Is the cryptocurrency craze much ado about nothing?

Bitcoin, the most popular cryptocurrency, had a market capitalization of more than $ 700 billion according to CoinMarketCap at the time of writing. In November, Bitcoin had a market capitalization of almost $ 1.3 trillion. Although the market capitalization of bitcoin is almost half of what it was a mere three months prior, it is still more than Coca Cola, Nike or McDonald’s. It is also more than the GDP of Kenya, South Africa and Portugal combined. Bitcoin has seen a huge demand over the past few years despite being highly volatile because it had a history of outperforming most major asset classes over the last ten years.

There has been immense demand for Bitcoin, NFTs and web 3.0 related decentralized assets. Are cryptocurrencies a prime example of greater fool theory? Is it a bubble that is slowly starting to burst or is there actually some genuine value in cryptocurrencies ? To truly understand Bitcoin, and other cryptocurrencies, we need to look beyond the hype and understand the fundamentals. Cryptocurrencies have many advantages, and many disadvantages associated with it. Some of the advantages include:

·        Decentralization. Cryptocurrencies are envisaged to be completely decentralized without any intermediaries. A system with cryptocurrencies eliminates the possibility of a single point of failure such as a government institution or bank.

·        Speed. Cryptocurrencies may increase the speed of financial transactions. Without the need for a third party, transactions may be processed faster.

·        Redesign. Cryptocurrencies allow us to imagine a new financial system and economic order. It promises a democratized world, where tasks are automated, transparent and wealth is more evenly distributed. In fact, the crypto space has already proven to be the gateway to poverty alleviation and financial freedom for many.

Despite what cryptocurrency evangelists will have you believe; cryptocurrencies have some disadvantages as well. Igor Makarov from the London School of Economics and Antoinette Schoar from MIT have shown:

·        Little real use. Ninety percent of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities.

·        Concentration. Currently, Bitcoin mining activity is highly concentrated. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity. This level of concentration is often found in other cryptocurrencies as well

·        Facilitates illegal transactions. The anonymity facilitates the use of cryptocurrencies for illegal transactions. However, currently, illegal transactions, scams and gambling together make up less than 3% of volume.

Despite the numerous advantages, and disadvantages of bitcoin (and other cryptocurrencies), it should be noted that this is a fluid and rapidly developing environment. Some of the issues we face today may disappear tomorrow and a few new ones may be uncovered. It really is anyone’s guess whether we are at the precipice of a financial revolution or are we about to see the bursting of the biggest bubble known to mankind.

You may also find our articles on Ethical considerations of the Metaverse and Bitcoin: The new dinar fascinating.

Allah knows best