3 cryptocurrencies and 1 change of financial paradigm

At almost every stage in the development of human society, there has been a need to exchange goods and services. Given the highly complex nature of production systems, traditional swapping stopped being useful and led to the need to use instruments that represented value and were socially accepted. From exchanging raw materials, society progressed to using paper money and, from here, the giant leap to the new challenge facing the world economy in the twenty-first century: the birth of the virtual currency; an intangible, highly volatile asset that no government body has as yet been able to control and whose potential is as immense as the questions that it raises. Bitcoin, Ethereum and Ripple are the three main cryptocurrencies that have led to a new worldwide financial paradigm.

Let’s take a closer look at them, one by one:

Bitcoin

Created in 2008, during the financial crash that took the world into a crisis that it’s still reeling from. It is issued using an open-source program where anyone can edit the software. In 2017, bitcoin reached a historical high of $20,000 per unit, although its high level of instability has led it to falls of between 20% and 50%, from which it subsequently recovers.

However, its origins are linked to organised crime. The lack of control from the authorities saw its popularity soar among the world’s criminals. In fact, its use nowadays by smugglers, sexual delinquents, money-launderers and tax evaders is a huge concern for organisations such as Europol and the FBI.

Like gold, it is a rare asset: there are only 21 million and to date around 17 million have been withdrawn. At a rate of 25 bitcoins every 10 minutes, the moment when the “magic number” is reached is getting ever closer. Its numbers are dwindling and it’s becoming more expensive to obtain bitcoins. Consequently, its price continues to rise in line with the difficulty of obtaining it.

Bitcoin capitalisation now stands at around $305 billion (more than Visa). Figures such as Kenneth Rogoff, professor of Economics and Public Policies at Harvard University, ask whether we are facing the largest bubble in the world.

Ethereum

This is the second largest cryptocurrency by capitalisation volume, reaching $ 80.5 billion. Its main difference to bitcoin is that this currency has no maximum limit.

It was created through a collective financial platform that began in August 2014, but had to wait eleven months until it was launched on to the market.

Ethereum uses the internal currency ether, the underlying decentralised cryptocurrency used to execute contracts involving Ethereum. In this regard, Ethereum is not like the majority of existing cryptocurrencies as it is not just a network that reflects monetary-value transactions, but a network that feeds Ethereum-based contracts. These open-source contracts can be used to execute a wide range of services securely, including voting systems, financial exchanges, crowdfunding platforms, intellectual property and autonomous decentralised organisations.

In 2017 Ethereum was revalued at around 10%, going from $7.35 to $723.28 per unit.

Ripple

Its capitalisation stands at $30.224 billion. This currency is based on the possibility of linking payments using trusted open networks. Its main advantage is that it does not depend on an institution that takes monetary policy decisions, but it is the participants themselves who take on this role democratically. In other words, the Ripple network is a social network service based on honour and trust between individuals. This way, the financial capital is supported on the share capital.

Like the other currencies, it is impossible to falsify or duplicate it thanks to blockchain technology, which uses a cryptosystem.

All that glitters is not “digital gold”

We need to remember that cryptocurrencies have no legal security or regulation and if a virtual wallet is stolen (the program where the cryptocurrencies are stored), there is no one to turn to. In 2014 and 2016, computer pirates hacked the Mt.Gox and Bitfinex exchanges and emptied them of 440 million euros in virtual currencies. Given this stormy episode, many investors protect their currencies by storing them in devices that have no internet connection.

According to Steve Strongin, head of investment analysis at Goldman Sachs, cryptocurrencies have no long-term staying power due to slow transaction processes, problems with security and high maintenance costs.

One particularly relevant piece of information is that each virtual currency transaction consumes a huge amount of electricity. The Digiconomist platform says that joint bitcoin and ethereum mining consumes more energy than countries such as Jordan, Iceland, Oman and Syria. Bitcoin alone uses 0.12% of the world’s electricity. Also, for each coin withdrawn, between 24 and 40 tons of CO2 are emitted into the atmosphere.

However, it seems impossible to ignore the fact that this sophisticated software grammar hides a new seam of over $245 billion, the current capitalisation of cryptocurrencies. Their increasingly more widespread use means a radical change to how economic activity is carried out, and the numerous possibilities that they offer reveal a change of role of government agencies and banking institutions.