Cryptocurrencies and Blockchain Explained

Simply put, Bitcoin and similar cryptocurrencies are “mined” by fast computers (or servers) that run algorithms 24/7. When an algorithm successfully solves a given mathematical puzzle, a new Bitcoin is unlocked, and the value is credited to the miner. These “mines” can be massive enterprises. One analysis found that a firm called Bitfarms was, at one time, generating over $300,000 in gross profit daily from such an operation.

Nearly all of the world’s significant cryptocurrency wealth is held by a relatively small number of people—most of whom got in on the ground floor. However, regardless of whether an investor holds large quantities of cryptocurrencies or only a minor amount, the risks are immense. Cryptocurrencies are generally unregulated and there is little to no transparency regarding the exchanges that make it easy to purchase and trade them. This shaky foundation imploded in 2022 when crypto values plummeted, and many related firms collapsed. Crypto lenders such as Genesis went belly-up, and bankruptcy was filed by major exchanges including FTX and BlockFi. While the final outcome of these business failures remains to be seen, account holders and creditors may suffer immense losses. FTX’s founder is accused of massive fraud.

On a global basis, crypto mining activity is eating up enough electricity to power an entire nation of modest population size. It’s ironic that many young consumers who lean towards green products and sustainability are, at the same time, big boosters of and investors in power-hungry cryptocurrencies.

In fact, this mining of cryptocurrencies like Bitcoin is extremely dubious from an ecological point of view, despite the fact that mine owners are attempting to locate in areas with low energy costs and reduced-emission generation infrastructure. Servers guzzle electricity.

Blockchain Technology Enables Cryptocurrencies

Blockchain software makes it possible for groups to share, track and store data. It works on an open source, decentralized, peer-to-peer data communication basis. In other words, it is not controlled by government agencies or central banks, which encouraged entrepreneurs to utilize it as a way to store and transfer wealth. Blockchain tracks and links transactions in “chains,” which are verified cryptographically into lists (known as “blocks”). The result is a consistently verifiable record of when and how transactions occurred, and thereby which account holds what assets as of a certain date. Blockchain is the technology that records ownership of Bitcoin and similar cryptocurrencies. Assuming that the system or network hosting the blockchain is secure (which is not always the case), there is potential here to increase efficiencies. An open-source collaborative known as Hyperledger (associated with the Linux Foundation) encourages the use of blockchain in a wide variety of industries beyond the financial sector, such as manufacturing and distribution. Hyperledger envisions blockchain used in advanced industrial and information systems in order to create “smart contracts and other assistive technologies.”

Until 2019, China was the world’s largest operator of crypto mines by far—one analysis found that China was, at one time, generating 75% of all Bitcoins. However, China’s government is attempting to inhibit mining in response to this immense power drain in a nation that is still generating much of its electricity from plants that are burning coal under very dirty, undesirable conditions. Much, but not all, of China’s crypto mining was done in regions with significant levels of clean, hydroelectric power.

Cryptocurrency fans often consider crypto and blockchain technologies to be revolutionary. In fact, the nickname DeFi, a popular nickname for this sector, (which stands for decentralized finance) sounds a lot like “defiance.” Crypto can be universal in nature (not controlled by any one institution), cross-border (not controlled by any one nation) and theoretically transparent in operation.

At the same time, however, crypto is unfortunately subject to vast losses to hacking and account takeover. Recent hacks of cryptocurrency accounts include incidents such as the 2022 Ronin Network heist totaling $614 million, the Coincheck hack of 2018 totaling $547 million and the 2021 Poly Network hack totaling $611 million. Funds are sometimes recovered—and sometimes not. A single hack may enable a thief to access the assets of thousands of users at once.

Since cryptocurrencies are virtual—exist only in the cloud, they are accessed and controlled only by the account owner’s username and password. The true identity of the account owner is generally not recorded or known, and the password or key to an account is vital for accessing its assets. There have been multiple stories of users who have lost their account information and therefore their assets, sometimes in the millions of dollars.

Cryptocurrencies have not only been popular with millennials and people looking for alternative investments. They have also been wildly popular with thieves, crooks and scammers. For example, they are the preferred method of payment for perpetrators of computer network ransomware—the practice whereby thieves, often located in Russia or North Korea, remotely lockup (encrypt) computer operations, even those of massive enterprises like hospitals and electric utilities, and hand over the decryption keys only after they have been paid off—sometimes to the tune of multiple millions of dollars in cryptocurrency.

Over the mid- to long-term, we are likely to see more than a few governments and national treasuries around the world experiment with issuing their own versions of digital currencies. China is already a pioneer with its e-CNY or digital yuan. The goal will be to speed up certain types of trading, investing and payments, through digitization. However, to be successful and meaningful, such digital currencies will have to backed by the full faith and credit of the governments that issue them. In addition, proof of ownership and the identification of the parties to a digital transaction are likely to be streamlined.

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