thought-crypto-exchanges-were-safe-the-lesson-in-ftxs-collapse-195800">'I thought crypto exchanges were safe': the lesson in FTX's collapse</a>
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<p>The lesson is that knowing a firm has an AFS licence only takes you so far, and often not very far at all.</p>
<p>Unless you check the <a href="https://asic.gov.au/online-services/search-asic-s-registers/professional-registers/">specific authorisations</a>, there’s no way of knowing how little the firm you are dealing with is licensed to do.</p>
<p>And ASIC-regulation doesn’t involve <a href="https://www.apra.gov.au/what-prudential-regulation">prudential regulation</a>, which is directed at the stability of the company itself, ensuring among other things that it should be able to meet its financial commitments under reasonable circumstances. </p>
<p>Prudential regulation is the job of the Australian Prudential Regulation Authority, which regulated neither FTX Australia nor FTX Express.</p>
<h2>Licences for sale</h2>
<p>FTX Australia’s ASIC licence was originally granted to someone else entirely back in 2008. A series of takeovers meant it passed through a number of hands until it ended up with FTX in March this year.</p>
<p>While an original applicant has to satisfy rigorous checks, this hasn’t always been the case for subsequent purchasers.</p>
<p>ASIC has known for years that its ASF licences were ending up in new hands when companies were bought and sold. In 2017, it asked the government’s ASIC <a href="https://treasury.gov.au/review/asic-enforcement-review/r2018-282438">Enforcement Review Taskforce</a> to recommend changes to the law that would allow it to revisit an AFS licence when its owners changed.</p>
<p>The change that was eventually legislated in 2020 only required licensees to <a href="https://asic.gov.au/for-finance-professionals/afs-licensees/changing-details-and-lodging-afs-forms/change-in-control-of-afs-licensee/">notify</a> ASIC when a licence changed hands, within 30 days.</p>
<p>It did not require ASIC to approve the change in control.</p>
<h2>Limited ASIC powers</h2>
<p>ASIC is able to inquire further to determine whether there is reason to believe a new licensee was likely to contravene its statutory obligations or is “fit and proper” – but it is not required to do so.</p>
<p>If it finds either that the licensee is likely to contravene its obligations or that it is not fit and proper, it is able to suspend or cancel the licence after giving the new owners a fair hearing. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-bad-credit-lender-cigno-has-dodged-asics-grasp-187887">How 'bad credit' lender Cigno has dodged ASIC's grasp</a>
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<p>But such inquiries have not become routine. Most of the (hundreds of) licensee purchases notified each year seem to go through to the keeper, as did FTX’s.</p>
<p>Even if ASIC had reviewed FTX’s purchase of the licence in March 2022, it might well have found no grounds to revoke it, given the very limited range of activities it authorised.</p>
<p>The FTX collapse may result in ASIC changing its attitude to change-of-control transactions involving AFS licensees, for which it might need more resources.</p>
<p>But even if that happens, clients would still be well advised to take care to understand exactly what “AFS licensed” really means.</p><img src="https://counter.theconversation.com/content/196361/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pamela Hanrahan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The licence didn’t extend to trading in cryptocurrenices, and had been granted to a firm FTX took over, rather than FTX itself.Pamela Hanrahan, Professor of Commercial Law and Regulation, UNSW Business School, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1958002022-12-11T19:06:34Z2022-12-11T19:06:34Z‘I thought crypto exchanges were safe’: the lesson in FTX’s collapse<figure><img src="https://images.theconversation.com/files/499168/original/file-20221206-18-xll7xg.jpg?ixlib=rb-1.1.0&rect=0%2C282%2C4594%2C2304&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Anthony* (a friend) called a few weeks ago, deeply worried.</p>
<p>A deputy principal of a high school in Queensland, over the past year he spent hundreds of thousands of dollars buying cryptocurrencies, borrowing money using his home as equity. </p>
<p>But now all his assets, valued at A$600,000, were stuck in an account he couldn’t access. </p>
<p>He’d bought through FTX, the world’s third-biggest cryptocurrency exchange, endorsed by celebrities such as Seinfeld co-creator Larry David, basketball champions Steph Curry and Shaquille O’Neal, and tennis ace Naomi Osaka.</p>
<p>With FTX’s spectacular collapse, he’s now awaiting the outcome of the liquidation process that is likely to see him, 30,000 other Australians and more than <a href="https://www.businessofapps.com/data/ftx-statistics/">1.2 million customers worldwide</a> lose everything. </p>
<p>“I thought these exchanges were safe,” Anthony said. </p>
<p>He was wrong. </p>
<h2>Not like stock exchanges</h2>
<p>Cryptocurrency exchanges are sometimes described as being like stock exchanges. But they are very different to the likes of the London or New York stock exchanges, institutions that have weathered multiple financial crises. </p>
<p>Stock exchanges are both highly regulated and help regulate share trading. Cryptocurrency exchanges, on the other hand, are virtually unregulated and serve no regulatory function. </p>
<p>They’re just private businesses that make money by helping “mum and dad” investors to get into crypto trading, profiting from the commission charged on each transaction.</p>
<p>Indeed, the crypto exchanges that have grown to dominate the market – such as Binance, Coinbase and FTX – arguably undermine the whole vision that drove the creation of Bitcoin and blockchains – because they centralise control in a system meant to decentralise and liberate finance from the power of governments, banks and other intermediaries. </p>
<p>These centralised exchanges are not needed to trade cryptocurrency, and are pretty much the least safe way to buy and hold crypto assets. </p>
<h2>Trading before exchanges</h2>
<p>In the early days of Bitcoin (all the way back in 2008) the only way to acquire it was to “mine” it – earning new coins by performing the complex computations required to verify and record transactions on a digital ledger (called a blockchain). </p>
<p>The coins would be stored in a digital “wallet”, an application similar to a private bank account, accessible only by a password or “private key”. </p>
<p>A wallet can be virtual or physical, on a small portable device similar in appearance to a USB stick or small phone. Physical wallets are the safest because they can be unplugged from the internet when not being used, minimising the risk of being hacked. </p>
<figure class="align-center ">
<img alt="A physical digital wallet is the safest way to store your cryptocurrency." src="https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A physical digital wallet is the safest way to store your cryptocurrency.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Before exchanges emerged, trading involved owners selling directly to buyers via online forums, transferring coins from one wallet to another like any electronic funds transfer.</p>
<h2>Decentralised vs centralised</h2>
<p>All this, however, required some technical knowledge.</p>
<p>Cryptocurrency exchanges reduced the need for such knowledge. They made it easy for less tech-savvy investors to get into the market, in the same way web browsers have made it easy to navigate the Internet. </p>
<p>Two types of exchanges emerged: decentralised (DEX) and centralised (CEX).</p>
<p>Decentralised exchanges are essentially online platforms to connect the orders of buyers and sellers of cryptocurrencies. They are just there to facilitate trading. You still need to hold cryptocurrencies in your own wallet (known as “self-custody”). </p>
<p>Centralised exchanges go much further, eliminating wallets by offering a one-stop-shop service. They aren’t just an intermediary between buyers and sellers. Rather than self-custody, they act as custodian, holding cryptocurrency on customers’ behalf. </p>
<h2>Exchange, broker, bank</h2>
<p>Centralised exchanges have proven most popular. Seven of the world’s ten biggest crypto exchanges by trading volume <a href="https://coinmarketcap.com/rankings/exchanges/">are centralised</a>.</p>
<p>But what customers gain in simplicity they lose in control.</p>
<p>You don’t give your money to a stock exchange, for example. You trade through a broker, who uses your trading account when you buy and deposits money back into your account when you sell. </p>
<p>A CEX, on the other hand, acts as an exchange, a brokerage (taking customers’ fiat money and converting it into crypto or vice versa), and as a bank (holding customer’s crypto assets as custodian). </p>
<p>This is why FTX was holding cash and crypto assets worth <a href="https://www.ft.com/content/f05fe9f8-ca0a-48d5-8ef2-7a4d813af558">US$10-50 billion</a>. It also acted like a bank by borrowing and lending cryptocurrencies – though without customers’ knowledge or agreement, and without any of the regulatory accountability imposed on banks. </p>
<p>Holding both wallets and keys, founder-owner Sam Bankman-Fried “borrowed” his customers’ funds to prop up his other businesses. Customers realised too late they had little control. When it ran into trouble, FTX simply stopped letting customers withdraw their assets.</p>
<h2>The power of marketing</h2>
<p>Like stockbrokers, crypto exchanges make their money by charging a commission on every trade. They are therefore motivated to increase trading volumes. </p>
<p>FTX did this most through celebrity and sports marketing. Since it was founded in 2019 it has spent an estimated <a href="https://decrypt.co/114210/ftx-spent-hundreds-of-millions-of-dollars-on-sports-marketing-on-road-to-bankruptcy">US$375 million</a> on advertising and endorsements, including buying the naming rights to the stadium used by the Miami Heat basketball team. </p>
<figure class="align-center ">
<img alt="FTX Arena in Miami." src="https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">FTX Arena in Miami.</span>
<span class="attribution"><span class="source">Lynne Sladky/AP</span></span>
</figcaption>
</figure>
<p>Such marketing has helped to create the illusion that FTX and other exchanges were as safe as mainstream institutions. Without such marketing, it’s debatable the value of the cryptocurrency market would have risen from US$10 billion in 2014 to <a href="https://coinmarketcap.com/charts/">US$876 billion in 2022</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-sports-sponsorship-is-unlikely-to-save-cryptocurrency-firms-from-crypto-winter-195582">Why sports sponsorship is unlikely to save cryptocurrency firms from 'crypto winter'</a>
</strong>
</em>
</p>
<hr>
<h2>Not your key, not your coins</h2>
<p>There’s an adage among crypto investors: “Not your key, not your coins, it’s that simple.”</p>
<p>What this means is that your crypto isn’t safe unless you have self-custody, storing your own coins in your own wallet to which you alone control the private key. </p>
<p>The bottom line: crypto exchanges are not like stock exchanges, and CEXs are not safe. If the worst eventuates, whether it be an exchange collapse or cyber attack, you risk losing everything.</p>
<p>All investments carry risks, and the unregulated crypto market carries more risk than most. So follow three golden rules.</p>
<p>First, do some homework. Understand the process of trading crypto. Learn how to use a self-custody wallet. Until governments regulate crypto markets, especially exchanges, you’re largely on your own. </p>
<p>Second, if you’re going to use an exchange, a DEX is more secure. There is no evidence to date that any DEX has been hacked. </p>
<p>Lastly, in this world of volatility, only risk what you can afford to lose.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/crypto-what-could-more-regulation-mean-for-the-future-of-digital-currencies-194322">Crypto: what could more regulation mean for the future of digital currencies?</a>
</strong>
</em>
</p>
<hr>
<hr>
<p><em>*Name has been changed.</em></p><img src="https://counter.theconversation.com/content/195800/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cryptocurrency exchanges like FTX aren’t safe. Here’s what every crypto investor needs to know.Paul Mazzola, Lecturer Banking and Finance, Faculty of Business and Law, University of WollongongMitchell Goroch, Cryptocurrency Trader and Researcher - Centre for Responsible Organisations & Practices, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1946922022-11-17T13:29:36Z2022-11-17T13:29:36ZDramatic collapse of the cryptocurrency exchange FTX contains lessons for investors but won’t affect most people<figure><img src="https://images.theconversation.com/files/495726/original/file-20221116-12-324kxc.jpg?ixlib=rb-1.1.0&rect=81%2C72%2C4464%2C2940&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The cryptocurrency exchange FTX fell from a multibillion-dollar company to bankruptcy in less than a week.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/logo-with-crypto-coins-with-100-dollar-bill-are-displayed-news-photo/1244719587?phrase=FTX%20crypto&adppopup=true">NurPhoto via Getty Images</a></span></figcaption></figure><p><em>In the fast-paced world of cryptocurrency, vast sums of money can be made or lost in the blink of an eye. In early November 2022, the second-largest cryptocurrency exchange, FTX, was valued at more than US$30 billion. By Nov. 14, <a href="https://www.cnn.com/2022/11/15/business/ftx-madoff-bankman-fried-bair/index.html">FTX was in bankruptcy proceedings</a> along with more than 100 companies connected to it. <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">D. Brian Blank</a> and <a href="https://scholar.google.com/citations?user=FKJSqjEAAAAJ&hl=en&oi=ao">Brandy Hadley</a> are professors who study finance, investing and fintech. They explain how and why this incredible collapse happened, what effect it might have on the traditional financial sector and whether you need to care if you don’t own any cryptocurrency.</em></p>
<h2>1. What happened?</h2>
<p>In <a href="https://inside.com/campaigns/inside-tech-2021-07-21-28706/sections/243700">2019</a>, Sam Bankman-Fried founded FTX, a company that ran one of the largest cryptocurrency exchanges.</p>
<p>FTX is where many crypto investors trade and hold their cryptocurrency, similar to the New York Stock Exchange for stocks. Bankman-Fried is also the founder of <a href="https://www.forbes.com/profile/alameda-research/?sh=563773816570">Alameda Research</a>, a hedge fund that trades and invests in cryptocurrencies and crypto companies. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A photo of a curly-haired man." src="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sam Bankman-Fried founded both FTX and the investment firm Alameda Research. News sources have reported some less-than-responsible financial dealings between the two companies.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/sam-bankman-fried-founder-and-ceo-of-ftx-testifies-during-news-photo/1237105664?phrase=sam%20bankman-fried&adppopup=true">Tom Williams via Getty Images</a></span>
</figcaption>
</figure>
<p>Within the traditional financial sector, these two companies would be separate firms entirely or at least have divisions and firewalls in place between them. But in early November 2022, news outlets reported that a <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/">significant proportion of Alameda’s assets</a> were a type of cryptocurrency released by FTX itself. </p>
<p>A few days later, news broke that FTX had allegedly been loaning customer assets to Alameda for risky trades <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">without the consent of the customers</a> and also issuing its own FTX cryptocurrency for Alameda to use as <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">collateral</a>. As a result, criminal and regulatory investigators began scrutinizing FTX for potentially <a href="https://www.law360.com/assetmanagement/articles/1549319?nl_pk=c7efe457-0cc1-4a20-9d63-ded5145502ae&utm_source=newsletter&utm_medium=email&utm_campaign=assetmanagement&utm_content=2022-11-15&read_more=1&nlsidx=0&nlaidx=0">violating securities law</a>.</p>
<p>These two pieces of news basically led to a bank run on FTX.</p>
<p>Large crypto investors, like FTX’s competitor Binance, as well as individuals, began to <a href="https://decrypt.co/113723/investors-withdrawal-millions-from-ftx-binance-begins-liquidating-ftt-token">sell off cryptocurrency held on FTX’s exchange</a>. FTX quickly lost its ability to meet customer withdrawals and halted trading. On Nov. 14, FTX was also hit by an apparent <a href="https://www.coindesk.com/business/2022/11/14/ftx-hack-or-inside-job-blockchain-experts-examine-clues-and-a-stupid-mistake/">insider</a> <a href="https://edition.cnn.com/2022/11/12/business/ftx-hack/index.html">hack</a> and lost $600 million worth of cryptocurrency.</p>
<p>That same day, FTX, Alameda Research and 130 other affiliated companies founded by Bankman-Fried filed for bankruptcy. This action may leave <a href="https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html">more than a million</a> suppliers, employees and investors who bought cryptocurrencies through the exchange or invested in these companies with <a href="https://www.cnn.com/2022/11/14/business/ftx-customer-money-bankruptcy/index.html">no way to get their money back</a>.</p>
<p>Among the groups and individuals who held currency on the FTX platform were many of the normal players in the crypto world, but a number of more traditional investment firms also held assets within FTX. <a href="https://www.businessinsider.com/sequoia-loss-on-ftx-collapse-letter-to-investors-2022-11">Sequoia Capital</a>, a venture capital firm, as well as the <a href="https://www.theglobeandmail.com/business/article-ftx-ontario-teachers-pension-canada-regulators/">Ontario Teacher’s Pension</a>, are estimated to have held millions of dollars of their investment portfolios in ownership stake of FTX. They have both already written off these investments with FTX as lost.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A magnifying glass over the word cryptocurrency." src="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=357&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=357&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=357&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=449&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=449&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=449&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">While there has been some movement to regulate cryptocurrency, enforcement is still lacking.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/cryptocurrency-royalty-free-image/1355796318?phrase=crypto%20magnifying%20glass&adppopup=true">Solidcolours/E+ via Getty Images</a></span>
</figcaption>
</figure>
<h2>2. Did a lack of oversight play a role?</h2>
<p>In traditional markets, corporations generally <a href="https://www.law360.com/bankruptcy/articles/1549089?nl_pk=6ef803a8-f435-44cb-93f5-de6a024ff206&read_more=1&nlsidx=0&nlaidx=3">limit the risk they expose themselves to</a> by maintaining liquidity and solvency. Liquidity is the ability of a firm to sell assets quickly without those assets losing much value. Solvency is the idea that a company’s assets are worth more than what that company owes to <a href="https://www.wsj.com/livecoverage/stock-market-news-today-11-15-2022/card/ftx-says-number-of-creditors-in-bankruptcy-could-top-1-million-LrfYrHxDtIoVBV42QDiG?mod=djemMoneyBeat_us">debtors and customers</a>.</p>
<p>But the crypto world has generally operated with much less caution than the traditional financial sector, and <a href="https://www.nytimes.com/2022/11/11/technology/ftx-investors-venture-capital.html?smid=tw-dealbook&smtyp=cur">FTX is no exception</a>. About <a href="https://www.bloomberg.com/opinion/articles/2022-11-14/ftx-s-balance-sheet-was-bad">two-thirds</a> of the money that FTX owed to the people who held cryptocurrency on its exchange – roughly $11.3 billion of $16 billion owed – was backed by illiquid coins created by FTX. FTX was taking its customers’ money, giving it to Alameda to make risky investments and then creating its own currency, known as FTT, as a replacement – cryptocurrency that it was unable to sell at a high enough price when it needed to.</p>
<p>In addition, nearly 40% of Alameda’s assets were in FTX’s own cryptocurrency – and remember, both companies were founded by the same person. </p>
<p>This all came to a head when investors decided to sell their coins on the exchange. FTX did not have enough <a href="https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is-still-looking-for-money">liquid</a> assets to meet those demands. This in turn drove the value of FTT from over $26 a coin at the beginning of November to under $2 by Nov. 13. By this point, FTX owed more money to its customers than <a href="https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal">it was worth</a>.</p>
<p>In regulated exchanges, investing with customer funds is <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">illegal</a>. Additionally, auditors validate financial statements, and firms must publish the amount of money they hold in reserve that is available to fund customer withdrawals. And even if things go wrong, the <a href="https://www.firstrepublic.com/insights-education/sipc-vs-fdic-insurance-protection-differences">Securities Investor Protection Corporation</a> – or SIPC – protects depositors against the loss of investments from an exchange failure or financially troubled brokerage firm. None of these guardrails are in place within the crypto world.</p>
<h2>3. Why is this a big deal in crypto?</h2>
<p>As a result of this meltdown, the company Binance is now considering creating an <a href="https://techxplore.com/news/2022-11-binance-fund-crypto-future-failures.html">industry recovery fund</a> – akin to a private version of SIPC insurance – to <a href="https://www.bloomberg.com/news/articles/2022-11-14/binance-ceo-cz-zhao-bids-to-replace-ftx-s-sam-bankman-fried-as-crypto-savior">avoid</a> future <a href="https://www.law360.com/bankruptcy/articles/1548995?nl_pk=6ef803a8-f435-44cb-93f5-de6a024ff206&read_more=1&nlsidx=0&nlaidx=4">failures</a> of crypto exchanges.</p>
<p>But while the collapse of FTX and Alameda – valued at more than $30 billion and now essentially worth nothing – is dramatic, the bigger implication is simply the potential <a href="https://apnews.com/article/sam-bankman-fried-ftx-crypto-downfall-a2eaec231027dfd9f18426ff8982bbf8">lost trust in crypto</a>. Bank runs are rare in traditional financial institutions, but they are <a href="https://www.wsj.com/articles/crypto-com-withdrawals-rise-after-ceo-admits-transaction-problem-11668350510">increasingly common</a> in the crypto space. Given that Bankman-Fried and FTX were seen as some of the biggest, most trusted figures in crypto, these events may lead more investors to think twice about putting money in crypto.</p>
<h2>4. If I don’t own crypto, should I care?</h2>
<p>Though investment in cryptocurrencies has grown rapidly, the entire crypto market – <a href="https://www.coindesk.com/markets/2021/10/21/crypto-market-cap-surges-to-new-record-27-trillion/">valued at over $3 trillion</a> at its peak – is much <a href="https://beincrypto.com/institutional-investment-in-crypto-experts-weigh-in-on-implications/">smaller</a> than the $120 trillion <a href="https://medium.com/ngrave/too-big-to-fail-crypto-market-size-vs-traditional-assets-eff4bb2ec529">traditional stock market</a>.</p>
<p>While investors and regulators are still evaluating the consequences of this fall, the impact on any person who doesn’t personally own crypto will be minuscule. It is true that many larger investment funds, like BlackRock and the Ontario Teachers Pension, held investments in FTX, but the estimated <a href="https://www.ai-cio.com/news/ontario-teachers-pension-could-lose-95-million-on-ftx-investment">$95 million the Ontario Teachers Pension lost</a> through the collapse of FTX is just 0.05% of the entire fund’s investments.</p>
<p>The takeaway for most individuals is not to invest in <a href="https://www.wsj.com/articles/ftx-sam-bankman-fried-sit-in-the-crosshairs-of-u-s-prosecutors-11668398012?mod=djem10point">unregulated</a> markets without understanding the risks. In high-risk environments like <a href="https://www.natlawreview.com/article/ftx-bankruptcy-and-question-prudent-retirement-plan-investments-saga-continues">crypto</a>, it’s possible to lose everything – a lesson investors in FTX are learning the hard way.</p><img src="https://counter.theconversation.com/content/194692/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even though some traditional financial firms parked millions in the bankrupt company – once valued at $30 billion – the impact of FTX’s spectacular crash is limited to crypto investorsD. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityBrandy Hadley, Associate Professor of Finance and the David A. Thompson Professor in Applied Investments, Appalachian State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1943762022-11-11T16:19:02Z2022-11-11T16:19:02ZFTX contagion will be ugly within crypto, but probably less damaging to the wider world<figure><img src="https://images.theconversation.com/files/494859/original/file-20221111-16-fqlo06.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Former FTX billionaire Sam Bankman-Fried</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/193490669@N06/52192821057/in/photolist-2nvMH4Q-2nHYJao-2nwFZxy-2nw6uGi-2nw6Rk8-2nwH9Tw-2mSuUHn-2m7p1Vf-2nx767s-2nw6yUX-2nXNmVx-2jFpLfb-2nwp7S5-2nwqsVs-2nwiWHJ-2nwqsUq-2nwqsTD-2nwp7Rt-2nVdAUq-2nYsVmX-2nYwRkK-2nYsVnU-2nYamgx-2nYsi2x-2nYexQs">Dan Matt</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Crypto assets are infamous for being highly speculative and volatile, but it is their “debt problems” that have once again made headlines. Since November 2021, the <a href="https://coinmarketcap.com/charts/">total value</a> of cryptocurrencies has now fallen from a peak of over US$3 trillion (£2.6 trillion) to circa US$830 billion (£706 billion).</p>
<p>This has coincided with a major downturn in global markets due to interest rates going up, but falling prices also reflect a series of collapses and bankruptcies within the industry. These include the <a href="https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna-crypto/?sh=27de6b424ff1">Terra Luna blockchain</a>, <a href="https://www.forbes.com/advisor/investing/cryptocurrency/what-is-celsius/">lender Celsius</a>, the <a href="https://www.coindesk.com/layer2/2022/07/12/behind-voyagers-fall-crypto-broker-acted-like-a-bank-went-bankrupt/">Voyager exchange/brokerage</a>, <a href="https://www.cnbc.com/2022/07/11/how-the-fall-of-three-arrows-or-3ac-dragged-down-crypto-investors.html">hedge fund 3AC</a>, and now also <a href="https://theconversation.com/cryptocurrencies-why-binances-failed-ftx-rescue-deal-could-mean-crypto-winter-is-coming-194313">FTX/Alameda</a>, which has just <a href="https://www.bbc.co.uk/news/business-63601213">filed for bankruptcy</a>. </p>
<p><strong>Crypto assets total value</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Market cap of total crypto assets" src="https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=426&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=426&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494861/original/file-20221111-24-4def91.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=426&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note that the graph shows monthly figures – the peak was actually higher on a day to day basis.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>The collapse of FTX, the world’s second largest crypto exchange, concerns a liquidity crisis. This is where a company doesn’t have enough cash or its assets cannot be converted to cash quickly enough to satisfy demand. </p>
<p>In the case of FTX, there had been concerns about the closeness of its relationship with its hedge fund sister company Alameda. These boiled over when rival exchange Binance announced a few days ago that it was <a href="https://www.coindesk.com/business/2022/11/06/binance-sells-holdings-of-ftx-token-as-alameda-ceo-defends-firms-financial-condition/">sufficiently worried</a> to <a href="https://cryptonews.com/news/ftx-price-prediction-as-binance-ceo-dumps-500-million-token-holdings-can-ftt-recover.htm">unload US$500 million</a> of holdings in the FTX native cryptocurrency FTT. </p>
<p>Panicked investors began selling FTT and related cryptocurrencies quickly, leading them to plummet in value. <a href="https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732">Alameda tried</a> to buy enough FTT to keep prices up, but ran out of firepower. FTT fell to ruinous levels, doing severe financial damage to Alameda and FTX.</p>
<p>In parallel, frightened FTX customers <a href="https://www.bbc.co.uk/news/business-63564364">withdrew US$6 billion</a> from the exchange in just three days. FTX then halted withdrawals, having apparently lent the rest of customers’ money to Alameda, trapping customers with holdings worth billions more on the exchange – perhaps permanently. </p>
<p>With <a href="https://www.pionline.com/cryptocurrency/institutional-investors-measure-damage-ftx-collapse-portfolios">numerous major FTX investors</a> like BlackRock, Ontario Teachers Pension Fund and Sequoia Capital also in line to lose all their money, chief executive Sam Bankman-Fried (SBF) is <a href="https://www.moneycontrol.com/news/world/ftx-looks-for-9-4-billion-in-rescue-funds-bahamas-freezes-some-assets-9492961.html">reportedly trying</a> to raise US$9.4 billion. Ominously, Binance initially expressed interest in buying FTX but <a href="https://twitter.com/binance/status/1590449161069268992">pulled out</a> after looking at its rival’s finances.</p>
<h2>The domino effect</h2>
<p>Will anyone else rescue FTX? This could happen by institutional investors buying lots of FTT to drive its price back up, or pumping US dollars into the exchange to reassure customers and allow them to withdraw their money. </p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4057510">In research</a> that I conducted with colleagues, we showed that investing in recent “losers” like FTT can be a profitable strategy in the short term. They tend to have higher returns <a href="https://academic.oup.com/rfs/article-abstract/25/7/2005/1602153?redirectedFrom=fulltext">in the week</a> after a sharp fall than previous strong performers. </p>
<p>Overall, however, a rescue seems unlikely. It would be very risky to attempt to rescue an exchange that potentially has no fundamental value. Market sentiment also remains negative because of the economic backdrop: <a href="https://www.reuters.com/markets/currencies/dollar-advances-ahead-inflation-data-cryptos-crumble-2022-11-10/">US inflation</a> may now have peaked, suggesting interest rates will stop rising, but it’s still early days. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1590709166515310593"}"></div></p>
<p>Without a rescue, there are essentially three issues: what it means for the crypto industry, what it means for crypto assets like bitcoin, and what it means for global financial markets and the wider economy. </p>
<p>The contagion in the crypto industry could be ugly. Various crypto investment firms like <a href="https://www.coindesk.com/business/2022/11/09/who-still-has-exposure-to-ftx/">Genesis and Multicoin Capital</a> have confirmed they have large sums of money trapped on FTX.</p>
<p>The other issue is Alameda, which is <a href="https://twitter.com/SBF_FTX/status/1590709166515310593">soon to be defunct</a>. It appears to owe multiple billions of US dollars in trading money borrowed from lenders besides FTX, which will probably not be paid back. This could cause solvency issues elsewhere. <a href="https://www.bloomberg.com/news/articles/2022-11-11/blockfi-pauses-withdrawals-says-can-no-longer-operate-as-usual">Crypto bank BlockFi</a>, which was itself rescued by FTX following the Luna collapse earlier in the year, has already halted customer withdrawals. </p>
<p>As for crypto prices, bitcoin has fallen from about US$21,000 to as low as the mid-$15,500s before recovering to above US$17,000 at present. With many smaller cryptos falling even harder, expect further selling as players hit by FTX move their investments into dollars to stay afloat. </p>
<p><strong>Bitcoin price chart</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bitcoin price chart" src="https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494864/original/file-20221111-12-vhr05.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Worse still, Alameda is one of crypto’s largest market makers, a crucial role in financial markets which involves taking the other side of a trade to enable buyers and sellers to transact. At a time when more selling is likely, reduced trading liquidity could drag prices down even further, potentially creating a wider stampede. </p>
<p>Nonetheless, an FTX/Alameda bankruptcy may not see bitcoin completely collapse in price. Because it is more decentralised than other crypto assets, meaning its not controlled by any single entity, investors may to some extent swap it for their other cryptocurrencies rather than buying US dollars. Overall, <a href="https://u.today/jpmorgan-predicts-bitcoin-will-collapse-to-13000">JP Morgan reckons</a> that bitcoin might drop to US$13,000 in the weeks ahead, suggesting we’re not too far from the bottom. </p>
<p>It’s also worth noting <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4057510">previous findings</a> from my team that the amount of stablecoin Tether in circulation is a good indicator of future crypto prices. This bottomed in the summer and has not dropped significantly recently. </p>
<h2>Wider risks</h2>
<p>Could FTX contagion also threaten overall financial stability, similar to the <a href="https://www.thebalancemoney.com/lehman-brothers-collapse-causes-impact-4842338#:%7E:text=The%20Lehman%20Brothers%20bankruptcy%20was%20the%20largest%20in,could%20not%20bail%20out%20Lehman%20without%20a%20buyer.">Lehman collapse</a> in 2008? Generally, cryptocurrencies are not yet considered a serious threat to global financial stability since they are still poorly linked to real economic activities beyond the financial sector.</p>
<p>However, if large institutional investors exit crypto altogether and sell bitcoin and other tokens en masse, crypto prices could fall even harder and lead to increased spillover. Other crypto investors would take another hit and spend less in the wider economy as a result, or sell non-crypto holdings like shares to cover their losses. </p>
<p>Based on <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4057510">our analysis of liquidity</a>, Canadian, US and EU stock markets are more closely linked to crypto than Chinese and Japanese stock markets. Therefore the reaction of these markets to cryptocurrency problems would be more pronounced. </p>
<p>Overall, however, FTX is still probably much more of a crypto problem than a wider problem: it’s the story of how disastrous financial management by FTX and its rivalry with Binance has <a href="https://www.theguardian.com/technology/2022/nov/10/what-happened-to-ftx-and-could-crisis-spill-over-to-rest-of-crypto">threatened the stability</a> of the cryptocurrency markets. We’ll be watching closely to see how the contagion plays out in the coming weeks.</p><img src="https://counter.theconversation.com/content/194376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Stand by for more drama in the days ahead.Larisa Yarovaya, Deputy Head of the Centre for Digital Finance, Associate Professor in Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1816812022-09-14T17:32:08Z2022-09-14T17:32:08ZBeyond just cryptocurrencies, digital money has changed how we live<figure><img src="https://images.theconversation.com/files/478377/original/file-20220809-15302-qqm53q.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C8000%2C4000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Digital money is one of the predominant forms of currency used today.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/beyond-just-cryptocurrencies--digital-money-has-changed-how-we-live" width="100%" height="400"></iframe>
<p>In simple terms, digital money can be defined as a form of currency that uses computer networks to make payments. Breathless media coverage of the future potential of cryptocurrencies such as Bitcoin has made <a href="https://www.theglobeandmail.com/business/article-pierre-poilievre-wants-to-make-canada-the-worlds-crypto-capital-why/">digital money a hot topic</a>.</p>
<p>One of the main differences between digital money and physical currency, such as cash, is that digital money lacks any identifying features that make it unique. If you take a glance at any bank notes you might have sitting in your wallet or purse, you will quickly notice that each note has a serial number — a unique string of letters and numbers that marks the uniqueness of that bill.</p>
<p>But as we know, digital objects, such as songs or images, <a href="https://blogs.baruch.cuny.edu/art3057/files/2014/09/benjamin-work-of-art.pdf">are easily reproducible infinitely on the internet</a>. What prevents us from reproducing the digital money in our bank accounts so easily?</p>
<p>Most of us have been using digital money all along. It is not the digital nature of cryptocurrencies that differentiate them from digital money, but rather how they ensure the ownership of digital property that mark them as transformational.</p>
<p>The problems of digital money and who owns it are likely to increase in complexity, with far-reaching implications in everyday life. The <a href="https://ccl.uvic.ca">Counter Currency Laboratory</a>, a new initiative based in the <a href="https://www.uvic.ca/socialsciences/anthropology/index.php">Department of Anthropology</a> at the University of Victoria, was established to explore these questions. Our research there documents the present and future of money, and its effects on how we live.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a large coin with the bitcoin symbol in the background, a graph with red and green bars in the foreground" src="https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=442&fit=crop&dpr=1 754w, https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=442&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/481190/original/file-20220825-23-i0s72d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=442&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitcoin, one of the earliest and most well-known cryptocurrencies, began circulation in 2009.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Credit cards</h2>
<p>Commercial banks and payment networks, such as those that use credit cards, safeguard the uniqueness of our digital dollars. These institutions guarantee that we do not go around spending the same digital dollar more than once. Once we spend digital money, banks deduct it from our accounts so that it can’t be spent again.</p>
<p>The first widely used form of digital money was credit cards with magnetic stripes. The use of a magnetic stripe encoded with identifying information was first introduced <a href="https://www.mobiletransaction.org/history-of-credit-card-machines/">almost 50 years ago</a>. This form of digital money went into widespread use in the 1970s and 1980s, spurred by the invention of electronic point of sale terminals <a href="https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/">connected to computer networks managed by the likes of Visa and Mastercard</a>. </p>
<p>But how does this digital money work exactly? When paying for something in a store, the buyer taps their credit card on the digital terminal, and the merchant’s bank forwards the details of the credit card to the network. This credit card network requests <a href="https://www.centurionpaymentservices.com/how-credit-card-processing-works/">authorization of the payment from the cardholder’s bank</a>. The cardholder’s bank validates the cardholder’s details and the amount of available credit and then approves the purchase.</p>
<p>Hundreds of millions of <a href="https://www.creditcards.com/statistics/market-share-statistics/">these digital money transactions occur every day</a>. Although this transaction involves a buyer, a seller, two banks and a credit card network, no physical money is actually exchanged. Rather, a series of messages are transmitted resulting in a debt incurred by the shopper to their bank and a credit in the merchant’s bank account.</p>
<p>In this sense, the digital money used here is not a material medium of exchange, such as bills or coins, but rather a unit of account entry. This digital money is a credit or debt in the digital ledgers maintained by the banks of both the merchant and the consumer. Other forms of digital money, such as debit card transactions or e-transfers work similarly.</p>
<h2>No central authority</h2>
<p>Cryptocurrencies such as Bitcoin differ from the forms of digital money that are already commonly used by consumers around the world. The main difference is that when payments are made, a <a href="https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain">blockchain</a> replaces the relationship between the two banks.</p>
<p>A blockchain is a list of records containing transaction data that is held in a distributed ledger, which is a digital record of the account books for Bitcoin transactions. Ledger copies are stored and maintained by the <a href="https://doi.org/10.1080/10350330.2013.777594">thousands of computers that participate in the cryptocurrency network</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/YG9UV5e_CrM?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">CBC News takes a look at the social benefits of blockchain.</span></figcaption>
</figure>
<p>Digital money poses the problem of double spending. How can one ensure that the same money in an individual’s account isn’t spent more than once? Blockchain technology solves this problem <a href="https://www.harpercollins.com/products/digital-gold-nathaniel-popper">without recourse to a central authority</a>.</p>
<p>In commonly used forms of digital money, the computer servers that facilitate the credit card network prevent double spending. These servers ensure that a cardholder cannot use the exact same digital dollars used for buying groceries in the supermarket to also buy a round of drinks at the pub. </p>
<p>In the Bitcoin network, any attempt to spend the same Bitcoin twice would be invalidated collectively by all the computers in the network, which would prevent any attempt to spend the same digital money in two places.</p>
<h2>Digital property</h2>
<p>Perhaps the actual revolutionary development brought about by cryptocurrencies is not their digital nature, but rather that they enable the transfer of ownership of digital assets without recourse to a centralized authority. </p>
<p>The infinite replicability enabled by the internet challenged notions of property that have long undergirded modern civilization. The blockchain and distributed ledgers maintain the order of intellectual property on the internet. Indeed it is these aspects of cryptocurrency that may have the most lasting impact on how we live together, both in cyberspace and actual space.</p><img src="https://counter.theconversation.com/content/181681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daromir Rudnyckyj receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>Not all digital money is cryptocurrency. Digital money can take the form of card or mobile phone payments, central bank digital currencies and virtual currencies such as Zuck Bucks.Daromir Rudnyckyj, Professor, Anthropology, University of VictoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1891052022-09-12T12:12:52Z2022-09-12T12:12:52ZWhat is proof-of-stake? A computer scientist explains a new way to make cryptocurrencies, NFTs and metaverse transactions<figure><img src="https://images.theconversation.com/files/483613/original/file-20220908-9424-5bl1si.jpg?ixlib=rb-1.1.0&rect=0%2C25%2C5700%2C3763&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Blockchain transactions are carried in blocks. The amount of energy it takes to add a new block varies widely depending on how it's done.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/blockchain-formed-by-binaries-and-network-royalty-free-image/1322421028">Yuichiro Chino/Moment via Getty Images</a></span></figcaption></figure><p>Proof-of-stake is a mechanism for achieving consensus on a blockchain. Blockchain is a technology that records transactions that can’t be deleted or altered. It’s a decentralized database, or ledger, that is under no one person or organization’s control. Since no one controls the database, consensus mechanisms, such as proof-of-stake, are needed to coordinate the operation of blockchain-based systems.</p>
<p>While <a href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a> popularized the technology, blockchain is now a part of many different systems, enabling interesting applications such as <a href="https://theconversation.com/what-is-decentralized-finance-an-expert-on-bitcoins-and-blockchains-explains-the-risks-and-rewards-of-defi-161479">decentralized finance</a> platforms and non-fungible tokens, or <a href="https://theconversation.com/how-nonfungible-tokens-work-and-where-they-get-their-value-a-cryptocurrency-expert-explains-nfts-157489">NFTs</a>.</p>
<p>The first widely commercialized blockchain consensus mechanism was <a href="https://www.investopedia.com/terms/p/proof-work.asp">proof-of-work</a>, which enables users to reach consensus by solving complex mathematical problems. For solving these problems, users are commonly provided stake in the system. This process, dubbed mining, requires large amounts of computing power. <a href="https://www.investopedia.com/terms/p/proof-stake-pos.asp">Proof-of-stake</a> is an alternative that consumes far less energy.</p>
<p>At its core, blockchain technology provides <a href="https://doi.org/10.1145/3369752">three important properties</a>:</p>
<ol>
<li>Decentralized governance and operation – the people using the system get to collectively decide how to govern and operate the system.</li>
<li>Verifiable state – anyone using the system can validate the correctness of the system, with each user being able to ensure that the system is currently working as expected and has been since its inception.</li>
<li>Resilience to data loss – even if some users lose their copy of system data, whether through negligence or cyberattack, that data can be recovered from other users in a verifiable manner.</li>
</ol>
<p>The first property, decentralized governance and operation, is the property that controls how much energy is needed to run a blockchain system.</p>
<h2>Voting in blockchain systems</h2>
<p>Blockchain systems use voting to decentralize governance and operation. While the exact mechanisms for how voting and consensus are achieved differ in each blockchain system, at a high level, blockchain systems <a href="https://online.stanford.edu/how-does-blockchain-work">allow each user to vote on how the system should work</a>, and whether any given operation – accepting a new block into the chain, for example – should be approved.</p>
<p>Traditionally, voting requires that the identity of the people casting ballots can be known and verified to ensure that only eligible people vote and do so only once. Some blockchain systems allow users to present a digital ID to prove their identity, enabling voting with negligible energy usage.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/-C19r0UsYws?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Proof-of-work and proof-of-stake compared.</span></figcaption>
</figure>
<p>However, in most blockchain systems, users are anonymous and have no digital ID that can prove their identity. What, then, stops an individual from pretending to be many individuals and casting many votes? There are several different approaches, but the most used is proof-of-work. </p>
<p>In proof-of-work, users get votes based on the amount of computational power they have in proportion to other users. They demonstrate their ownership of this computational power by solving difficult mathematical problems. If one user can solve twice as many problems as another user, they have twice the computational power as other users and get twice as many votes.</p>
<p>However, solving these mathematical problems is extremely energy intensive, leading to complaints that proof-of-work is not sustainable. Researchers at the University of New Mexico have found that the climate impact from bitcoin mining is <a href="https://www.nature.com/articles/s41598-022-18686-8">greater than impact of global beef production</a>.</p>
<h2>Proof-of-stake</h2>
<p>To address the energy consumption of proof-of-work, another way to validate users is needed. Proof-of-stake is one such method. In proof-of-stake, users validate their identities by demonstrating ownership of some asset on the blockchain. For example, in Bitcoin, this would be ownership of bitcoins, and in Ethereum, it is ownership of Ether. </p>
<p>Though this does require users to temporarily lock their assets in the blockchain for a period of time, it is far more efficient because it requires negligible energy expenditure. By the company’s estimation, moving from proof-of-work to proof-of-stake will <a href="https://ethereum.org/en/energy-consumption/">reduce Ethereum’s energy consumption by 99.95%</a>.</p>
<h2>Ethereum’s ‘Merge’</h2>
<p>This <a href="https://www.nbcnews.com/tech/tech-news/cryptocurrency-goes-green-proof-stake-offer-solution-energy-concerns-rcna1030">improved energy efficiency</a> is why many blockchain systems intend to transition away from proof-of-work to proof-of-stake. Ethereum plans to make this change during the week of Sept. 15, 2022. This is known as the Merge. During this merge, operations will shift from being voted on using proof-of-work to being voted on using proof-of-stake. At the completion of the merge, only proof-of-stake will be used to vote on transactions. </p>
<p>The hope is that this will set up Ethereum to be sustainable for the foreseeable future.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/EEuPmA8w0Kc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The ‘Ethereum Merge’ is slated to shift one of the largest blockchains to energy-efficient, proof-of-stake technology.</span></figcaption>
</figure>
<p><em>This article has been updated to include new research about the environmental impact of bitcoin mining.</em></p><img src="https://counter.theconversation.com/content/189105/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Scott Ruoti does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ethereum, one of the world’s largest blockchains and host of decentralized finance, NFTs and billions of dollars’ worth of cryptocurrency, is poised to dramatically reduce its energy consumption.Scott Ruoti, Assistant Professor of Computer Science, University of TennesseeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1902292022-09-11T20:10:14Z2022-09-11T20:10:14ZOne year on, El Salvador’s Bitcoin experiment has proven a spectacular failure<p>A year ago, El Salvador became the first country to make Bitcoin legal tender – alongside the US dollar, which the Central American country adopted in 2001 to replace its own currency, the colón.</p>
<p>President Nayib Bukele, a cryptocurrency enthusiast, promoted the initiative as one that would deliver multiple economic benefits. </p>
<p>Making Bitcoin legal tender, <a href="https://www.abc.net.au/news/2021-06-07/el-salvador-to-introduce-bitcoin-as-official-currency/100194700">he said</a>, would attract foreign investment, generate jobs and help “push humanity at least a tiny bit into the right direction”.</p>
<p>His ambitions extended to building an entire “Bitcoin city” – a tax-free haven <a href="https://www.afr.com/technology/why-the-world-s-first-bitcoin-city-is-a-disaster-in-the-making-20211207-p59fid">funded</a> by issuing US$1 billion in <a href="https://www.ft.com/content/67515f23-ccdc-4dbc-a184-70848e183ac3">government bonds</a>. The plan was to spend half the bond revenue on the city, and the other half on buying Bitcoin, with assumed profits then being used to repay the bondholders.</p>
<figure class="align-center ">
<img alt="El Salvador's President Nayib Bukele announced his plan for 'Bitcoin City' at a conference for cryptocurrency speculators in November 2021." src="https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483661/original/file-20220909-16-1dpxdp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">El Salvador’s President Nayib Bukele announced his plan for ‘Bitcoin City’ at a conference for cryptocurrency speculators in November 2021.</span>
<span class="attribution"><span class="source">Salvador Melendez/AP</span></span>
</figcaption>
</figure>
<p>Now, a year on, there’s more than enough evidence to conclude Bukele – who has also called himself “<a href="https://www.theguardian.com/world/2021/sep/26/naybib-bukele-el-salvador-president-coolest-dictator">the world’s coolest dictator</a>” in response to criticisms of his creeping authoritarianism – had no idea what he was doing. </p>
<p>This bold financial experiment has proven to be an almost complete failure.</p>
<h2>Making Bitcoin legal tender</h2>
<p>Making Bitcoin legal tender meant much more than allowing Bitcoin to be used for transactions. That was already possible, as it is in most (<a href="https://tile.loc.gov/storage-services/service/ll/llglrd/2021687419/2021687419.pdf">but far from all</a>) countries. </p>
<p>If a Salvadoran wanted to pay for something in bitcoins, and the recipient was willing to accept them, they could. </p>
<p>But Bukele wanted more. Making bitcoins legal tender meant a payee had to accept them. As the <a href="https://twitter.com/nayibbukele/status/1402446890466217985/photo/2">2021 legislation</a> stated, “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/can-bitcoin-be-a-real-currency-whats-wrong-with-el-salvadors-plan-162348">Can Bitcoin be a real currency? What's wrong with El Salvador's plan</a>
</strong>
</em>
</p>
<hr>
<p>To encourage Bitcoin uptake, the government created an app called “Chivo Wallet” (“chivo” is slang for “cool”) to trade bitcoins for dollars without transaction fees. It also came preloaded with US$30 as a bonus (the median weekly income <a href="https://worldsalaries.com/average-salary-in-el-salvador/">is about US$360</a>).</p>
<p>Yet despite the law and these incentives, Bitcoin has not been embraced.</p>
<h2>Greeted with little enthusiasm</h2>
<p>A <a href="https://www.nber.org/system/files/working_papers/w29968/w29968.pdf">nationally representative survey</a> of 1,800 Salvadoran households in February indicated just 20% of the population was using Chivo Wallet for Bitcoin transactions. More than double that number downloaded the app, but only to claim the US$30.</p>
<p>Among respondents who identified as business owners, just 20% said they were accepting bitcoins as payment. These were typically large companies (among the top 10% of companies by size). </p>
<hr>
<p><strong>Business acceptance of Bitcoin in El Salvador</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=249&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=249&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=249&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=313&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=313&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483632/original/file-20220909-16-l4bcjm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=313&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.nber.org/papers/w29968">NBER Working Paper 29968</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>A survey for the El Salvador Chamber of Commerce in March found <a href="https://www.bloomberg.com/news/articles/2022-03-18/el-salvador-s-businesses-barely-bother-with-bitcoin-study-finds?sref=LjvtXsd7">only 14%</a> of businesses were transacting using Bitcoin. </p>
<h2>Making huge losses</h2>
<p>Fortunately for Salvadorans, nothing has come of the US$1 billion Bitcoin bonds scheme. But the Bukele government has still spent <a href="https://www.latimes.com/world-nation/story/2022-07-01/el-salvador-president-bukele-buys-more-bitcoin">more than US$100 million</a> buying bitcoins – which are now worth less than US$50 million.</p>
<p>When Bukele announced his plans in July 2021, Bitcoin’s value was about US$35,000. By the time the legislation came into effect, on September 7 2021, it was about US$45,000. Two months later, it peaked at US$64,400. </p>
<p>Now it is trading at around US$20,000.</p>
<p>Bukele has made <a href="https://twitter.com/nayibbukele/status/1439821189279625217?lang=en">self-congratulatory tweets</a> about “buying the dip” but almost all the bitcoins bought by the government have been for more than US$30,000, at an average price of more than US$40,000. </p>
<p>A year ago, Bukele was urging his citizens to hold their money in bitcoins. For anyone who did, the losses would be devastating. </p>
<h2>Flawed analyses</h2>
<p>Bukele’s misunderstanding of Bitcoin – and economics more generally – has been demonstrated repeatedly.</p>
<p>In June 2021 he <a href="https://twitter.com/nayibbukele/status/1401335885497524226?lang=en">tweeted</a>: “Bitcoin has a market cap of US$680 billion. If 1% of it is invested in El Salvador, that would increase our GDP by 25%.” </p>
<p>This suggests he seemed to think Bitcoin was some sort of investment fund. It also showed <a href="https://theconversation.com/can-bitcoin-be-a-real-currency-whats-wrong-with-el-salvadors-plan-162348">he did not understand GDP</a>. Foreign investment is not a component of GDP. There has been no surge in foreign investment nor GDP.</p>
<p>In a January 2022 <a href="https://twitter.com/nayibbukele/status/1488018025223704583">tweet</a> he argued a “gigantic price increase is just a matter of time” because there will only ever be 21 million bitcoins while there are 50 million millionaires in the world. “Imagine when each one of them decides they should own at least ONE #Bitcoin,” he proclaimed. Bitcoin’s value has since halved.</p>
<h2>The rest of the world is not impressed</h2>
<p>The Bitcoin plan has adversely affected El Salvador’s credit rating and relations with the International Monetary Fund. With investors more wary of lending to the country, local borrowers have had to offer higher interest rates. </p>
<p>In January the IMF <a href="https://archive.ph/RO7j1">urged El Salvador</a> to reverse Bitcoin’s legal lender status <a href="https://www.imf.org/en/Publications/CR/Issues/2022/01/26/El-Salvador-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-512245">because of</a> the “large risks for financial and market integrity, financial stability and consumer protection”. Bitcoin is notorious for its use in scams and other illegal activities, as well as its volatility.</p>
<p>Bukele <a href="https://twitter.com/nayibbukele/status/1486162932224479235?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1486162932224479235%7Ctwgr%5Ee9c4f2005b666c8d41a8c46b48de25776f26bdd8%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fambcrypto.com%2Fbukele-goes-all-simpsons-after-imfs-bitcoin-warning%2F">tweeted</a> a dismissive response involving a Simpsons-themed meme.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=486&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=486&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=486&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=610&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=610&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483651/original/file-20220909-12-b9agut.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=610&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">El Salvador’s President Nayib Bukele’s response to the IMF’s warnings about the risk of making Bitcoin legal tender.</span>
<span class="attribution"><a class="source" href="https://twitter.com/nayibbukele/status/1486162932224479235?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1486162932224479235%7Ctwgr%5Ee9c4f2005b666c8d41a8c46b48de25776f26bdd8%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fambcrypto.com%2Fbukele-goes-all-simpsons-after-imfs-bitcoin-warning%2F">Twitter</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>This seems particularly rash, given El Salvador has been <a href="https://www.bloomberg.com/news/articles/2022-01-25/imf-board-urges-el-salvador-to-ditch-bitcoin-as-legal-tender?leadSource=uverify%20wall">seeking a loan</a> of more than $1 billion from the IMF.</p>
<p>International credit rating agencies <a href="https://www.fitchratings.com/research/sovereigns/fitch-downgrades-el-salvador-long-term-idr-to-ccc-from-b-09-02-2022">Fitch</a> has downgraded El Salvador’s credit rating this year, citing concerns about its Bitcoin policies. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cryptocurrencies-are-great-for-gambling-but-lousy-at-liberating-our-money-from-big-central-banks-173901">Cryptocurrencies are great for gambling – but lousy at liberating our money from big central banks</a>
</strong>
</em>
</p>
<hr>
<p>No other country with its own currency, not even ones such as Zimbabwe and Venezuela with discredited currencies, has followed suit and made Bitcoin legal tender. </p>
<p>Given El Salvador’s record, it is is unikely any ever will.</p><img src="https://counter.theconversation.com/content/190229/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist with the Bank for International Settlements.</span></em></p>El Salvador’s President Nayib Bukele thought making Bitcoin legal tender would revolutionise his country’s economy, He was wrong.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1903762022-09-09T13:57:33Z2022-09-09T13:57:33ZThe Ethereum merge could kick off a transformation in crypto’s battered reputation<p>Cryptocurrencies might still be a very long way from <a href="https://coinmarketcap.com/charts/">their highs</a> of 2021, but some of the major ones have staged some decent recoveries in the past couple of months. Notably ether (ETH), the second largest cryptocurrency after bitcoin, is trading at almost US$1,700 (£1,463) at the time of writing, having dropped as low as US$876 in mid-June. </p>
<p>Ether, which was created by Canadian/Russian programmer Vitalik Buterin, is the cryptocurrency used for transactions <a href="https://theconversation.com/ethereum-what-is-it-and-why-has-the-price-gone-parabolic-153733">on Ethereum</a>, the leading platform on which developers can applications using blockchain technology. </p>
<p>Blockchains are online ledgers that run without been controlled by any single company. Much of these applications revolve around smart contracts, which are automated contracts that remove the need for intermediaries such as lawyers and are seen as having <a href="https://www.nasdaq.com/articles/exploring-the-disruptive-potential-of-smart-contracts">huge potential</a> for the future. </p>
<p><strong>Ether price (US$)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing the ether price" src="https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=434&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=434&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483747/original/file-20220909-10017-3kysne.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=434&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
</figcaption>
</figure>
<p>One of the main catalysts for ether’s rebound has been the Ethereum merge, a huge project to change the way the underlying blockchain operates. Where transactions on Ethereum are currently validated using an energy-intensive system known as proof-of-work (PoW), in which lots of very powerful computers compete to solve complex mathematical puzzles, from around September 15 it will shift to a new system known as proof of stake (PoS). </p>
<p>PoS basically means that transactions on the blockchain will be validated not by all these computations but by a network of investors whose commitment is demonstrated by the fact that they own at least 32 ether (yours for about US$54,000). </p>
<p>The idea is that this gives them an economic incentive to enhance the security of the network, and are therefore very unlikely to try and sabotage it. Whereas bitcoin transactions all depend on PoW, lots of newer cryptocurrencies use PoS, including Ethereum rivals such as <a href="https://solana.com/staking">Solana</a> and <a href="https://cardano.org/">Cardano</a>. </p>
<h2>Going green</h2>
<p>When the Ethereum merge takes place, power consumption on the blockchain will be <a href="https://theconversation.com/ethereum-second-biggest-cryptocurrency-to-cut-energy-use-by-over-99-but-the-industry-still-has-a-long-way-to-go-189907">reduced by 99%</a>. Since it is currently the <a href="https://kriptomat.io/blockchain/most-popular-blockchain-networks/#:%7E:text=Bitcoin%20accounts%20for%20nearly%2040,blockchain%20is%20the%20most%20popular">most used blockchain</a> in terms of transactions, this will save a huge amount of electricity each year, corresponding to Chile’s <a href="https://theconversation.com/ethereum-second-biggest-cryptocurrency-to-cut-energy-use-by-over-99-but-the-industry-still-has-a-long-way-to-go-189907">power consumption</a>.</p>
<p>As a result of the merge, some analysts expect ether to overtake bitcoin as the leading crypto in terms of the total value of all the coins (in crypto circles this is referred to as <a href="https://blockworks.co/the-flippening-will-ether-flip-bitcoin-in-the-next-year/">the “flippening”</a>). Ether is currently worth just over US$204 billion, while bitcoin is worth US$396 billion.</p>
<p><strong>Bitcoin vs ether</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart comparing market capitalisations of bitcoin and ether" src="https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483748/original/file-20220909-1182-6qofst.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitcoin = yellow, Ether = blue.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Until now, cryptocurrencies and bitcoin in particular have suffered from a bad reputation. Bitcoin was initially conceived with the egalitarian goal of allowing investors access to a financial system with no need for banks and with money that isn’t controlled by countries. It has been championed for its ability to enable billions of people without bank accounts to transact online, and to facilitate things like microfinance and ultra-cheap cross-border trading. </p>
<p>Yet bitcoin has come to be associated with environmental degradation and criminal activities. The mainstream media has endlessly linked the leading cryptocurrency – and by extension the whole space – with <a href="https://www.bbc.co.uk/news/technology-60072195">money laundering</a>, <a href="https://www.forbes.com/sites/tedknutson/2022/01/10/crypto-increasingly-used-in-humandrug-trafficking-says-gao/?sh=6bb419b6637e">online drug dealing</a>, <a href="https://www.theguardian.com/technology/commentisfree/2022/jun/19/the-crypto-crash-all-ponzi-schemes-topple-eventually">Ponzi schemes</a> and <a href="https://www.nbcnews.com/tech/security/bitcoin-crypto-exchange-hacks-little-anyone-can-do-rcna7870">exchange hacking</a>. </p>
<p><a href="https://www.techradar.com/news/netflixs-latest-documentary-will-make-you-think-twice-about-cryptocurrency">Netflix documentaries</a> have further reinforced this negative public image. Recent scandals in the crypto world, such as the fall of <a href="https://www.gfinityesports.com/cryptocurrency/luna-crypto-crash/">Ethereum rival Luna</a> and the <a href="https://www.coindesk.com/policy/2022/09/01/celsius-third-bankruptcy-hearing-yields-little-in-the-way-of-customer-relief/">bankruptcy of Celsius</a> and other crypto lenders, have not helped either. </p>
<p>One major consequence has been that major financial institutions like investment banks and pension funds have been cautious of ploughing money into this space, despite the leap forward in technology that blockchains represent. </p>
<p>But if the most widely adopted crypto platform successfully shifts to PoW in the coming days, many believe that this will overcome the biggest institutional objection and see much more money flowing into the space (there are already early signs, such as <a href="https://en.cryptonomist.ch/2022/09/09/fidelity-bitcoin-trading-retail-clients/">Fidelity’s new crypto fund</a> for retail investors). This is likely to accelerate the global regulatory framework that would minimise undesirable activities. </p>
<p>By closing down the environmental objections to crypto, other advantages to ether are likely to come to the fore. The merge will offer a return to investors in the form of rewards in exchange for locking up their money for a period of time (“staking”). </p>
<p>Although you need to stake 32 ether to become one of the network’s validators, numerous companies have set up systems to enable smaller investors to pool their money so that they can participate. For example, Binance, the world’s largest crypto exchange, offers investors 6% <a href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yield</a> for pooled staking on ether. </p>
<p>Staking will therefore create a win-win situation with guaranteed returns and a very liquid system that makes it easy for people to move their money in and out of ether. This will further enhance the appeal of ether and PoS cryptos in general. </p>
<p>This could help to accentuate other positives around crypto, another of which is humanitarian donations. When Russia invaded Ukraine, for instance, the Ukrainian government called for donations in bitcoin and ether to support its efforts against invaders. This quickly attracted <a href="https://www.euronews.com/next/2022/03/28/crypto-war-aid-for-ukraine-are-donations-in-bitcoin-an-innovation-or-just-a-sideshow#:%7E:text=Since%20February%2026%2C%20when%20Ukrainian,goal%20as%20of%20March%2023.">substantial amounts</a> of money. </p>
<p>Tonga was <a href="https://www.independent.co.uk/tech/tonga-volcano-bitcoin-donations-b1995193.html">similarly successful</a> with a campaign after its volcanic eruption earlier this year. By being able to cross borders easily and cheaply, cryptocurrencies are the ideal vehicle for international donations.</p>
<h2>Lingering uncertainties</h2>
<p>All that said, it is uncertain how the Ethereum blockchain will function after the merge in terms of transaction speeds and costs. One major problem with Ethereum in the past has been that transactions have been ludicrously expensive, <a href="https://www.fxstreet.com/cryptocurrencies/news/ethereum-is-killing-itself-costing-users-thousands-of-dollars-for-every-transaction-202110061314">sometimes running</a> to thousands of US dollars at peak times in 2021. </p>
<p>The developers of the Ethereum Foundation <a href="https://www.gfinityesports.com/cryptocurrency/ethereum-gas-prices-merge/">do not expect</a> the merge to make a <a href="https://cointelegraph.com/news/lower-costs-higher-speeds-after-ethereum-s-merge-don-t-count-on-it">big difference</a> in these respects (currently “gas” fees <a href="https://etherscan.io/gastracker">are averaging</a> between US$1 and US$4 per transaction depending on which platform you are using). Much more important is likely to be another shift in ethereum’s journey to “Ethereum 2.0” <a href="https://ethereum.org/en/upgrades/sharding/#:%7E:text=Sharding%20is%20the%20process%20of,rollups%20over%20the%20entire%20network.">known as sharding</a>, which is due to happen in 2023. </p>
<p>We will also have to wait and see how smooth the merge is. Synchronisation and update bugs could see problems such as validators disconnected from the blockchain. Negative stories like these could see investors staying away for fear of instability. </p>
<p>But on the whole, while the merge will not be a miraculous event, it could help improve the image of cryptocurrencies and attract institutional and retail investors. At a time when sustainable investing is increasingly high priority, the ether merge and its attractive returns have the potential to put ether at the top of the list.</p><img src="https://counter.theconversation.com/content/190376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jean-Philippe Serbera does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Crypto’s second-largest currency is shifting to a new environmentally friendly system.Jean-Philippe Serbera, Senior Lecturer in Banking And Financial Markets, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1899072022-09-05T16:37:59Z2022-09-05T16:37:59ZEthereum: second biggest cryptocurrency to cut energy use by over 99%, but the industry still has a long way to go<figure><img src="https://images.theconversation.com/files/482739/original/file-20220905-14-6z4map.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Proof of work mining requires specialist hardware, and as a result is energy intensive.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/miner-bitcoin-cryptocurrency-763347796">Mark Agnor/Shutterstock</a></span></figcaption></figure><p>Cryptocurrencies use an eye-watering amount of energy. Ethereum, the world’s second-largest cryptocurrency, uses an estimated <a href="https://digiconomist.net/ethereum-energy-consumption">78 terawatt hours</a> of electricity each year, comparable to the power consumption of Chile. </p>
<p>Ethereum has announced plans to rid itself of the energy-intensive code that has long muddied crypto’s environmental image, and cut <a href="https://cointelegraph.com/news/99-98-less-power-lighthouse-s-first-ethereum-and-eth2-merge-transaction">99% of its energy use</a> in the process.</p>
<p>Some <a href="https://www.businessinsider.com/crypto-ethereum-dev-merge-one-most-historic-events-blockchain-upgrade-2022-8?r=US&IR=T">cryptocurrency commentators</a> suggest that the “merge”, as the makeover has been coined, represents one of the most important events in the history of crypto. Even those uninterested in pixelated cat pics and metaverse meetups, most of which depend on Ethereum, will find comfort knowing the carbon equivalent of <a href="https://digiconomist.net/ethereum-energy-consumption">Hong Kong’s annual emissions</a> will be erased overnight.</p>
<p>The merge will result in Ethereum shifting its security mechanism away from what’s known as a proof-of-work method towards so-called proof of stake.</p>
<h2>Proof of work v proof of stake</h2>
<p>Cryptocurrencies are not governed by banks. For networks using the proof-of-work method, the job of validating transactions is performed by a global network of specialist machines, known as <a href="https://theconversation.com/bitcoin-chinas-crackdown-isnt-enough-only-a-global-effort-can-stop-cryptos-monstrous-energy-demand-161776">miners</a>. These machines repeatedly guess a random code with the winner receiving transaction fees as well as some newly minted cryptocurrency.</p>
<p>Crypto mining works like an ever-expanding game of <a href="https://www.youtube.com/watch?v=xJlKLC-nMJ0">hungry hippos</a>. The more players that join the mining competition, the harder it becomes for any single player to win anything. These machines consume vast amounts of energy. A single Ethereum transaction is responsible for the same amount of energy used by the average <a href="https://digiconomist.net/ethereum-energy-consumption">US household in a week</a>.</p>
<figure class="align-center ">
<img alt="A coal-fired power station with fumes pouring into a blue sky." src="https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482740/original/file-20220905-2243-h4rmn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A single Ethereum transaction is responsible for the same amount of energy used the average US household in a week.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/view-smoking-coal-power-plant-129709763">Kodda/Shutterstock</a></span>
</figcaption>
</figure>
<p>The proof-of-stake process reduces the need for energy-intensive processing equipment to validate transactions. Cryptocurrency owners instead offer their own coins as a security deposit for the chance to become validators. Ethereum requires users to stake a minimum of <a href="https://www.investopedia.com/terms/p/proof-stake-pos.asp#toc-understanding-proof-of-stake-pos">32 Ether tokens</a>.</p>
<p>Rather than competing, validators are selected to mine. Do the job well, and the validator is rewarded with even more crypto. But if they validate fraudulent transactions or otherwise defy network rules, they lose their stake. This disincentive is called <a href="https://cryptorobin.com/what-is-slashing/">“slashing”</a>. </p>
<p>Proof-of-stake networks are typically assembled around 20 machines, using a comparatively small amount of energy. While being more efficient, proof of stake also reduces network congestion while being cheaper for users.</p>
<p>Advocates for proof of work argue that proof of stake is an unproven alternative. <a href="https://decrypt.co/108791/ethereum-merge-almost-here-what-could-go-wrong">Many fear</a> that the merge might consolidate control of the network in the hands of wealthy investors while weakening its security. </p>
<p>However, several networks, including Cardano and TRON, already use a proof-of-stake method. To uphold security, crypto owners in these networks vote for the most qualified validators. </p>
<p>As it is written into the project’s “<a href="https://medium.com/@VitalikButerin/a-proof-of-stake-design-philosophy-506585978d51">development roadmap</a>”, Ethereum’s journey to proof of stake has always been likely. Ethereum’s developers have consistently repeated claims of an <a href="https://www.reddit.com/r/ethereum/comments/o3swez/years_of_history_claiming_ethereum_will_go_to_pos/">imminent shift</a>. But progress has been slow, leading many to believe the merge might never happen.</p>
<h2>Resisting the change</h2>
<p>Proof-of-work mining has up to now proved very profitable. However, the global energy crisis and crumbling crypto markets have made it far less lucrative than previously. </p>
<p>The energy crisis is also prompting regulators to act on energy-intensive industries. This is particularly true in Europe where the transition away from Russian energy dependence is biting hardest. While a <a href="https://www.bloomberg.com/news/articles/2022-03-14/eu-crypto-proposal-seen-as-de-facto-bitcoin-ban-fails-in-vote">proposal</a> to ban proof-of-work mining failed to win EU approval earlier this year, an imminent crackdown looks <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202207_3%7Ed9614ea8e6.en.html">inevitable</a>. </p>
<p>Yet, despite the regulatory risk, the movement to keep Ethereum’s proof-of-work mechanism alive is gathering momentum. Several prominent crypto traders have repeated their <a href="https://www.coindesk.com/business/2022/08/15/miner-chandler-guo-repeats-support-for-ethereum-fork-post-merge/">support</a> for proof-of-work mechanisms. </p>
<p>Alternative versions, called “forks”, that ignore the software update are therefore highly likely. These forks will replicate the existing network, allowing subsets of the community to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0921800921000781">continue mining</a>. </p>
<p>Many <a href="https://www.coindesk.com/business/2022/08/26/coinbase-pledges-to-evaluate-forked-ethereum-tokens-in-update-to-merge-policy/">exchanges</a> broadly support Ethereum’s proof-of-stake chain. Opensea, the largest marketplace for collectable crypto assets, says it <a href="https://cointelegraph.com/news/opensea-says-marketplace-won-t-support-forked-nfts-post-merge">will not</a> list any other kind of Ethereum digital artwork. </p>
<p>However, the market is far from conclusive in its support. Large exchanges, such as FTX and Coinbase, <a href="https://www.coindesk.com/tech/2022/08/24/ethereum-proof-of-work-forks-gift-or-grift/">have confirmed</a> that they will allow users to trade forked Ethereum tokens.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1563601624756498432"}"></div></p>
<p>While soaring energy bills could discourage the mining of an unpopular Ethereum fork, miners, in this case, may migrate towards <a href="https://fortune.com/2022/07/29/eth-price-ethereum-original-coin-soar-miners-migrate-ahead-of-merge/">more established</a> proof-of-work networks. This would reduce Ethereum’s carbon footprint, but redistribute crypto’s carbon headache around the network.</p>
<h2>What does this mean for Bitcoin?</h2>
<p>Responsible for an estimated <a href="https://digiconomist.net/bitcoin-energy-consumption">70 million tonnes of CO₂ a year</a>, Bitcoin remains the dirty elephant in the room. </p>
<p>Mining the number one cryptocurrency has become so competitive that the cost of entry can be up to <a href="https://www.sciencedirect.com/science/article/abs/pii/S2214629621004813?via%3Dihub">US$1.8 (£1.55) million</a>. Bitcoin mining is done by commercial mining companies that have to invest heavily in specialist hardware. Bitcoin miners, therefore, tend to be protective of their investments and <a href="https://theconversation.com/bitcoin-greenpeace-says-a-code-change-could-slash-cryptocurrency-energy-use-heres-why-its-not-so-simple-180264">resist</a> changes to the status quo.</p>
<p>For cryptocurrency networks that cannot clean up their act, a <a href="https://www.sciencedirect.com/science/article/pii/S2214629621004813">global regulatory crackdown</a> on proof-of-work mining is required. Miners are otherwise free to migrate to other chains, or operate from <a href="https://theconversation.com/bitcoin-chinas-crackdown-isnt-enough-only-a-global-effort-can-stop-cryptos-monstrous-energy-demand-161776">countries</a> with weak environmental regulations, rather than adopt more sustainable practices.</p>
<p>During an energy crisis and climate emergency, Ethereum’s switch to a more efficient technology is good news. If it proves successful, regulators will probably see no reason why Bitcoin and other wasteful cryptocurrencies should not follow suit.</p><img src="https://counter.theconversation.com/content/189907/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Howson has received funding from The British Academy. He does not own any cryptocurrencies, NFTs, or any other digital assets.</span></em></p>Cryptocurrency has a substantial carbon footprint. Ethereum have taken steps to address this, but will others follow suit?Peter Howson, Assistant Professor in International Development, Northumbria University, NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1896302022-09-05T04:36:26Z2022-09-05T04:36:26ZThe most important cryptocurrency event in years is about to begin – and the biggest windfall goes to the planet<figure><img src="https://images.theconversation.com/files/482452/original/file-20220902-18-jpygje.jpg?ixlib=rb-1.1.0&rect=15%2C7%2C5121%2C3265&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Dave Hunt/AAP</span></span></figcaption></figure><p>Amid the continuous noise about cryptocurrencies, it’s often hard to pick out what really matters. However this month, if all goes to plan, the energy-hungry digital sector will undergo its biggest shake-up in years. </p>
<p>Ethereum, the world’s second largest cryptocurrency, is on Tuesday <a href="https://www.theguardian.com/technology/2022/aug/29/cryptocurrency-ethereum-plans-to-cut-carbon-emissions-by-99-per-cent-with-upgrade">expected</a> to start a technology changeover which, once complete, should cause its carbon emissions to <a href="https://decrypt.co/71353/ethereum-foundation-eth-2-0-will-use-99-95-less-energy">plummet by 99%</a>. </p>
<p>The rapid growth in cryptocurrencies in recent years has been staggering. Unfortunately, so too has been their contribution to climate change, due to the enormous amount of electricity used by computers that manage the buying and selling of crypto coins. </p>
<p>Take, for example, the world’s biggest cryptocurrency, Bitcoin. At a time when the world is desperately trying to reduce energy consumption, Bitcoin uses more energy each year than medium-sized nations such as <a href="https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/">Argentina</a>. If the Ethereum switch succeeds, Bitcoin and other cryptocurrencies will be under immense pressure to deal with this problem.</p>
<figure class="align-center ">
<img alt="woman in mask walks past Bitcoin display" src="https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&rect=8%2C0%2C5982%2C3997&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482451/original/file-20220902-24-gnktac.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Ethereum move puts pressure on Bitcoin and others to follow suit.</span>
<span class="attribution"><span class="source">Kin Cheung/AAP</span></span>
</figcaption>
</figure>
<h2>Why are cryptocurrencies so polluting?</h2>
<p>Cryptocurrencies are digital currency systems in which people make direct online payments to each other.</p>
<p>Unlike traditional currencies, cryptocurrencies are not managed from a single location such as a central bank. Instead, they’re managed by a “blockchain”: a decentralised global network of high-powered computers. These computers are known as “miners”.</p>
<p>The Reserve Bank of Australia <a href="https://www.rba.gov.au/education/resources/explainers/cryptocurrencies.html">provides</a> this simple explanation of how it all works (edited for brevity):</p>
<blockquote>
<p>Suppose Alice wants to transfer one unit of cryptocurrency to Bob. Alice starts the transaction by sending an electronic message with her instructions to the network, where all users can see the message.</p>
<p>The transaction sits with a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions. The information from the block is turned into a cryptographic code and miners compete to solve the code to add the new block of transactions to the blockchain.</p>
<p>Once a miner successfully solves the code, other users of the network check the solution and reach an agreement that it’s valid. The new block of transactions is added to the end of the blockchain, and Alice’s transaction is confirmed.</p>
</blockquote>
<p>This process, used by most cryptocurrencies, is termed “proof-of-work mining”. The central design feature is the use of calculations which require a lot of computer time – and huge amounts of electricity – to perform. </p>
<p>Bitcoin alone consumes around <a href="https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/">150 terawatt-hours</a> of electricity each year. Producing that energy emits some 65 million tonnes of carbon dioxide into the atmosphere annually — about the same emissions as Greece. </p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S221462962200007X">Research</a> suggests Bitcoin last year produced emissions responsible for around 19,000 future deaths. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=503&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=503&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=503&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=633&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=633&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482660/original/file-20220905-26-uwmair.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=633&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The proof-of-work approach intentionally wastes energy. The data in a blockchain has no inherent meaning. Its sole purpose is to record difficult, but pointless, calculations which provide a basis for allocating new crypto coins. </p>
<p>Cryptocurrency advocates have given a variety of excuses for the monstrous energy consumption, but none stand up to scrutiny. </p>
<p>Some, for example, seek to justify cryptocurrency’s carbon footprint by saying some miners use renewable energy. That may be true, but in doing so they can <a href="https://thenarwhal.ca/bitcoin-miners-are-eating-up-canadas-electricity/">displace</a> other potential energy users – some of whom will have to use coal- or gas-fired power.</p>
<p>But now, the most successful of Bitcoin’s rivals, Ethereum, is changing tack. This month it promises to switch its computing technology to something far less polluting. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ethereum-the-transformation-that-could-see-it-overtake-bitcoin-170316">Ethereum: the transformation that could see it overtake bitcoin</a>
</strong>
</em>
</p>
<hr>
<figure class="align-center ">
<img alt="sun sets behind power plant emitting steam" src="https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482459/original/file-20220902-23-hm5l3f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Ethereum switch will lead to a radical drop in electricity use.</span>
<span class="attribution"><span class="source">Michael Probst/AP</span></span>
</figcaption>
</figure>
<h2>What the switch is about</h2>
<p>Ethereum’s project involves ditching the “proof of work” model for a new one called “proof of stake”. </p>
<p>Under this model, crypto transactions are validated by users, who stake substantial quantities of blockchain tokens (in this case, Ethereum coins) as collateral. If the users act dishonestly, they lose their stake.</p>
<p>Importantly, it will mean the vast network of supercomputers currently used to check transactions will no longer be required, because users themselves are doing the checking – a relatively easy task. Doing away with the computer “miners” will lead to an estimated 99% drop in Ethereum’s electricity use.</p>
<p>Some smaller cryptocurrencies – such as the Ada coin traded on the Cardano platform – use “proof of stake” but it’s been confined to the margins to date.</p>
<p>For the past year, Ethereum has been <a href="https://www.theguardian.com/technology/2022/aug/29/cryptocurrency-ethereum-plans-to-cut-carbon-emissions-by-99-per-cent-with-upgrade">running</a> the new model on experimental blockchains. But this month, the model will be merged into the main platform.</p>
<figure class="align-center ">
<img alt="green-lit computers in darkened room with person tinkering" src="https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482455/original/file-20220902-17-qyhp0u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The new Ethereum model would dispense with the need for a global network of energy-sucking computers.</span>
<span class="attribution"><span class="source">Lui Xingzhe/EPA</span></span>
</figcaption>
</figure>
<h2>Nowhere for cryptocurrency to hide</h2>
<p>So what does all this mean? The Ethereum experiment could fail – if, say, some stakeholders find ways to manipulate the system. But if the switch does succeed, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model, or else shut down. </p>
<p>This pressure has already begun. Tesla founder Elon Musk’s <a href="https://theconversation.com/teslas-bitcoin-about-face-is-a-warning-for-cryptocurrencies-that-ignore-climate-change-160928">last year announced</a> his company would no longer accept Bitcoin payment for its electric cars, due to the currency’s carbon footprint. </p>
<p>The New York state legislature in June <a href="https://www.cnbc.com/2022/06/03/heres-whats-in-new-yorks-new-bitcoin-mining-ban-.html">passed a bill</a> to ban some Bitcoin operations that use carbon-based power. (However, the decision requires sign off from New York’s governor and may be vetoed). </p>
<p>And in March this year, the European parliament voted on a proposal to ban the proof-of-work model. The proposal was <a href="https://bitcoinmagazine.com/markets/eu-parliament-backtracks-ban-on-bitcoin-proof-of-work">defeated</a>. But as Europe heads into the cooler months, and grapples with an energy crisis triggered by sanctions on Russian gas supplies, energy-guzzling cryptocurrencies will remain in the firing line.</p>
<p>One thing is clear: as the need to slash global emissions becomes ever more pressing, cryptocurrencies will run out of excuses for their egregious energy use.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/teslas-bitcoin-about-face-is-a-warning-for-cryptocurrencies-that-ignore-climate-change-160928">Tesla's Bitcoin about-face is a warning for cryptocurrencies that ignore climate change</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/189630/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The landmark change places Bitcoin and other cryptocurrencies under immense pressure to follow suit.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1883392022-08-11T16:56:30Z2022-08-11T16:56:30ZCrypto platforms say they’re exchanges, but they’re more like banks<figure><img src="https://images.theconversation.com/files/478364/original/file-20220809-15110-oy8izt.jpg?ixlib=rb-1.1.0&rect=8%2C73%2C5455%2C3358&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Crypto trading platforms Celsius and Voyager filed for bankruptcy in July 2022, suspending all withdrawals, swaps and transfers between accounts and leaving users’ assets trapped inside their platforms.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/crypto-platforms-say-they-re-exchanges--but-they-re-more-like-banks" width="100%" height="400"></iframe>
<p>There is a well-known saying shared by both crypto experts and skeptics: “Not your keys, not your coins.” The phrase, <a href="https://cointelegraph.com/news/antonopoulos-your-keys-your-bitcoin-not-your-keys-not-your-bitcoin">popularized by Bitcoin entrepreneur Andreas Antonopoulos</a>, refers to how the contents of a crypto wallet are the property of whoever has access to that wallet’s digital “keys.”</p>
<p>This means that unless you personally have the keys to your crypto assets and store them offline, you are vulnerable to hacks, scams and bankruptcies. <a href="https://www.ic3.gov/Media/News/2022/220718.pdf">The endless stream of crypto scams has been well documented</a>. So have the <a href="https://web3isgoinggreat.com/?theme=hack">security breaches</a> — and not to mention the <a href="https://www.reuters.com/technology/how-big-is-bitcoins-carbon-footprint-2021-05-13/">eye-popping carbon emissions</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-digital-economys-environmental-footprint-is-threatening-the-planet-126636">The digital economy's environmental footprint is threatening the planet</a>
</strong>
</em>
</p>
<hr>
<p>Of course, offline storage requires an extra level of understanding, technological sophistication and inconvenience. Enter crypto exchanges like Coinbase and Crypto.com, which offer simple, convenient platforms for users to buy and sell cryptocurrencies and NFTs. </p>
<p>However, <a href="https://www.bloomberg.com/news/articles/2022-06-26/crypto-winter-why-this-bitcoin-bear-market-is-different-from-the-past">the crypto crash</a> has revealed that these firms are not just exchanges — they are more like banks. Except defunct crypto exchanges like <a href="https://www.cnn.com/2022/07/14/business/celsius-bankruptcy/index.html">Celsius Network</a> and <a href="https://dfr.vermont.gov/consumer-alert/voyager-digital-files-chapter-11-bankruptcy">Voyager Digital</a> were only banks if you read the fine print. Most customers, of course, did not. </p>
<figure class="align-center ">
<img alt="A hand holding a cellphone with the Coinbase app open on it in front of a laptop with the Coinbase website open" src="https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&rect=16%2C0%2C3607%2C2221&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=368&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=368&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=368&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=463&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=463&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478362/original/file-20220809-9831-cb7fie.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=463&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Crypto exchanges like Coinbase and Crypto.com offer simple, convenient platforms for users to buy and sell cryptocurrencies and NFTs.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Who needs deposit insurance?</h2>
<p>Until very recently, crypto exchanges were all the rage. They had <a href="https://www.hollywoodreporter.com/business/digital/cryptocurrency-spend-big-on-hollywood-names-to-gain-trust-1235019008/">A-list celebrity spokespeople</a>, <a href="https://www.latimes.com/business/story/2021-11-16/crypto-staples">stadium naming rights</a> and <a href="https://www.ctvnews.ca/politics/poilievre-personally-holds-investment-in-bitcoin-as-he-promotes-crypto-to-canadians-1.5907615">public endorsements by major politicians</a>. </p>
<p>Crypto exchange companies market themselves as platforms for users to buy and sell crypto. But they also function like stockbrokers and, more concerningly, their core business models quite closely resemble banking.</p>
<p>Traditional exchanges, like the New York Stock Exchange, rarely go bankrupt. And since they do not offer account services, if they do go bankrupt their clients are not on the hook for any losses. Brokerage firms, like Wealthsimple, do sometimes go bankrupt, but <a href="https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors">their clients’ portfolios are held in the client’s own name</a> and, accordingly, may simply be transferred to a different broker. In the event of fraud, <a href="https://www.cipf.ca/cipf-coverage/about-cipf-coverage#coverage">both Canada</a> and <a href="https://www.sipc.org/for-investors/what-sipc-protects">the United States</a> provide automatic insurance for lost assets. </p>
<p>Banks, like the Royal Bank of Canada, take on more risks and <a href="https://fred.stlouisfed.org/series/BKFTTLA641N">fail more often</a>. Because banks use customer deposits to make loans, <a href="https://corporatefinanceinstitute.com/resources/knowledge/other/bank-run/">banks are vulnerable to runs</a>. This is why most high-income countries — <a href="https://www.cdic.ca/what-happens-in-a-failure/">including Canada</a> — have deposit insurance and regulate banking more than other financial services.</p>
<p>Herein lies the problem. Companies like Celsius and Voyager <a href="https://www.investvoyager.com/app/the-broker-model/">marketed themselves as both exchanges and brokers</a>, so that is how their apps appeared. But if anyone were to read the <a href="https://celsius.network/terms-of-use">terms and conditions</a>, it would be clear that they were actually uninsured, quasi-banks. </p>
<h2>Risks in crypto-banking</h2>
<p>In companies like Celsius and Voyager, customers’ accounts were not held separately in their own wallets, but rather <a href="https://www.investvoyager.com/useragreement">held in a pool owned by the platform</a>. The platform would use this pool of money to make loans (often to other crypto firms) or to engage in its own speculative investing (often in crypto assets). When depositors cashed out, they were paid from the pool, which was able to cover normal on-demand withdrawals, but did not have enough cash to handle everyone pulling out simultaneously. </p>
<p>Sound familiar? </p>
<figure class="align-center ">
<img alt="A stack of bitcoins sit in front of the logo for cyptocurrency company Voyager" src="https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478365/original/file-20220809-16047-qqm53q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Crypto giant Voyager lied to their clients about being insured by the Federal Deposit Insurance Corporation (FDIC).</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>When crypto prices collapsed, <a href="https://www.cnbc.com/2022/07/19/what-happens-to-my-funds-if-a-crypto-exchange-goes-bankrupt.html">these firms’ loans went belly up</a> and some were forced to suspend withdrawals. When Celsius filed for <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">Chapter 11 bankruptcy</a>, their <a href="https://www.coindesk.com/business/2022/07/18/celsius-bankruptcy-filings-hint-retail-customers-will-bear-brunt-of-its-failure/">depositors learned their accounts were worthless</a>, having been gambled away by the company. </p>
<p>These firms deliberately obscured this reality to their clients. In Voyager’s case, they <a href="https://www.cbsnews.com/news/voyager-fdic-insurance-federal-reserve/">outright lied about being FDIC-insured</a>. Snake-oil salesmen from these companies convinced <a href="https://twitter.com/celsiusnetwork/status/1384156564013993996">their customers that regulated banks were the problem</a>, only to learn exactly why those regulations exist in the first place. </p>
<p>To make matters worse, <a href="https://www.cnbc.com/2022/08/03/voyager-ceo-made-millions-in-stock-sales-in-2021.html">the lack of transparency in crypto markets makes it quite easy for executives and developers to dump their positions long before they suspend withdrawals</a>. By the time customers realize their money is gone, those responsible have cashed out with a tidy profit. </p>
<h2>The future of decentralized finance</h2>
<p>So where do we go from here? </p>
<p>At the micro level, the answers are obvious. <a href="https://www.sec.gov/reportspubs/investor-publications/divisionsmarketregbdguidehtm.html#V">Crypto exchanges should be regulated in the same manner as brokers</a>. Client assets must be held separately and securely, with clear rules on risk exposure in the firms’ own trading. </p>
<p>Crypto assets themselves should be clearly designated as securities, and therefore subject to oversight. Exchange platforms should be required to hold sufficient cash in government-issued currency. If this sounds like it violates the ethos of decentralized finance, that’s because it should.</p>
<p>The macro level is trickier. Post-2008, we have demonized the big banks and fetishized technology. Crypto enthusiasts claim Wall Street is only in it for itself, and they are right. But they’ve recreated the same system, only it’s even riskier. </p>
<p>The late arrivals to the crypto party — the ones now holding the bag — <a href="https://www.npr.org/2022/07/26/1112439917/amid-the-hype-they-bought-crypto-near-its-peak-now-they-cope-with-painful-losses">are not the wealthy investing class</a>. <a href="https://www.marketplace.org/2022/06/09/when-a-cryptocurrency-you-never-heard-of-drains-your-life-savings/">They are regular people</a>, rightly distrustful of banks and, by extension, our institutions, and are desperately searching for ways to shield themselves from <a href="https://theconversation.com/a-summer-of-discontent-why-public-sector-workers-are-preparing-to-strike-in-b-c-186808">skyrocketing inflation</a>.</p>
<p>Rebuilding that trust takes time and energy. It takes a willingness to deal with the inequities caused by a rising cost of living and an extractive financial system. And, crucially, it takes effective regulation. If it looks like a bank and behaves like a bank, it needs to be treated like a bank.</p><img src="https://counter.theconversation.com/content/188339/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. O'Connell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Because cryptocurrency exchange platforms act more like banks, they should be subject to increased oversight to protect clients’ assets.William D. O'Connell, PhD Candidate, Political Science, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1871412022-07-25T13:57:22Z2022-07-25T13:57:22ZCryptocurrencies are gaining ground across Africa. That’s both good news and bad<figure><img src="https://images.theconversation.com/files/474385/original/file-20220716-12-et8a8k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some of the of 19,000 private cryptos in use by end of June 2022. Users have increased sharply in Africa after the COVID-19 outbreak. Silas Stein/Picture Alliance via </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/june-2022-baden-wuerttemberg-rottweil-the-application-apps-news-photo/1241318687?adppopup=true">Getty Images</a></span></figcaption></figure><p><em>Cryptocurrencies have become popular in African and other developing countries. That’s according to a <a href="https://unctad.org/system/files/official-document/presspb2022d8_en.pdf">policy brief</a> released recently by UNCTAD, a United Nations agency. Significant proportions of Kenya <a href="https://www.citizen.digital/tech/kenya-leads-in-africas-cryptocurrency-ownership-5th-in-world-un-n301621">(8.5%)</a>, South Africa (7.1%) and Nigeria’s (6.3%) populations are using these digital currencies. In June, the Central African Republic <a href="https://www.bbc.com/news/world-africa-61565485">adopted</a> bitcoin as a legal tender.</em></p>
<p><em>The report warns that widespread use of unregulated digital currencies poses danger to the continent’s financial system. In an interview with The Conversation Africa, Iwa Salami, an expert in financial technology law and regulation, examines the future of digital currencies in Africa.</em></p>
<h2>Why is cryptocurrency becoming popular in Africa?</h2>
<p>Cryptocurrencies have gained acceptance among a large proportion of the low-income population that was, previously, <a href="https://www.tandfonline.com/doi/pdf/10.1080/23322039.2022.2058734">financially marginalised</a>. Most banks in Africa were not accessible to this segment. Even when they were, low-income account holders were discouraged by <a href="https://www.weforum.org/agenda/2017/04/financial-inclusion-south-africa/">high transaction costs</a>. </p>
<p>Another factor is economic stagnation compounded by debt crises and political instability in African economies since the era of independence. This has resulted in weak currencies ravaged by inflation in countries like <a href="https://www.brookings.edu/wp-content/uploads/2016/07/kenya-country-case.pdf">Kenya</a> and <a href="http://jedsnet.com/journals/jeds/Vol_5_No_2_June_2017/4.pdf">Nigeria</a>. </p>
<p>Cryptocurrencies promised to address both financial exclusion and the problem of weak domestic currencies.</p>
<p>Cryptocurrency gives everyone with access to a mobile device and internet connectivity the opportunity to engage in activities similar to those conducted through financial institutions and intermediaries. That includes payments, sending remittances and making investments.</p>
<p>Investment is particularly inviting to the <a href="https://furtherafrica.com/2022/06/08/crypto-adoption-in-africa-soars-despite-challenges/#:%7E:text=Rising%20acceptance%20rates%20in%20Africa,persons%20has%20acknowledged%20using%20cryptocurrency">technically savvy</a>. It gives them the opportunity to hold assets that aren’t affected by rising inflation and depreciating domestic currencies. </p>
<p>Cryptocurrencies are also quicker, cheaper and easier to use than conventional methods. That’s because the technology facilitates <a href="https://www.blockchain-council.org/blockchain/peer-to-peer-network/">peer-to-peer</a> transactions rather than relying on intermediaries. These currencies were <a href="https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-pandemic-affected-the-cryptocurrency-market/">more accessible</a> than traditional banks during the pandemic and lockdowns. This further drove their use and growth across Africa.</p>
<h2>What does a high number of people holding cryptos imply?</h2>
<p>This can facilitate economic activity in African countries. People with no access to banks and banking services are able to pay for goods and services using cryptos. </p>
<p>Crypto transactions are also believed to be a more secure way of transacting. Unless someone gains access to the private key for your crypto wallet, they cannot sign transactions or access your funds. </p>
<p>The system also facilitates transparency. All cryptocurrency transactions take place on the publicly distributed blockchain ledger. There are tools that allow anyone to look up transaction data – including where, when, and how much of a cryptocurrency someone sent from a wallet address. </p>
<h2>But there are risks, too. What are those?</h2>
<p>First, cryptocurrencies are very complex. They require a bit of technological astuteness to embrace. A significant proportion of the adult population in sub-Saharan Africa (34.7%) is <a href="https://www.statista.com/statistics/262886/illiteracy-rates-by-world-regions/">illiterate </a> and may not be able to grasp it. This, to a certain extent, turns the financial inclusion argument on its head.</p>
<p>Secondly, although it is argued that the blockchain is a more secure way of transacting, the downside, of course, is that if you lose your private key there’s no way to recover your funds. This is a threat that does not exist if you have a bank account. </p>
<p>Thirdly, cryptocurrencies have had a history of <a href="https://www.forbes.com/sites/nicolelapin/2021/12/23/explaining-cryptos-volatility/?sh=3c053c927b54">volatility</a>, (as is currently being <a href="https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html">experienced</a> in the crypto market). This has adversely affected retail investors, especially those who do not understand this type of asset class. </p>
<p>Another issue of profound concern to African states is the potential threat to monetary sovereignty. Should crypto ever be more widely used than domestic fiat currency, national monetary agencies such as central banks may not be able to <a href="https://www.afronomicslaw.org/2020/03/06/why-african-countries-must-consider-national-digital-currencies-to-counter-the-threats-posed-by-private-digital-currencies-like-facebook-libra">steer their economies</a> to a path of growth using monetary policy. Such policy is, after all, primarily administered through domestic currencies. </p>
<p>An associated threat is the weakening of effective capital controls in African states. These are needed to prevent <a href="https://boycewire.com/causes-and-effects-of-capital-flight/">capital flight</a> from domestic economies. Any weakening can result in significant volatility in currency rates and the rapid depreciation of domestic currencies. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/decentralised-finance-calls-into-question-whether-the-crypto-industry-can-ever-be-regulated-151222">Decentralised finance calls into question whether the crypto industry can ever be regulated</a>
</strong>
</em>
</p>
<hr>
<p>There are also threats to financial stability. This could arise from significant exposure that financial institutions, like banks, have to crypto firms such as through loans. Regulation in some African countries, <a href="https://www.cbn.gov.ng/Out/2021/CCD/Volume%203%20Number%202%20CBN%20Update%20February%202021.pdf">such as Nigeria</a> addresses this by restricting transactions between banks and crypto assets service providers.</p>
<h2>What is the future of cryptocurrencies in Africa?</h2>
<p>Despite the ongoing downturn in the market, cryptocurrency represents the future of finance and financial transactions. And there are indications that cryptocurrencies are here to stay which is seen from their increasing recognition by countries. At one extreme, the governments of El Salvador and the Central African Republic have adopted bitcoin as legal tender, although the implementation and impact of this on their broader economies have been faced with <a href="https://www.bloomberg.com/news/articles/2022-05-04/bitcoin-adoption-by-central-african-republic-a-concern-imf-says">severe criticisms</a>.</p>
<p>Others, such as <a href="https://theconversation.com/nigerias-digital-currency-what-the-enaira-is-for-and-why-its-not-perfect-171323">Nigeria</a>, have recognised the need for state representation of digital currencies in the form of central bank digital currencies. Many other countries are now <a href="https://www.bis.org/about/bisih/topics/cbdc.htm">exploring</a> this option. </p>
<p>It is important to note, however, that the <a href="https://coingeek.com/nigeria-enaira-now-available-via-ussd-to-boost-adoption-and-financial-inclusion/">uptake</a> of central bank digital currencies has been <a href="https://www.vanguardngr.com/2022/04/enaira-pushes-through-difficult-environment/">very low</a> in developing countries that have rolled them out. There are also ongoing <a href="https://www.refinitiv.com/perspectives/future-of-investing-trading/the-rise-of-central-bank-digital-currencies/">investigations</a> by countries into the economic impact of central bank digital currencies and whether adoption is the right approach. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nigerias-digital-currency-what-the-enaira-is-for-and-why-its-not-perfect-171323">Nigeria's digital currency: what the eNaira is for and why it's not perfect</a>
</strong>
</em>
</p>
<hr>
<p>But if cryptocurrencies are to live up to their promise, both on the African continent and elsewhere, there must be a globally <a href="https://www.europeanfinancialreview.com/cryptocurrencies-cross-border-financial-regulatory-dimensions/">coordinated</a> and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3733647">holistic approach</a> to regulation, since transactions are global. Although some action on this front is emerging, the current fragmented approach to regulation across the world is not ideal.</p><img src="https://counter.theconversation.com/content/187141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Iwa Salami does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To live up to their promise, both on the African continent and elsewhere, digital currencies must be globally coordinated.Iwa Salami, Reader (Associate Professor) in Law, University of East LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1739012022-07-03T19:53:32Z2022-07-03T19:53:32ZCryptocurrencies are great for gambling – but lousy at liberating our money from big central banks<figure><img src="https://images.theconversation.com/files/468917/original/file-20220615-21-pd9tyr.jpg?ixlib=rb-1.1.0&rect=0%2C155%2C6470%2C3250&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The dream that decentralised finance – or “<a href="https://theconversation.com/what-is-defi-and-why-is-it-the-hottest-ticket-in-cryptocurrencies-144883">DeFi</a>” – can free the monetary system from the clutches of governments and banks has helped launch 20,000 cryptocurrencies.</p>
<p>But with 2022 proving to be more of a crypto-nightmare – including for the vaunted “stablecoins” that held the most promise as rivals to central bank-issued currencies – questions are now being asked as to whether DeFi really has any future.</p>
<p>There are predictions the cryptocurrency market, having lost more than half its value in the first six months of 2022, could collapse further – or be on the point of a rebound. This speaks to that fact that crypto is great for gambling, but still lousy as usable currency. It lacks other useful attributes too. </p>
<p>To assess DeFi’s prospects, it is useful to consider how finance became centralised in the first place. </p>
<h2>Origins of money</h2>
<p>Money is a feature of increasingly sophisticated human networks. When we lived as bands of hunter-gatherers there was little need for it. One could keep an informal tally of favours owed.</p>
<p>With the greater complexity of settled communities, in which people specialised in activities matching their skills and preferences, the barter system became the norm. </p>
<p>But barter required a double coincidence of wants. Someone who had excess food and wanted help building a home had to find a hungry builder. They then needed to haggle over how many hours labour was a fair exchange for a meal.</p>
<p>So “money” was invented. </p>
<p>Money could be shells or some useful storable good. It could be a tally of debts safely recorded somewhere (the earliest forms of writing, dating from 3000 BC, were <a href="https://www.archaeology.org/issues/213-1605/features/4326-cuneiform-the-world-s-oldest-writing">cuneiform</a> financial records). Then came human-made tokens, which led to coins <a href="http://rg.ancients.info/lion/article.html">of rare metals</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=333&fit=crop&dpr=1 600w, https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=333&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=333&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=418&fit=crop&dpr=1 754w, https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=418&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/438152/original/file-20211216-15-9tevib.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=418&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">So-called ‘spade money’, a hybrid between weeding tools used for barter and stylised objects used as money, emerged in ancient China about 3,000 years ago.</span>
<span class="attribution"><span class="source">Davidhartill/Wikimedia Commons</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Banking’s origins</h2>
<p>Money meant people could save the rewards of their labour, and lend it to others. But bringing together lenders with borrowers, and assuring the lenders the borrowers would repay, was a challenge. This is why banks developed. </p>
<p>Banks didn’t just issue a convenient form of money in the form of coins and notes. They also provided four basic banking services:</p>
<ul>
<li><p><strong>bundling:</strong> by gathering a lot of small deposits, they could make large loans</p></li>
<li><p><strong>diversification:</strong> by lending to a range of borrowers, one default mattered much less</p></li>
<li><p><strong>risk assessment:</strong> specialised skills in assessing trustworthiness reduced defaults </p></li>
<li><p>maturity transformation: they could offer loans for longer periods than most depositers wanted to keep their money in the bank.</p></li>
</ul>
<p>The oldest bank still operating today is Italy’s <a href="https://www.gruppomps.it/en/about-us/history.html">Monte dei Paschi di Siena</a>, founded in 1472. </p>
<figure class="align-center ">
<img alt="The headquarters of the Banca Monte dei Paschi di Siena, in Siena, Italy." src="https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/468887/original/file-20220615-17-mupsdz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The headquarters of the Banca Monte dei Paschi di Siena, in Siena, Italy.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Addressing problems with banks</h2>
<p>But private banks with their own currencies was not a stable system. So-called “bank runs” occurred when depositors lost confidence in a bank and sought to withdraw their funds. When a bank was unable to redeem all the banknotes or deposits demanded, panic ensued. </p>
<p>Bank runs were often contagious. People found it hard to distinguish whether a bank had an idiosyncratic problem (such as a fraudulent manager) or was suffering from a general problem (such as an economic downturn leading to bad debts). A run on one bank would often trigger runs on others. </p>
<figure class="align-center ">
<img alt="Police keep order during a run on the Adolf Mandel Bank in New York City, February 16 1912." src="https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=432&fit=crop&dpr=1 600w, https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=432&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=432&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=543&fit=crop&dpr=1 754w, https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=543&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/471987/original/file-20220701-5543-3m5byj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=543&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Police keep order during a run on the Adolf Mandel Bank in New York City, February 16 1912.</span>
<span class="attribution"><span class="source">Everett Collection/Shutterstock</span></span>
</figcaption>
</figure>
<p>In the 20th century most countries resolved these problems by having a government-owned central bank issue currency and regulating private banks to assure depositors of their solvency. These regulations included requiring banks to keep a minimum proportion of their assets available for withdrawals and to take out deposit insurance. </p>
<h2>The movement for decentralised finance</h2>
<p>This process of bank centralisation has not been universally applauded, however. Libertarians are suspicious of the system’s reliance on government-issued monopolies and licensed banks. They dislike banks almost as much as they do governments. They regard centralised finance as both inefficient and coercive. </p>
<p>Their dream: decentralised (or disintermediated) finance, enabling transactions directly, without the need for banking intermediaries. By cutting out the “middle man”, their pitch has been, transaction costs will be lower and the power of the state over individuals curbed. </p>
<p>With the internet and block-chain technology, these dreams have launched more than <a href="https://coinmarketcap.com/">20,000 cryptocurrencies</a>, with the first, and still largest, <a href="https://www.schwab.com/learn/story/cryptocurrencies-what-are-they">being Bitcoin</a>. </p>
<figure class="align-center ">
<img alt="A Bitcoin conference in San Francisco in 2019." src="https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/471989/original/file-20220701-16-qael5c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A Bitcoin conference in San Francisco in 2019.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>The ‘decentralisation illusion’</h2>
<p>But as the massive losses within the cryptocurrency markets in recent months demonstrate, DeFi has yet to prove it’s a viable alternative to the centralised banking system. It remains unclear how the four banking services discussed above can be delivered without trusted financial intermediaries.</p>
<p>Indeed, <a href="https://www.bis.org/publ/qtrpdf/r_qt2112b.pdf">according to economists</a> with the Bank of International Settlements (the central bank of central banks):</p>
<blockquote>
<p>While the main vision of DeFi’s proponents is intermediation without centralised
entities, we argue that some form of centralisation is inevitable. As such, there is a “decentralisation illusion”. </p>
</blockquote>
<h2>Few uses other than speculation</h2>
<p>As the BIS economists note, decentralised finance still has few real-economy uses. Mostly it has facilitated speculation. But what attracts speculators – wildly fluctuating prices – makes for a bad currency. </p>
<p>A salutary lesson comes from the experience of two (former) top ten cryptocurrencies, TerraUSD and its stablemate Luna. TerraUSD was supposed to a “stablecoin”, with its value pegged at US$1. That was true up to the beginning of May. By the end of May it was trading at less than 3 US cents. Over the same period Luna’s price dropped from <a href="https://coinmarketcap.com/historical/20220501/">$82</a> to <a href="https://coinmarketcap.com/historical/20220515/">0.02 US cents</a>.</p>
<p>These examples illustrate how cryptocurrencies such as Bitcoin, <a href="https://worldfinancialreview.com/what-is-bitcoins-fundamental-value/">lacking any fundamental value</a>, are speculative gambles.</p>
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Read more:
<a href="https://theconversation.com/what-is-bitcoins-fundamental-value-thats-a-good-question-171387">What is Bitcoin's fundamental value? That's a good question</a>
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<p>So central bank currencies still really have no rivals for the everyday business of buying and selling things, and are still far safer stores of value than crypto, even with inflation eroding their purchasing power.</p><img src="https://counter.theconversation.com/content/173901/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins formerly worked in the Reserve Bank of Australia and the Bank for International Settlements. </span></em></p>To assess the prospects of cryptocurrencies, it’s useful to consider how money was invented and became centralised in the first place.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1853392022-06-22T13:36:33Z2022-06-22T13:36:33ZCrypto crash: market volatility is testing investor will but crypto-enthusiasts still see a future for the asset class<figure><img src="https://images.theconversation.com/files/470141/original/file-20220621-15-gj9nrl.jpg?ixlib=rb-1.1.0&rect=37%2C9%2C6193%2C4119&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Significant losses have caused a crypto market exodus, but for how long?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bitcoin-coin-on-background-smartphone-screen-2101596688">Andrey Gorgots/Shutterstock</a></span></figcaption></figure><p>Bitcoin, the original cryptocurrency, remains a bellweather for the sector. It hit an <a href="https://www.statista.com/statistics/326707/bitcoin-price-index/">all-time high</a> of more than US$68,000 (£55,600) in November 2021, when the <a href="https://www.cnbc.com/2022/06/15/bitcoin-has-lost-more-than-50percent-of-its-value-this-year-what-to-know.html">overall value</a> of the cryptocurrency market was close to US$3 trillion. In the months since, however, most major cryptocurrencies have fallen by more 70% and bitcoin itself has dropped below US$18,000. </p>
<p>Is this just another crash in the volatile cryptocurrency market, or is this the beginning of the end for this alternative asset class?</p>
<p>When bitcoin was first introduced in early 2009, it was a new type of asset. While trading was thin initially, price appreciation drove its value to nearly US$20,000 in <a href="https://www.coindesk.com/markets/2017/12/29/from-900-to-20000-bitcoins-historic-2017-price-run-revisited/">late 2017</a>. This happened as more retail investors were drawn to cryptocurrencies as a supposed <a href="https://www.sciencedirect.com/science/article/pii/S1057521918307622?casa_token=WBgIQBZKIEsAAAAA:nBaHn8TXmikh2P-fkSt1JvFJyKOW2JGhm7BO9WgppxNgc9UeaKj517cunUdUmLYvE8Jz-1qJgl-q">hedge or safe-haven</a> versus other asset classes. </p>
<p>And as the market grew, so too did the range of investment opportunities. Futures and options – financial contracts to buy or sell an asset or security at a specific price or date – are a common hedging tool used in other markets such as oil or the stock market. In December 2017, the first bitcoin futures on a regulated exchange were <a href="https://www.theguardian.com/technology/2017/dec/11/bitcoin-makes-debut-futures-market-cboe-chicago-board-options-exchange#:%7E:text=The%20first%2Dever%20bitcoin%20future,the%20Chicago%20Board%20Options%20Exchange.">listed</a> by the Chicago Board Options Exchange. Bitcoin options followed on the <a href="https://www.cmegroup.com/media-room/press-releases/2019/11/12/cme_group_announcesjan132020launchforbitcoinoptions.html">Chicago Mercantile Exchange</a> in January 2020. This period of expansion was topped by the launch of the first <a href="https://theconversation.com/bitcoin-why-its-value-has-rocketed-once-again-170396">bitcoin exchange-traded fund</a> (ETF) in October 2021, providing investors with exposure to bitcoin without having to buy it on a crypto exchange. </p>
<h2>Growing crypto acceptance</h2>
<p>At the same time, the traditional financial sector was becoming increasingly accepting of cryptocurrencies as a legitimate asset class. A <a href="https://www.fidelitydigitalassets.com/research-and-insights/fidelity-digital-assets-2021-institutional-investor-digital-assets-study">2021 study</a> of institutional investors found seven in 10 expected to buy or invest in digital assets in the future. This combination of maturity and acceptance, however, also increased the correlation between the stock market and cryptocurrencies, leading to a decline in their <a href="https://www.sciencedirect.com/science/article/pii/S1544612320304244">safe-haven</a> properties.</p>
<p>Bitcoin was <a href="https://www.sciencedirect.com/science/article/pii/S0165176518300041?casa_token=ek-p2N0GrCcAAAAA:db-abkf9sQz-sm746gCnLil9CFr__TBqcJcQtOk7pVstb5yD0K4xmZBP8bVkaRhpVEDRJonR_A">fairly disconnected</a> from traditional financial markets in its early days. But as it became “just another asset”, the sector <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612322002380">began to be affected</a> by the same macroeconomic factors that influence traditional markets. The US Federal Reserve’s decision to <a href="https://time.com/nextadvisor/banking/savings/latest-fed-rate-hike-silver-lining-for-savers/">raise interest rates</a> by 0.75% in June to combat growing inflation, the ongoing war in Ukraine, and the subsequent <a href="https://theconversation.com/oil-why-higher-prices-will-complicate-the-energy-transition-157199">rise in oil prices</a> have all acted as a drag on cryptocurrencies in recent months. Moves to <a href="https://time.com/nextadvisor/investing/cryptocurrency/biden-executive-order-crypto-expert-reaction/">regulate the sector</a> have also had an impact.</p>
<p>But it isn’t only macroeconomic factors that have caused this crypto downturn. In May and June this year, stablecoin <a href="https://theconversation.com/cryptocurrencies-why-theyve-crashed-and-what-it-could-mean-for-their-future-183048">values plummetted</a>, major cryptocurrency exchange Binance paused bitcoin withdrawals due to a <a href="https://fortune.com/2022/06/13/binance-pauses-bitcoin-withdrawals-changpeng-cz-zhao/">“stuck transaction”</a>, and lending platform Celsius Network <a href="https://www.reuters.com/technology/crypto-firm-celsius-pauses-all-transfers-withdrawals-between-accounts-2022-06-13/">froze withdrawals and transfers</a> citing “extreme” market conditions.</p>
<p>Amid this disruption, users of public blockchain platform Solana have reportedly voted to <a href="https://www.coindesk.com/tech/2022/06/19/solana-defi-platform-votes-to-control-whale-account-in-bid-to-avoid-liquidation-chaos/">temporarily take control</a> of a so-called “<a href="https://www.investopedia.com/terms/b/bitcoin-whale.asp">whale</a>” account – the platform’s largest at around US$20 million – to stop the account owner liquidating its positions and driving prices down even further. </p>
<p>Together, these factors have caused investor confidence to drain from the sector. The <a href="https://alternative.me/crypto/fear-and-greed-index/">Crypto Fear & Greed Index</a> is almost at an all-time-low of 9/100, which indicates “extreme fear”. The index was at 75/100 when bitcoin reached its November 2021 high.</p>
<h2>The crypto outlook</h2>
<p>So what does the future hold for this alternative asset class? As can only be expected in the cryptocurrency ecosystem, the range of views is extreme. Some see this market correction as a great time to “<a href="https://www.forbes.com/uk/advisor/investing/cryptocurrency/crypto-market-crash-is-it-the-right-time-to-buy-the-dip/">buy the dip</a>”. Others believe this is the <a href="https://www.wsj.com/articles/the-crypto-party-is-over-11655524807">end of the party</a> for cryptocurrencies.</p>
<p>Resolute bitcoiners can always find positive signs in the market and many use on-chain metrics (trading signals based on data gleaned from public blockchain transactions) to determine good times to buy. Recently, popular metrics including market value to realised value (MVRV – a ratio showing current versus average coin prices) <a href="https://cointelegraph.com/news/bitcoin-critics-say-btc-price-is-going-to-0-this-time-but-these-3-signals-suggest-otherwise">suggest</a> bitcoin is about to start an accumulation period based on past history. On the other hand, this may be an indication of confirmation bias as investors search for signals that confirm their beliefs.</p>
<p>Others argue this is just one more instance in a long line of <a href="https://www.sciencedirect.com/science/article/pii/S1544612317307419">bursting cryptocurrency bubbles</a> – a typical crypto market cycle. Comparisons with the <a href="https://www.cnbc.com/video/2022/06/13/bitcoin-crashes-15percent-celsius-halts-withdrawals-and-cryptos-dot-com-bubble-cnbc-crypto-world.html">dotcom crash</a> of 2000 have been rife in the market, but crypto enthusiasts argue the basic premise of dotcom stocks was correct – in that the internet <em>was</em> the future. They believe the same is true of <a href="https://www.forbes.com/sites/davidbirch/2022/06/19/if-the-crypto-crash-is-another-tulip-bubble-that-is-really-good-news/?sh=34d70a6951f1">bitcoin</a>, predicting that the sector will recover. </p>
<p>Economists have <a href="https://books.google.ie/books?hl=en&lr=&id=muI3AQAAMAAJ&oi=fnd&pg=PA13&dq=extraordinary+popular+delusions&ots=XrXWcBF8Pu&sig=Vg_YVS_p3WuLqXx4_SUk3F0mgjo&redir_esc=y#v=onepage&q=extraordinary%20popular%20delusions&f=false">studied bubbles for centuries</a>, however, and evidence shows many assets never recover nominal price highs after the market bubble bursts. Some of these economists, including former US secretary of labor Robert Reich, <a href="https://www.theguardian.com/technology/commentisfree/2022/jun/19/the-crypto-crash-all-ponzi-schemes-topple-eventually">have equated</a> cryptocurrencies to <a href="https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme">Ponzi schemes</a> that, unless regulated, will go the way of all such schemes and eventually collapse. </p>
<p>Certainly, the vision of cryptocurrencies as a decentralised asset available on a peer-to-peer network with no barriers to entry goes against recent actions such as the freezing of withdrawals by some platforms. These moves will not go down well with crypto-enthusiasts. Further, the increased correlation of cryptocurrencies to other asset classes is diminishing their value as a diversification tool, while growing interest in <a href="https://www.sciencedirect.com/science/article/pii/S0040162522002414">Central Bank Digital Currencies</a> threatens to further erode crypto’s attractiveness to its core investors. </p>
<p>Cryptocurrencies also face <a href="https://www.nature.com/articles/d41586-022-00927-5">challenges</a> around <a href="https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:%7E:text=But%20crypto%20has%20a%20dirty,of%20Argentina%2C%20population%2045%20million.">energy use</a>, privacy and <a href="https://online.maryville.edu/blog/blockchain-and-bitcoin-cyber-security-risks/">security</a>. It is not clear if these issues can be solved without eroding the elements that made cryptocurrencies popular in the first place. The recent US launch of a <a href="https://www.cnbc.com/2022/06/18/bitcoin-price-drops-below-18600-as-sell-off-accelerates.html">short Bitcoin ETF</a>, which enables investors to gain from declines in the bitcoin price, will allow investors to hedge their positions and trade against bitcoin.</p>
<p>Investing in cryptocurrencies is like riding a rollercoaster with large appreciations followed by sudden dips. Volatility is endemic, bubbles and crashes are commonplace, and there are divisive opinions on environmental, ethical and social benefits. The major correction in this market has tested the will of even the most avid crypto-enthusiast. Buckle up because this story is not over yet.</p><img src="https://counter.theconversation.com/content/185339/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p><p class="fine-print"><em><span>Brian Lucey holds approx €5 worth of cryptocurrencies. It used to be more....</span></em></p>Are we witnessing the beginning of the end for crypto or is this just another crash in a volatile market?Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingBrian Lucey, Professor of International Finance and Commodities, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.