The “Other” Side of Crypto

Introduction

Cryptocurrencies continue to be integrated more regularly into our day-to-day lives. In India, we have seen a significant rise of trading platforms that allow you to buy/sell various cryptos from your smartphones. In sports, crypto-based sponsorships deals continue to surface; be it Spanish club’s Valencia’s front-of-shirt-cum-Fan-Token partnership with Socios.com or Formula 1’s US$100m deal with Crypto.com, crypto continues to attract attention, large-scale or otherwise.

But with increased ubiquity also comes added scrutiny, and cryptocurrencies have been seeing big-scale challenges emerge in recent months. Let’s take a look at them.

Volatility of Value

Unlike regular currencies that are governed by centralised banks, decentralised cryptocurrencies have their value predicate on the investors – individual, large-scale mining corporations – instead of being the other way round. Essentially, cryptos hold value because we deem them as such, because of which any interference, even by an individual, can cause their values to collapse.

Take the example of Bitcoin, arguably the most renowned crypto worldwide. Bitcoin’s value reached an all-time of US$65,000 in April earlier this year, only to plummet to half of that value by June. June 21, in fact, saw the largest one-day decline of the crypto in over a month – nearly 10%. Last month also saw Ethereum hit a low value with Dogecoin declining 12% to trade at US$0.22 at one point.

One of the major reasons of Bitcoin’s collapse is China’s recently increased crackdown on mining operations across the country. Crypto mining is most profitable when many investors pool in to create a large-scale mining operation, and China is responsible for roughly 65% of world’s such Bitcoin-mining operations, with the regions of Inner Mongolia, Xinjiang, Yunnan and Sichuan being the major sources. China has tried to stamp on crypto’s rise ever since 2013, and the threat decentralised crypto poses to its own currency has seen the Chinese government target not only mining operations but also offshore platforms that allow the Chinese people to use cryptos for gambling and commerce using Virtual Private Networks.

The attack on these offshore accounts can also affect many sponsorship deals happening in sports across Europe. Take the example of Sportsbet.io – a crypto-based betting platform that has multiple sponsorship deals across Premier League clubs Arsenal, Southampton and Watford. These deals allow Sportsbet to target Premier League’s large Chinese audience to promote its platform. If their operation halts, it could mean a drastic shift in the sponsorship scene across not only the UK – where betting sponsorships are already under the microscope – but also other major European sports leagues.

On an individual level, tech mogul Elon Musk has also been playing a huge part in the fluctuation of many cryptocurrencies (mostly Bitcoin), depicting how easy it can be to volatise them. After revealing a US$1.5 billion worth of investment in Bitcoin in its annual report for 2020 in February earlier this year, Musk’s electric vehicle and clean energy company Tesla announced in March that it’d be taking Bitcoin as payment for its vehicles, contributing to the crypto’s rise going into April. Only 49 days later, however, in May, the company backtracked on its decision after data emerged regarding the negative impact of crypto mining on the environment, citing that it would resume accepting Bitcoin once it becomes more sustainable, aligning with the company’s clean energy vision.

Speaking of environment…

Also Read – Crypto in Football

The Environmental Angle

China’s more-than-half contribution to the global crypto mining directly affects the environment, given the fact that coal is the overwhelmingly main source of energy in the country, especially in Inner Mongolia, one of China’s major crypto-mining regions. Not to mention the overall heat generated by the hardware tasked with mining cryptocurrencies, which requires advanced cooling systems installed especially in places where the climate is already more than warm, already has a detrimental effect on the environment.

That, though, is only half of what makes mining of cryptocurrencies highly energy inefficient. To provide an insultingly oversimplified explanation, a cryptocurrency is earned as a reward for your machine deciphering a cryptograph on the decentralised ledger. The more powerful a machine is, the higher its chances of earning more crypto are. Subsequently, to keep inflation in check, these cryptographs continue to get harder as more miners with more powerful hardware emerge. To put it bluntly, increased mining makes getting a crypto harder, which means increased power throughput for relatively reduced return. Imagine this playing out on a global scale, keeping in mind that annual mining of Bitcoin roughly amounts to the energy the Netherlands use up in its entirety in a year.

Going Ahead

The concept of cryptocurrency has understandably become more and more popular since its inception into the mainstream nearly a decade ago. But its increased application has given rise to a lot of global-scale issues that require taking care of before crypto can actually take off to ultimately become the foundation of the new-world financial institutions in the future. Of course, given the demand, sustainable solutions will appear, but until then crypto will have to remain subject to scrutiny, incredulity in its reliability, and scorn over its reality.