By Nicholas Schade ‘23
The values of various cryptocurrencies are rapidly surging, many of which breaking their all-time peaks. Bitcoin, the most popular of such currencies, is currently valued at around $57,000 and has been exponentially rising since December 2020, when it was only valued at around $19,000. With their soaring popularity, the question has been posed whether cryptocurrencies could become a common medium of exchange in the future, or if they could yield high rewards as worthwhile investments.
Cryptocurrencies are forms of online money developed with the idea that they could be used as an easily accessible method of paying for goods and services through the internet. There are currently over 6,700 different cryptocurrencies being traded in-public, some of the most widespread being Bitcoin, Ethereum and Dogecoin. All cryptocurrencies are decentralized, meaning that they are not regulated by central authorities like banks. Instead, a database called blockchain is used, which records and validates transactions through a network of various computers spread throughout the world that continuously check their own archives for accuracy.
Cryptocurrency enthusiasts tout online money as being highly secure. While individual users’ savings have been hacked, for a person to change blockchain records they would need to breach at least 51 percent of the computers on the network to make their altered transactions the majority. Another common argument is that because the value of cryptocurrencies is not controlled by banks, they can be used as a hedge against inflation.
However, there are notable flaws that bar cryptocurrencies from being used as a legitimate means of payment. A prominent aspect of all online currencies is their volatility, meaning their sporadic and constantly changing market value. In December 2017 Bitcoin traded at $20,000 a coin, but before picking up steam once more traded as low as $3,200 in 2018 and 2019. Sudden value changes like those displayed with Bitcoin can make it difficult for businesses to establish a reasonable price for their products. With Bitcoin’s drastically rising value it has been noted that its volatility could decrease in the future, allowing it to become a widespread medium of exchange. “It gets less risky the higher it goes … which is the opposite of most stocks,” explained Bill Miller, President of the non-profit American Gaming Association.
In their current state, Bitcoin and other online monies have gained more traction as profitable trades than they have as a form of currency. Similar to stocks, the values of cryptocurrencies are often driven upwards by speculation. These are trades that hold the possibility of losing significant value, but also the possibility of having even higher gain. Speculation is based on price fluctuations, meaning that a person would want to buy a currency when its price is lower, and hold it until they believe that its value has reached a peak. To buy cryptocurrency for trading, one can use online exchange websites like Coinbase and eToro. Cryptocurrency can be bought with any type of traditional money, though finance company Nerdwallet recommends that traders never use their credit cards to make such purchases. Exchange websites often provide free digital wallets to store the cryptocurrency that only take minutes to set up. Because buying a single “coin” for some cryptocurrencies like Bitcoin can cost more than a yearly income, it is possible to buy them in fractional shares, sometimes down to the millionth of a decimal.
Even when trading or holding cryptocurrency, there are risks to be wary of. If a trader loses the password to their online wallets they can be locked out of their savings forever, as such happened to investor Stefan Thomas who had over $220 million worth of Bitcoin stored on his computer. Unlike stocks, cryptocurrencies are also not insured by the Securities Investor Protection Corporation, and thus exchange failures or theft can be extremely devastating. Some exchange apps like Coinbase will ensure users that have been hacked, but not when they have their passwords stolen.
There are both practical uses and substantial profits to be made from using or trading cryptocurrencies. As a new technology, there is a level of uncertainty that users should be aware of, yet such risk should not dissuade eager users from investing appropriate amounts of money in cryptocurrencies.