Understanding Crypto

Understanding Crypto


Image source: The Motley Fool


The word crypto seems to be just thrown around these days without much context. We hear people talking about it and see it on front-page headlines, so presumably ‘crypto’ has some significance to our lives. But what exactly is crypto, how does it work, and what are its implications in the financial realm? 


In short, crypto is an umbrella term that encompasses all the financial transaction systems that process monetary proceedings in a decentralized manner. Some well-known cryptocurrencies include Bitcoin, Ethereum, Dogecoin, and Tether. When users send money using these currencies, there are no centralized authorities that oversee these transactions. Rather, a network of machines all over the world work together to affirm these exchanges in a system called the blockchain, which is essentially a virtual ledger that keeps track of all processes made. The blockchain is an extraordinarily intricate system that relies upon a continuously growing list of financial records to be verified using a peer-to-peer network. Because of this complex process, it guarantees security in transactions as it is nearly impossible to hack into the system or to change the financial records on a transaction because of its dependence on thousands of machines in crypto mining. 


One can view this growing dependence on cryptocurrencies as an either environmentally disastrous or revolutionary trend within the financial world. Although the effectiveness of crypto transactions seems promising at first, the hours saved don’t come without a cost. The process of crypto-mining (the verification of transactions by thousands of computers across the world) is incredibly energy intensive, consuming between 120 and 240 billion kilowatt-hours per year, a range that exceeds the total annual electricity usage of many countries, such as Argentina or Australia. This energy expenditure adds to the already increasing levels of carbon emissions that accelerate global warming, and has captured the attention of many climate activists. 


However, one could also argue that the significant increase in efficiency brought about by crypto transactions outweighs the cost of contributing to global warming. Crypto transactions render the need of a middleman unnecessary, allowing wire transfers to be completed in mere seconds regardless of how large the sum is; on the other hand, it could take up to days for other platforms such as paypal to execute such a transaction. 


The increased efficiency and security that crypto offers has not only interested companies such as Microsoft, Subway, Overstock, AT & T, but also national governments. Last year, the authoritarian government of El Salvador shocked international observers and delighted cryptocurrency enthusiasts when they adapted Bitcoin as an officially accepted form of currency (or rather forced it onto its population).                                  Source: bbc                                                                      


As for now, El Salvador’s experiment seems to have flopped. Though government officials have hailed this development as a success, the figures tell a different story. Bitcoin has lost 60% of its value since El Salvador’s adaption, and the majority of Salvadorans do not even use Bitcoins as a part of their daily spendings because they do not trust the currency. Regarding its objective to bring about financial inclusion, fisherman and farmer Jose Flore claimed that “It doesn’t benefit us poor people at all.”


While the world of finance might seem distant for us high schoolers, it is crucial for us as responsible global citizens to understand the merits and drawbacks of each emerging new development and its implications regarding the environment, politics, as well as ethics. The reverberations of these seemingly distant issues seep into every aspect of our lives more than we realize.