Actress and social media influencer Gwyneth Paltrow promotes it. American rapper Snoop Dog hypes it. And Elon Musk now allows use of it to purchase a Tesla.
So why the interest in cryptocurrencies like Bitcoin, Ethereum and Dogecoin? We are a cash-based society where trust in governments and their ability to manage money and its value is waning.
Governments are no longer limited by physical commodities like gold in determining how much currency they can print, opening the doors to devaluation and inflation. Other monetary policies — like the setting of interest rates — can be equally damaging, incentivizing a search for alternatives to hard cash.
Supply and demand issues can also affect currency values — the proverbial “too much money chasing too few goods” scenario. New money created to combat COVID-19 and financially assist individuals and businesses has resulted in more inflationary pressure. Twenty per cent of all U.S. dollars in circulation were created in 2020 alone.
Unlike conventional currencies, cryptocurrencies each have a pre-defined number of coins that can be created — 21 million for Bitcoin. Bitcoin, the first cryptocurrency, was reportedly created by pseudonymous Satoshi Nakamoto as a peer-to-peer electronic digital cash system in 2008. Nakamoto’s net worth is an estimated $73 billion. Who is Nakamoto? Nobody knows.
Crypto miners create new cryptocurrencies , a highly complex process. It’s not done with a shovel or pickaxe, but massive computing power which create value by solving complex math problems. Success allows a miner access to the blockchain. Created by Nakamoto, the blockchain is a data base that guarantees the security of transactions and creates trust. Without blockchains, there would be no cryptocurrencies.
So how do you do it? First, determine if there could be a market for a new cryptocurrency. Will it be used for general purposes like Bitcoin, or for a particular retailer to accept as payment? Canadian retailers Birks, national auto dealership HGregoire and Toronto Brewing all accept crypto payments. Even Walmart is rumoured to be launching its own cryptocurrency.
Next, convince the cryptocurrency community the coin will be widely accepted and trustworthy to transact with or use as a store of value. Tom Brady and Gisele Bündchen, Paris Hilton, Matt Damon and other celebs are being paid handsomely to promote the security and benefits of cryptocurrencies.
Now comes the technical part: Determine which blockchain will be used to market the cryptocurrency.
Blockchains contain secured blocks of data linked in a “chain” to a large group of connected computers, each having an exact copy of a ledger referenced to confirm crypto transactions and verify every transaction. Should any computer in the chain disagree with any of the others in the blockchain, the transaction will be rejected. The system is virtually foolproof.
Each cryptocurrency has a pre-determined limit of how many will ever be produced (typically fewer than 10 million). This must be decided before creating the very first crypto-coin. As of January, there are 18.9 million Bitcoins in circulation.
The new coin requires an initial value and the number of decimal places it will have. Most coins have two; Bitcoin has eight. This accommodates paying for small purchases, like a $5 cup of coffee from Starbucks, using a single coin valued in thousands of dollars.
The final step before initiating the first trade is selecting a cryptocurrency exchange that will handle transactions and trading for the new coin that can be purchased using conventional currencies or other cryptocurrencies.
Crypto exchanges and bridges linking blockchains are frequently targeted by cybercriminals. When asked why he robbed banks, Willie Sutton said: “Because that’s where the money is.” So it is with crypto exchanges.
Finally, it’s time to open accounts for customers who will accept payment using the new coin. The new coin is live after the first transaction occurs.
The market value of a cryptocurrency is based on a number of factors. Increased demand requires more coins to be mined (up to the initially predetermined limit) creating increased availability. They are highly sought after because they are fungible, limited in supply, durable, transferable and easily divisible. The value of a cryptocurrency is determined by the price people are willing to pay. Limited availability contributes greatly to establishing value.
There are a number of reasons why cryptocurrencies are becoming the currency of choice.
Anonymity of transacting in cryptocurrencies is sought after by those who engage in illegal transactions. And there are fewer devaluation and inflation risks associated with cryptocurrencies due to how many cryptocoins can ever be produced.
Trading and investing in cryptocurrencies can produce staggering results. From its initial value of just over one cent, Bitcoin rocketed to its high of US$65,466.84 on Nov. 8, 2021 — a 654,659,900 per cent increase. Anyone who purchased Bitcoin at its November peak and still held it on Feb. 2 suffered a 43 per cent drop in value to US$37,270 in three months. Many brokers have gone bankrupt or absconded with clients’ funds. Crypto exchanges and bridges linking blockchains are frequently targeted by cybercriminals.
When asked why he robbed banks, Willie Sutton said: “Because that’s where the money is.” So it is with crypto exchanges.
Other cryptocurrencies have evaporated to little or no value with no recourse for losses. Cryptocurrency trades or purchases are taxable and tax departments are seeking ways to track those transactions. Governments are entering the cryptocurrency game by creating Central Bank Digital Currencies (CBDC).
Like today’s currency system in which governments promise our currencies are safe, CBDC’s will also be backed by government guarantees. Governments argue CBDCs will reduce transaction timelines and costs, provide a means to monitor the Dark Web and cryptocurrency black markets and, theoretically, contribute to the decentralization of global financial systems. Given their history of transacting in cryptocurrencies, this is an interesting initiative by governments globally, possibly undertaken to ensure they maintain control over all forms of global currencies, including crypto.
A recent CNBC report revealed that in the U.S., five out of 10 Millennial millionaires have allocated more than 50 per cent of their wealth into Bitcoin and other cryptocurrencies, versus GenXers at 25 per cent and Baby Boomers at four per cent. NFL superstar Aaron Rodgers and other players have negotiated all or part of their future salaries to be paid in cryptocurrencies.
Given the fluctuations in cryptocurrency valuations, are the risks worth the investment? Time will tell.
Chris Kayser is a cybercriminologist and founder, president & CEO of Cybercrime Analytics Inc. He is the author of two books: Cybercrime through Social Engineering – The New Global Crisis and How to Master an Online Degree – A Guide to Success.” He can be reached at firstname.lastname@example.org, or www.cybercrimeanalytics.com.