What is blockchain technology?
The great variety of cryptocurrencies
How to buy and invest in cryptocurrencies?
Where do cryptocurrencies originate? The example of bitcoins
Cryptocurrencies (or cryptomonets) are digital assets. They are used as virtual currencies, but have no physical form. With two exceptions in the world, they are not legal tender. In fact, they are only used as a means of payment on a voluntary basis. They are a product of blockchain technology, a sophisticated evolution of cryptography, hence the prefix “crypto”.
Simplifying as much as possible, the blockchain can be defined as a kind of ledger, in which transactions relating to a certain cryptocurrency are recorded. Unlike what would happen in the case of a normal bank, the ledger is owned (in a certain sense) by everyone who participates in that network. This means that the control (and thus the reliability) of the system is not concentrated in the hands of a single authority, but rather in the hands of the entire extension of the distributed ledger. Every time a transaction takes place, in fact, a cryptographic problem is solved and the key is transmitted to all the servers, which all together contribute to recording it in the distributed ledger, the blockchain. It is precisely in the blockchain that this transaction becomes a permanent and indelible block, guaranteeing that the currency cannot be duplicated.
Cryptocurrencies are many. CoinMarketCap estimates there are over 16,000 of them on the market. The best known and the first to be created (in 2009), and currently also the one with the largest market capitalisation, is bitcoin. The importance of bitcoin is such that other cryptocurrencies have taken on the name “altcoin” (“alternative coin”). The altcoin with the largest market capitalisation is Ethereum, whose underlying technology (Ether) was also created to enable certain types of smart contracts. In third place is Tether, a “stablecoin”, i.e. a currency that anchors its value to a real asset, in this specific case the US dollar, as well as USD Coin and many other stablecoins. From third place onwards (again in terms of market capitalisation), given the volatility of individual cryptocurrencies, it is difficult to draw up a ranking that will last. Among the many other “historical” altcoins one can mention Cardano, Litecoin, Solana, EOS, Dogecoin, but also XRP, which is based on the Ripple financial transfer system, also used by some banks.
Buying cryptocurrencies is very simple and anyone can do it, either by using specialised platforms or by using an intermediary. Once purchased, cryptocurrencies are stored in a e-wallet, which can be in the form of hardware, such as external disks or memory sticks, or in the form of a software or an app. A very popular form of investment in cryptocurrencies is through the use of derivative financial products, such as futures or trusts.
Let us take a closer look at how the best-known cryptocurrency, namely bitcoin, is “produced”. Not only transactions, but also the birth of a cryptocurrency depends on solving a cryptographic problem established by an algorithm. This problem cannot be solved by just any server, as it requires considerable computing power and energy consumption. Well, the server that manages to solve the calculation is rewarded by issuing new bitcoins. This is the role of the so-called “miners”. In the case of bitcoins, the mining method - which from an IT point of view consists of a protocol for securing the asset - is called “proof of work”.
Over time, mining operations have become so complex that they require thousands of computers, which now need to be concentrated in large sheds. In addition to the energy consumed by the computing activity, there is also the energy of the ventilation systems, which are necessary to prevent the computers from overheating. According to the latest available data, bitcoin-related activity is equal to the energy consumption of the whole of Finland. According to other data, the miners would consume as much as 0.5% of the entire amount of electricity consumed each year. Without going into details, there is another, less energy-intensive mining methodology, called “proof of stake”, used for instance to generate new types of cryptocurrencies, such as Ethereum. Eventually, it is important to keep this in mind: in order to prevent the infinite production of a cryptocurrency from leading to its inflation, the mining algorithm envisages a finite amount of cryptomonecurrencies that can be generated.
Proponents of maximum network freedom consider cryptocurrencies to be one of its greatest expressions from a financial point of view. Indeed, they are not subject to a central banking authority that administers them, and their value varies based on supply and demand on the network (depending on the network’s mining capacity and the limitations imposed by the underlying algorithm). In many cases so far, investing in cryptocurrencies has meant investing in a currency not only capable of beating inflation, but also of generating profits. Moreover, the buying and selling of cryptocurrencies takes place without the need for intermediaries such as banks or credit institutions. Moreover, supporters of cryptocurrencies believe that they are faster and more efficient transfers of assets. Lastly, although they always leave a computer trace in some way, transactions do not always have to be associated with a first and last name - and supporters of privacy on the net consider this semi-anonymity an additional merit.
Cryptocurrencies are far from being without cons. The absence of a precise legal framework makes secure legal and contractual protection of users impossible. This lack of guarantees means that, in the event of theft or bankruptcy of a cryptocurrency platform, the means to resolve legal issues are not guaranteed. Moreover, the form of quasi-anonymity (some have written “pseudo-anonymity”) that cryptocurrencies guarantee has made them a rather popular tool for illegal transactions. On the fact that they are stores of value, there are then at least two solid objections. a) From the point of view of security, it is true that a cryptocurrency cannot be duplicated, but it is always possible to hack into a server on which it is stored and steal it. b) From the point of view of value preservation, they are highly volatile and very risky assets. As has often been the case, prices can halve within a few weeks as well as, in some cases, even almost go to zero. Lastly, there is the environmental issue: as mentioned above, the mining of new cryptocurrencies involves the expenditure of energy and the production of ever-increasing pollution.
To date, in 2022, only El Salvador and the Central African Republic recognise bitcoin as legal tender. In China, cryptocurrencies have been banned altogether, although the ban is still circumvented in many cases. Another 40 countries, however, have severely restricted or banned certain aspects of trading.
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