Cryptocurrencies and NFTs are a buyer’s market

Blockchain has gone mainstream. Last year, 16 percent of Americans claimed to have speculated in cryptocurrencies based on blockchain technology, and this year’s Super Bowl broadcast included several announcements from crypto markets. But even as its cheerleaders encourage others to dabble in crypto, its value remains dubious. Their securities are quite volatile and, as unregulated assets, they leave average investors vulnerable to crashes and scams. Just as worrying, creating these digital resources consumes energy at a prodigious rate, contributing to climate change.

This is a highly unregulated industry in its Wild West era. The Biden administration recently signed an executive order directing federal agencies to study the problem because the crypto market lacks the consumer protections that stabilize this type of investment and deter its use by criminals. If people decide to enter these uncharted waters, they must do so carefully.

Blockchain, a digital ledger that records transactions, is public, decentralized (distributed among computers on a network), and secure. Theoretically, data stored via the blockchain is almost impossible to modify without leaving signs of fraud. As a result, the technology can support a variety of applications, including the secure exchange of medical data and the tracking of financial transactions.

Cryptocurrencies, such as Bitcoin and Ether, can be used to pay for goods in much the same way as legal tender, except that the exchanges are recorded through the blockchain. Although the technology apparently frees crypto users from central authorities, such as governments or banks, most people still interact with it through intermediaries. Cryptocurrency exchanges allow people to buy and sell cryptocurrencies in the same way that investors trade stocks. However, unlike stocks, cryptocurrencies do not derive their value from a tangible object or company and cannot be guaranteed by a trusted authority.

As a result, cryptocurrency speculation can be extremely volatile. For example, the value of Bitcoin once fell 30 percent in a single day. Although the stock market has weathered similar declines, when this happens the federal government and other entities may step in to try to stabilize the fluctuations. With cryptocurrencies, there are no such backups.

Blockchain also allows users to protect their identities. This anonymity, as well as the freedom from official supervision, has made cryptocurrencies popular with ransomware hackers. Anonymity also makes it difficult for buyers to assess the legitimacy of any given cryptocurrency exchange: the person running the exchange can take money from investors while hiding behind a pseudonym, and then steal the loot. In 2021, $14 billion worth of cryptocurrencies were captured by scammers.

Furthermore, cryptocurrencies are not minted by a government; instead, many must be “mined” by members of the decentralized network who perform computational tasks to help validate transactions for that particular cryptocurrency. These tasks require enormous energy: In 2021, mining a single Bitcoin required enough electricity to power an American home for nine years. And the more Bitcoins are mined, the more energy it takes to earn new ones. This escalation favors the early users of the system, who entered when it was easier to earn Bitcoins. Just like in a pyramid scheme, early adopters benefit from onboarding newcomers: additional merchants will increase the value of their existing assets.

Similarly, energy-intensive processes are also used to mint NFTs (non-expendable tokens), but the two technologies are not the same. Think of an NFT as a digital receipt that represents ownership of a specific object, with the blockchain helping to track that ownership as it is transferred from one entity to another. Using NFTs could be a boon for artists: people can often share and download digital art for free, but by selling an NFT of a digital artwork, the artist gets paid and ensures that the person who buys the art is recognized as the official owner. . However, just like cryptocurrencies, the value of NFTs can vary wildly.

This kind of value-distorting fad is not new: think of the intricate mortgage market derivatives that caused the 2008 financial crisis. Unlike those, cryptocurrencies have become a mass-market product advertised to buyers. everyday. But the risk of creating bubbles that could bankrupt untold numbers of people is the same. Therefore, until this industry is better monitored or regulated, investing in cryptocurrencies or NFTs remains a gamble – buyer beware.

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