Cryptocurrency 101: What you need to know about the controversial currency

Cryptocurrency (crypto) is one of the more controversial financial experiments of the 21st century. Its supporters note its potentially strong return on investment and its adherence to utopian philosophies, while its skeptics believe it’s a dangerous investment with no use in the real world.

Since its mainstream adoption, the cryptocurrency market has been volatile and routinely gone through boom-and-bust cycles. Right now, it has a low valuation after the market crashed in 2022 and continued to receive blows through 2023. Some of these setbacks include the closure of two major crypto-friendly banks earlier this year and mass layoffs at Binance, crypto’s largest exchange platform, amid regulatory probes. However, the market has shown signs of bouncing back due to global macroeconomic situations and cooling rates of inflation.

If you’re still scratching your head at what exactly crypto is, why it’s controversial, where it’s heading and if it’s still a solid investment, we have the answers for you.

What is crypto, anyway?

Most of us have heard of crypto, but its inner workings can seem confusing. An article published by Britannica Money defines cryptocurrencies as digital assets that use a technology known as the blockchain to record, verify and execute transactions.

Crypto differs from conventional money. Fiat currency is the main form of currency in today’s world. Fiat currency is legal tender, backed, controlled and printed by a nation’s government, which contrasts with crypto, which seeks to create a decentralized currency free of control from any authority.

Much of the confusion surrounding crypto is related to the blockchain concept. According to Investopedia, a blockchain is a shared database that records every crypto transaction permanently. It functions broadly like a public ledger or permanent record-keeping system that logs all crypto transactions. Anyone can view a blockchain, theoretically making crypto a decentralized, freely controlled currency.

To purchase a cryptocurrency for either exchange or investment, an individual must spend legal tender, such as the Canadian dollar, to place a cryptocurrency in what is known as a wallet.

What are the controversies?

Crypto is not without its share of critics. Business magnate and billionaire Warren Buffett called Bitcoin, the first cryptocurrency, “probably rat poison squared.” To Buffett, a critical problem with crypto is that it is speculative and not backed by anything with real-world value. This is echoed in a report by the investment firm Starkiller Capital, explaining that crypto has no intrinsic value and investments rely solely on market fluctuations to earn profit.

Beyond finances, some of the criticism concerns the blockchain itself. According to some sources, blockchains can have major security vulnerabilities because they are irreversible, and any cybercrime is irreversible and permanent.

Besides blockchain security concerns, the currency is particularly vulnerable to other cybercrime, including ransomware attacks, issues with crypto wallet security and scams. In the first half of 2023, crypto-related cybercrime amounted to $600 million in direct loss to crypto users.

Cryptocurrency has also been criticized for its environmental impact. PC Magazine reported that a single Bitcoin transaction emits nearly 1090 kg of carbon dioxide, creates roughly 290 grams of electronic waste and uses about 2,290 kWh of electrical energy. That is the equivalent carbon footprint of more than 180,000 hours of YouTube videos, the e-waste of more than one iPhone and the electrical energy used by an average US household in about 80 days. In other words, cryptocurrency transactions emit more fossil fuels and use more electricity than some countries do in an entire year.

An uncertain future?

Experts are divided on the future of cryptocurrency. Some believe that recent events signal the collapse of the crypto market, while others believe the low period is a sign of crypto’s regular boom-and-bust cycle. Although prominent cryptocurrencies such as Bitcoin have rebounded as much as 83 per cent in 2023, countries like China are beginning to ban crypto outright. Other authorities are simply calling for stricter regulatory oversight.

 If cryptocurrency is here to stay, there are some challenges it needs to overcome. Proponents may call these growing pains, but critics call them fundamental flaws. Aside from the ongoing debate, if crypto continues to grow, these currencies must adapt to further regulatory oversight, better security hygiene and a lower environmental footprint.

Whether or not it’s still a solid investment is also open for debate. Christopher Liew, a CFA charterholder and financial writer, recommends investing in crypto only if you have extra money you’re comfortable potentially losing. Crypto is an unpredictable and volatile market that offers high rewards but entails high risk. Ultimately, it’s best to choose an investment you feel confident and comfortable with instead of just going with the newest and trendiest thing. After all, who knows what the market will be like in the next month, week, day or even the next minute.