Unfortunately, it's getting easier to predict what might happen to cryptocurrencies when the economy takes a nosedive.
- Born in the wake of the 2008 financial crisis, Bitcoin hasn't yet faced a downturn like we're starting to experience.
- Based on the developments of recent weeks, some crypto market trends are starting to emerge.
- Bitcoin's relationship to gold is strong, futures and options are losing their lure, and stablecoins are on the rise.
1. Bitcoin shows a higher correlation to gold<p>The idea of Bitcoin as "digital gold" has been around for a while. It's true that <a href="https://bigthink.com/new-study-on-cryptomining-energy" target="_self">the two assets share some similarities</a>: a price driven by the forces of supply and demand and limitations on supply, for example. However, whether or not investors would treat Bitcoin as a "safe haven" investment during times of turmoil in the stock market hadn't been proven.</p><p>On March 12, as the global stock markets plummeted and <a href="https://www.cnbc.com/2020/03/12/stock-futures-hit-a-limit-down-trading-halt-for-a-second-time-this-week-heres-what-that-means.html" target="_blank">circuit breakers halted</a> trading on the NYSE, the price of cryptocurrencies also took a nosedive. Bitcoin <a href="https://coinmarketcap.com/currencies/bitcoin/" target="_blank">lost</a> more than 40% of its value – the biggest single-day percentage drop in price since 2013.</p><p>However, on that day, gold held its price. Critics were quick to point out that the "digital gold" theory had been debunked, but perhaps they were a little too quick. Over the days that followed, gold recorded its sharpest drop in a single week, losing <a href="https://www.jmbullion.com/charts/gold-price/" target="_blank">around 12%</a> of its price.</p>
2. Open interest in futures and options takes a hit<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yMjkxNDEzNS9vcmlnaW4ucG5nIiwiZXhwaXJlc19hdCI6MTY1OTg1MDk3MH0.9NFPnEbQ0H3yk5F-VG16I_OKRc1y-2wPNeyQmqbJHGI/img.png?width=980" id="6a104" class="rm-shortcode" data-rm-shortcode-id="7c7356f86e2f3d8c0d604913bf6a221a" data-rm-shortcode-name="rebelmouse-image" /><p>March 12 was a pivotal moment on the cryptocurrency markets across derivatives, too. Before the coronavirus started to take hold, Bitcoin futures had been enjoying something of a moment. According to Skew, total open interest had more than doubled from around $2.2 billion in November 2019, to $5 billion in mid-February.</p><p>On March 12 and 13, as the price of Bitcoin dropped precipitously, crypto exchanges liquidated millions of dollars' worth of long positions.</p><p>Market leader BitMEX came under particular fire, as it had <a href="https://cointelegraph.com/news/bitmex-takes-a-hit-community-cries-foul-play-following-market-crash" target="_blank">experienced two 25-minute outages</a> meaning traders had no access to their accounts to top up margin or take any actions to hedge their positions. Traders on BitMEX saw over $1.5 billion of positions liquidated in the space of two days.</p>
3. Demand for stablecoins skyrockets<p>Stablecoins were another asset class that was burgeoning before panic surrounding COVID-19 took hold. Because they're pegged to fiat currencies such as the USD, stablecoins had become the go-to currencies for traders entering and exiting positions. In 2019, the most popular stablecoin, Tether (USDT), had <a href="https://coinmarketcap.com/currencies/tether/" target="_blank">doubled its market cap</a> from $2 billion to $4 billion, and <a href="https://www.bloomberg.com/news/articles/2019-10-01/tether-not-bitcoin-likely-the-world-s-most-used-cryptocurrency" target="_blank">overtaken Bitcoin</a> as the most traded cryptocurrency.</p><p>During the market turmoil in March, while the rest of the market tanked, Tether came out smelling of roses. The market cap of USDT gained a further $1.5 billion in the second half of March alone, as Tether Limited attempted to mint enough stablecoins to meet the demand of investors keen to convert their gains or losses to a more predictable asset.</p>
- The image of cryptocurrency tends to focus on privilege and flaunted wealth.
- Financial institutions dismiss Bitcoin as a fad, while exploiting the benefits of the underlying technology for themselves.
- But the story in developing countries paints a different picture – one of vast potential.
The skepticism of financial institutions<p>While traditional financial institutions are happy to benefit from Bitcoin in the form of derivatives contracts bought and sold through their institutions, they are continually dismissive of the crypto movement.</p><p>Most famously, JP Morgan Chase CEO, <a href="https://www.bloomberg.com/news/articles/2017-09-12/jpmorgan-s-ceo-says-he-d-fire-traders-who-bet-on-fraud-bitcoin" target="_blank">Jamie Dimon, described Bitcoin</a> as a "fraud," adding that it's a good option for murderers and drug dealers. </p><p>Meanwhile, Bill Harris, the former CEO of PayPal, <a href="https://www.vox.com/2018/4/24/17275202/bitcoin-scam-cryptocurrency-mining-pump-dump-fraud-ico-value" target="_blank">described Bitcoin</a> as "a colossal pump-and-dump scheme...best suited for one use: criminal activity." Similarly, billionaire <a href="https://www.bloomberg.com/news/articles/2018-02-14/munger-calls-bitcoin-a-noxious-poison-government-should-tackle" target="_blank">Charles Munger</a>, vice chairman of Berkshire Hathaway, explained that he "detested it the moment it was raised."</p><p>Moreover, Bank of America has expressed continual incredulity about crypto's underlying technology, the blockchain, even as they <a href="https://www.cnbc.com/2019/03/25/bank-of-america-skeptical-on-blockchain-despite-having-most-patents.html" target="_blank">rack up the most patents</a> for the technology.<br></p><p>To be sure, financial institutions have every reason to prevent the proliferation of cryptocurrencies. Not only do they circumvent their once-unchallenged grip on the monetary system, but these institutions, and those who run them, have little use for an alternative to the existing financial infrastructure. </p><p>Simply put, the incredulity the financial elites feel is self-serving at best. Not only do they sit in powerful positions that prop up their privilege, but their access to vast financial resources encourages them to be dismissive of a new asset class that serves less well-positioned people.</p>
Creating Financial Inclusion<p>With all this noise, an important expression of the crypto movement is struggling to breakthrough. For some, cryptocurrencies are just a modern way for a few people to become incredibly wealthy, while others see it as a threat to their business model and bottom line.</p><p>However, for many others, cryptocurrencies are a savior, a crucial way of exchanging value in turbulent and unstable situations. In between the headlines and hot takes, cryptocurrencies are making a real difference in the lives of the unbanked, those living in developing countries, and those impacted by geopolitical turmoil.</p><p>While <a href="https://libra.org/en-US/white-paper/#introduction" target="_blank">Facebook's highly touted Libra </a>is yet unproven, the purpose is right on the mark. The currency is targeting the worlds' 1.7 billion adults who don't have access to the financial system. In the US alone, <a href="https://cointelegraph.com/news/how-blockchain-is-banking-the-unbanked" target="_blank">25% of the population is considered unbanked</a>, meaning that there is a significant need for a better option. </p><p>Therefore, tech titan <a href="https://www.ibm.com/blogs/blockchain/2019/04/unbanked-to-big-banks-how-crypto-facilitates-financial-inclusion/" target="_blank">IBM</a> notes, "we have reached a tipping point in the banking industry where our relationships with banks and how they extract value from us is going to be transformed."</p><p>For a lot of people, that transformation is already taking place. In Venezuela, where the national currency's annual inflation rate is 1.7 million percent, cryptocurrencies are allowing people to buy things like food, milk, and housing. As Venezuelan economist, Carlos Hernández, wrote in a <a href="https://www.nytimes.com/2019/02/23/opinion/sunday/venezuela-bitcoin-inflation-cryptocurrencies.html" target="_blank">Times op-ed</a>, "'Borderless money' is more than a buzzword when you live in a collapsing economy and a collapsing dictatorship."</p><p>Indeed, cryptocurrencies effectively combat inflation, corruption, and high remittance costs. With cryptocurrencies, people aren't dependent on financial elites or established organizations to provide relief or opportunity. They can create this for themselves.</p>
Creating new opportunities for entrepreneurs<p>Beyond the use case of blockchain as cryptocurrencies, the open, censorship-resistant nature of the technology has fostered a startup culture that's positively buzzing with innovation, the benefit of which isn't just limited to wealthy hubs like San Francisco and Singapore. </p><p>For example, <a href="https://matic.network/" target="_blank">Matic Network</a> is an Indian company that is rapidly becoming the base protocol of India with its fast, scalable second-layer solution for Ethereum. Whereas Ethereum has struggled to scale beyond around 15 transactions per second, Matic uses side-chain technology to scale up to 65,000 transactions per second. </p><p>The company has already established partnerships with well-known names in the blockchain space, including Binance and Coinbase Ventures. As a development platform, Matic provides ready-made infrastructure to help kickstart the Indian blockchain startup scene, encouraging tech entrepreneurs to bring their applications to life</p><p>Despite its status as a developing country, India has long been the IT outsourcing hub of choice for companies the world over and contains a wealth of programming talent. </p><p>. </p>
Open source, shared benefits<p>For the many people who won't become Bitcoin millionaires and who aren't members of the financial elite, cryptocurrencies and blockchain are becoming a vital resource that levels the playing field, inviting total participation in a trustless economy that has a place for everyone. Furthermore, the low barrier to entry for building blockchain-based applications offers the potential to open new channels for entrepreneurship in developing countries.</p>
What does it mean for the future of the cryptocurrency movement and its impact on the environment?
- New study reveals that mining crypto can be use more energy than mine for gold.
- In order to understand the findings, we must first understand what crypto mining is.
- The crypto community is looking for a way to solve these issue.
What’s causing the energy consumption?<p>To better understand the study's findings, it's important to first have a basic understanding of what Bitcoin and other cryptocurrency "miners" are doing. Bitcoin is just one type of cryptocurrency, well-known as the original currency with the highest market capitalization, but it's not the only currency in circulation. Along with <a href="https://coinmarketcap.com/" target="_blank">many other coins and tokens</a>, Bitcoins are digital currency that can be owned by anyone, transferred from one party to another, which are <em>not </em>issued by a central authority like the US dollar or other fiat currency.</p><p>The underlying technology powering Bitcoin and many other cryptocurrencies (though not all) is <a href="https://bigthink.com/search/?q=blockchain+technology" target="_self"><em>blockchain technology</em></a><em>.</em> The Bitcoin network relies on a decentralized network with a distributed ledger to keep track of all transactions. As people send and receive Bitcoins to each other, the network records the transactions. All of the recording is done by a large group of volunteers who maintain the network; these "volunteers" are the miners. </p><p>Those <a href="https://www.chainbits.com/blockchain-101/what-is-cryptocurrency-mining/" target="_blank">"mining"</a> for Bitcoin aren't physically mining, but rather solving difficult cryptographic puzzles proving they've recorded the correct transactions and are in agreement with the network before adding a block (a chunk of information, i.e. set of transactions) to the history of transactions in the past (i.e. the "chain") — that's how we end up with a "blockchain." This is also how new Bitcoins are generated. </p><p>To accomplish this task, the Bitcoin network operates using a consensus mechanism called "Proof-of-Work" (PoW). This requires miners to do an extensive amount of processing and involves a lot of hardware running 24/7/365 in large amounts. If you've ever seen a cryptocurrency mining operation before, you'll know exactly what we mean.</p>
Understanding the scale<p>The second factor to consider besides the actual mechanics of what's happening when mining is the size of operations. While there are miners operating small rigs in their <a href="https://www.marketwatch.com/story/college-students-are-secretly-mining-bitcoin-in-their-dorms-on-room-check-days-i-have-to-put-a-blanket-over-it-2018-03-29" target="_blank">college dorm rooms</a>, there are an even larger number of exceptionally large mining operations taking place across the world. Given how energy intensive mining for cryptocurrencies is, energy consumption is only compounded when looking at the global scale of mining.</p><p>In fact, some estimates have put the global energy consumption of Bitcoin mining higher than <a href="https://www.theguardian.com/technology/2017/nov/27/bitcoin-mining-consumes-electricity-ireland" target="_blank">energy consumed by all of Ireland</a>. While others believe such estimates <a href="https://www.nbcnews.com/tech/tech-news/study-claims-bitcoin-uses-much-energy-ireland-not-so-fast-n875211" target="_blank">to be inflated</a>, the fact remains that mining cryptocurrencies requires a substantial amount of energy, especially after factoring in mining operations from other cryptocurrencies besides Bitcoin, like the second highest coin by market capitalization, Ether. </p>
What is the community doing to solve this?<p>Of course, those on the sidelines aren't the only ones noticing the vast amount of energy consumed by mining cryptocurrencies. Improving efficiency in the cryptocurrency world is already a concern for many of the top minds in the industry.</p><p>The founder of the Ethereum project, Vitalik Buterin, has already proposed a new direction for the well-known blockchain-based platform that's given rise to so many new tokens in recent years. Though currently operating on a Proof-of-Work (PoW) consensus mechanism like Bitcoin, the Ethereum network is slated to eventually make the switch to a new Proof-of-Stake (PoS) hybrid method of mining that will reduce energy consumption in the crypto mining industry while still maintaining the integrity of the network. The new initiative has been nicknamed "Casper" and is to be implemented with <a href="https://medium.com/edchain/what-is-sharding-in-blockchain-8afd9ed4cff0" target="_blank">sharding</a> for a new version of Ethereum known as "Serenity," <a href="https://www.financemagnates.com/cryptocurrency/news/buterin-proof-of-stake-ethereum-is-really-no-longer-so-far-away/" target="_blank">according to Buterin</a>. </p><p>At the same time, there are others in the community looking at different solutions. Some sources aren't looking at the energy consumption itself, but rather how miners are getting the energy they require. <a href="https://www.technologyreview.com/s/611908/this-company-thinks-it-can-help-solve-bitcoins-energy-problem/" target="_blank">New initiatives are popping up</a> in the market to offer green energy solutions directly to the mining community with a heavy thirst for energy.</p><p>While others, like Timothy Lee with ArsTechnica have pointed out that if the price of Bitcoin stays (relatively) consistent, then we're likely to see energy demands from the network <a href="https://arstechnica.com/tech-policy/2018/05/new-study-quantifies-bitcoins-ludicrous-energy-consumption/" target="_blank">decrease over time, not increase</a>, as block rewards (the amount of Bitcoins miners receive) decrease over time. The next "halving" is expected to <a href="https://www.bitcoinblockhalf.com/" target="_blank">occur in mid-2020</a> with the reward dropping by 50% roughly every four years following that until the last of the 21,000,000 Bitcoins are completely mined. </p><p> Others in the industry dislike the comparison between gold and cryptomining altogether. As CEO and co-founder of <a href="https://cryptopotato.com/" target="_blank">cryptopotato.com</a> says:</p><blockquote>I think that this kind of comparison is too shallow; it doesn't take into consideration two factors which are much more important than the amount of energy consumed. Bitcoin mining farms will always try to reduce their energy price and their consumption as much as they can while trying to find renewable energy resources so as to make processes cheaper and more efficient. In the case of gold mining, however, electricity is just one of many resources in a process which has a lot of constraints which result in nonrenewable resources being used such as coal and oil which have far reaching environmental repercussions.</blockquote><blockquote style="margin-left: 20px;"><em></em></blockquote>
Moving forward<p>Even with the significant energy consumption by cryptocurrency miners, the researcher behind the study, Max Krause, still believes cryptocurrencies will continue to grow in popularity and relevance in society, <a href="http://blogs.discovermagazine.com/d-brief/2018/11/05/mining-cryptocurrency-uses-energy-actual-mining-metals/#.W-NOBZNKiM_" target="_blank">saying that</a>:</p><blockquote><em>I believe in the next five years you'll have the option to buy something on Amazon or a coffee at your local shop with cryptocurrency. But what I want is for people to understand all the costs of the new technology. We can embrace new technology but we should have a good understanding of what exactly we are embracing.</em></blockquote><p>The question now remains how energy consumption concerns will impact the growth and direction of the cryptocurrency world in the coming future. What do you think?</p>
Once a lucrative exercise anyone could do, bitcoin mining has grown out of control, and governments are weighing what to do.
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