Cryptocurrency has perhaps become the most-hyped technology since the advent of the internet. When considering buying an asset, however, one must look beyond the excitement and go over its fundamentals. The cryptocurrency market has none: almost all of its value is propped up by speculation because it has no underlying utility.
Younger people are often less trustful of traditional avenues of investment and more drawn towards new and exciting ways to make money, which is understandable. I am concerned, however, that my peers will put too much faith into this technology and lose out, because I believe that cryptocurrencies can lead to compulsive behaviors, will eventually crash in value and create harmful pollution and electronic waste (e-waste).
Bitcoin, the world’s first cryptocurrency, was created in 2009. The technology was designed to be an easy way to transfer money without the interference of the government or centralized banks. Cryptocurrencies use a technology called the blockchain to verify transactions, where every user has a ledger containing a record of who owns how much. When a transaction is made, it is sent to miners who compete to confirm said transaction. Miners who are faster to verify and place it on the ledger are rewarded with newly minted coins.
Cryptocurrency is particularly popular with young people: according to Pew Research about 16% of American adults now own or have owned cryptocurrency, but that number jumps to 31% among people aged 18-29. Trading cryptocurrency for a teenager is as easy as downloading an app like Robinhood on their smartphone and linking a credit card. The thrill of gambling combined with push notifications and other triggers in the app can lead to addiction. Additionally, a cacophony of social media posts praising cryptocurrency can create the impression that everyone around you is making money but you are missing out. Organizations are beginning to recognize and treat cryptocurrency addiction like other forms of gambling addiction.
Even when used “responsibly” cryptocurrency is an all around bad investment. Proponents of cryptocurrency argue that it is both a safe store of value, like gold, and a replacement for fiat currency, like the dollar, when actually it is neither. Cryptocurrency isn’t a useful store of value because it is unstable and heavily correlated with existing markets. The reason that people buy precious metals such as gold, is because their values stay relatively static, or even increase, during market upheavals. Cryptocurrency, however, fluctuates wildly. Between November 2021 and January 2022, for instance, Bitcoin lost nearly half of its value. Not only does cryptocurrency fluctuate, but, according to Bloomberg, it fluctuates in increasingly strong correlation with existing markets such as the NASDAQ and S&P 500. There is no point in buying Bitcoin if it is merely a more unstable iteration of the NASDAQ.
Because of Bitcoin’s instability, it will never come to replace the dollar. Even Tesla, a company trying to come across to consumers as Bitcoin-friendly, understands its extreme riskiness. If you buy a Tesla with Bitcoin as opposed to dollars, and need to return the car, Tesla can choose which currency, Bitcoin or dollars, to refund you with. This means that if Bitcoin loses value like it did this winter, you are going to be paid back in Bitcoin and lose half of your money. If Bitcoin soars, as it did last fall, you will likely be paid back in the car’s dollar value and gain nothing. This policy is driven by Tesla’s fear of Bitcoin’s instability; the company doesn’t really trust Bitcoin the way it trusts the dollar, and neither should you. Long-term financial contracts such as warranties and debts are unfeasible with a currency that can collapse or skyrocket at a moment’s notice.
When investors flock to a product that has few real life applications it is called a speculative bubble. The bubble eventually bursts when investors realize the product’s lack of usefulness. This is something the American public has learned the hard way, with the dot-com bubble of the year 2000, the subprime mortgage crisis of 2008 and perhaps the cryptocurrency collapse of 2022.
New investors may also be unaware of cryptocurrency’s ecological impact. Cryptocurrency mining, the way that new cryptocurrency is created, is wasteful by design. Miners compete with each other to solve exceedingly complex puzzles, which reward the digital coins. The more miners on the network, the harder the puzzles, which means that nowadays miners are resorting to buying warehouses full of power-hungry computers to be able to compete. The energy powering the computers primarily comes from damaging fossil fuels, which contribute to the climate crisis. This puzzle-solving is integral to the blockchain systems that cryptocurrencies use, because it is what verifies transactions between users.
According to The New York Times Bitcoin alone now uses seven times as much electricity annually as all of Google’s operations, a service that provides much more value to consumers. Bitcoin also uses 1.25 times as much power each year as the entire nation of Pakistan, a country of 216 million. While some of this energy, (it’s hard to say how much), comes from renewable sources, the majority comes from fossil fuels. Refraining from using cryptocurrency would be an easy way to conserve millions of barrels of oil each year.
Additionally, cryptocurrency creates a massive amount of e-waste from the specialized computers used for mining. Roughly every 1.5 years the computers, which can only be used for cryptocurrency mining, become obsolete and are thrown away. This means that, according to The Guardian, every transaction made using Bitcoin is like throwing away two iPhone 12s. Most members of the climate-conscious Generation Z wouldn’t invest in the technology if they understood the magnitude of its environmental impact. Young people need to spread the word about cryptocurrencies’ massive energy and e-waste usage and suggest to investors in the technology that they do more research.
It is completely fair that young people would be skeptical of a stock market run by the old and rich, but cryptocurrency is not a realistic way to build wealth. ‘Meme coins’ such as Dogecoin and even supposedly respectable cryptocurrencies such as Bitcoin are extremely volatile and have the potential to wipe out a young, inexperienced investor’s portfolio. Investors would be better off saving their money if they don’t want to buy into the traditional stock market.
Photo: “2014 Copper and Silver ShibeMint Coins representing Dogecoin” by James Tamim is licensed under CC BY-SA 4.0
