How do we understand cryptocurrencies? As an investment opportunity, a future universal currency, or something else entirely? The name itself might suggest that the original goal of cryptocurrencies is to replace existing monetary systems with a new universal technology, but the current situation and likely future developments point in a different direction. What is Blockchain, where is the value of cryptocurrencies created, and why is there such a “buzz” around it all? Miroslav Novak, a long-time investor and trader, and Jan Francik, a professional cryptocurrency miner from Glocin, spoke about this and much more at our club event.
Most of today’s cryptocurrencies are built on Blockchain technology – a potential technological revolution capable of changing the world as we know it today. In short, it is a decentralized database system that allows information to be shared in an immutable, contiguous series. Each cryptocurrency based on Blockchain technology has a finite number of units that are unique and possible due to the protocol on which it is built. The chain contains linked blocks containing unique numerical codes (called hashes*). This makes the system considered tamper-proof – immutable. Why? Every transaction – that is, the transfer of information between blocks – is recorded in the Blockchain. If you try to change a block, you won’t succeed because the correct copies of the original records of that block are scattered all over the network. The value of the Blockchain is derived from the number of nodes in the network – that is, the number of users who control payments and have a complete database of transactions stored. The current database of BitCoin transaction records today contains approximately 120 Gb of data. With each additional copy, the system is less vulnerable because there is a real comparison of potential transactions.
Cryptocurrency as we understand it today has its roots in the book Neuromancer by William Gibson. The concept was simple – information itself became a commodity. The first modern cryptocurrency was BitCoin. The first purchase with BitCoins was a pizza, the first user bought it for 10,000 BitCoins. This brings us to another important point: where does the “value” in cryptocurrencies come from, and where does it go? The current value of the entire cryptocurrency market is estimatedat $300 billion, of which BitCoin represents $134 billion. We are therefore encountering a disconnect between the essence of the name and its original purpose. The basic characteristic of a currency, in order to be used as a means of payment, is a stable exchange rate. Thanks to this, we know that a roll is worth CZK 2, we can buy a roll tomorrow with the same CZK 2, and we do not mind exchanging currency for a roll. Cryptocurrencies, however, do not have a stable exchange rate. BitCoin’s exchange rate has risen by $1,000 to $8,106 in the last five days. But over the last 12 months, the lowest value of BitCoin was only $1,100, and the highest was over $19,000 per BitCoin. Its price goes through a cycle every year, with a peak before Christmas and then a correction during the spring, before rising again. This is because the value of cryptocurrency is based on its conception as a commodity, not a currency, and its elemental value is based on trust in it and its self-regulation in the finite number of currencies in circulation. What does this mean? Unlike the value of currencies, here the value is only as we determine it.
Cryptocurrencies are now a commodity traded on specialized global exchanges. At the same time, they are also seen as a commodity in legal terms. Just as you can invest in gold, you can invest in cryptocurrencies. In addition to trading, money can also be made with cryptocurrencies by so-called “mining”. What does that mean? A “miner” is an entity that controls the payments made in exchange for a share of the transactions. There is not one bank server that compares your account balance and if there is a sufficient balance in your account, it will allow you to make a payment. There are hundreds of thousands of servers in the world that compare payments made in real time. The last time BitCoin crashed, at the end of 2017, the time to make a payment was up to 10 days. In addition to checking payments, “miners” are also trying to decipher other unique hashes of new blocks. What used to take the power of a laptop to do is now calculated by data centers, which are able to provide enough heat from the processors to the average wellness center.
Is the hype around cryptocurrencies justified? They are springing up like mushrooms after the rain, and few are unique today. Worth mentioning is the 100% anonymised cryptocurrency Monero, which is used for payments on the Darknet, for example. Today there are over 900 different cryptocurrencies, the vast majority of which are predicted to die. The problem is that no one knows which ones.
Opinion Ventrue Club z.s.
We believe that Blockchain technology will play a significant role, whether in registries and registers – for example, real estate, civil registry, medical records, or one day it will replace transaction records in banks. It is likely to face regulation. Certainly a lot of people have made and will make a lot of money on cryptocurrencies, and some will lose a lot – it is pure speculation on the future price of something made up of ones and zeros with no material substance. An interesting direction is the use of cryptocurrencies to fund projects. As with all investments, cryptocurrencies are not for everyone and the issues need to be understood. It is likely to be safer to invest in mining and products to miners, less safe to actually purchase cryptocurrency.
*Hesh: A numeric code that is created through an encryption algorithm that converts an input value. It is used to quickly compare data and search database tables.