The launch of Bitcoin in 2009 ushered in a wave of different cryptocurrencies built on decentralized peer-to-peer networks. Today, according to CoinMarketCap reports, the total number of cryptocurrencies stands above 22,000. The total market cap is approximately $1.1 trillion. However, with continued mass and government adoption, cryptocurrencies have hit the headlines on several occasions in the past few years.
From FTX filing for bankruptcy to El Salvador adopting Bitcoin as legal tender to Solana’s hacking incident, the crypto world has been on a major roller coaster. Here, we take a look at factors to reflect on when investing in digital currencies. Also, we analyze whether they’re sustainable in the world of finance.
Digital currencies financing change
Theoretically, digital currencies as virtual money can be used to finance projects that have a positive environmental, cultural, and social impact. Better yet, the blockchain technology behind digital currencies can be a good way to enhance transparency in supply chains. However, digital currency investments are reliant on increased market value when held or stored for a period of time.
Rather than creating positive change, investors store these assets to gain value. In addition, when successfully sold, the biggest beneficiaries are individuals and not the wider society or environment. When used for speculative investing, cryptocurrencies don’t generate any economic value.
The carbon footprint stumbling block
Digital currencies such as Bitcoin require dedicated computer hardware to mine digital coins by solving complex cryptographic puzzles. This process requires very high computing power. Despite blockchains such as Ethereum moving away from proof-of-work to proof-of-stake consensus mechanisms, Bitcoin’s mining still uses significant power, which results in carbon dioxide emissions.
According to recent reports, Bitcoin mining in particular creates 22 million metric tonnes of carbon dioxide annually. Now consider the impact of Litecoin, Dogecoin, and hundreds of other cryptocurrencies that use a proof-of-work consensus mechanism.
Digital currencies have given more power to businesses
There has been a growing number of green cryptocurrencies that are behind sustainable projects that are making positive changes to the economy and environment. For instance, Solarcoin, launched in 2014, is awarded to solar panel owners, making solar energy affordable. In addition, the removal of third parties while making any transactions has been of great help to businesses.
Now small businesses have access to a more open and competitive payment infrastructure. This permissionless system is essential, especially for businesses receiving domestic and cross-border payments. Moreover, the art industry has benefited from blockchain applications, which help artists get more value for their work. A good example is the Mycelia project, led by the British musician Imogen Heap. The gaming industry is another good example of those benefiting from blockchain, with websites like Coinslotty.net being a great example of blockchain early adopters.
Volatility drives crypto value
The central bank or the government does not back cryptocurrencies. This means that they are not influenced by factors affecting fiat currencies. As demonstrated by previous statistics, cryptocurrencies are prone to double- or even triple-digit percentage fluctuations in a short span of time.
For investors, this is part of the main appeal of investing in digital currencies—the prospect of buying low and selling extremely high. Nonetheless, volatility works both ways. Investing in cryptocurrencies could mean losing significant amounts of money. Factors that contribute to volatility include:
Market demand
The decrease in supply and increase in demand for digital currencies has led to their increase in value over the last few years. However, unlike traditional currencies that are backed by gold, digital currencies have nothing to fall back on.
Regulatory risk
Cryptocurrencies are attracting government regulation in different countries. China, for instance, banned any transactions related to cryptocurrencies in May 2021. With government regulations, cryptocurrencies will lose their decentralized nature, which is their greatest appeal.
Security risk
The risk of hacking has always been imminent when it comes to cryptocurrencies. Even so, today there is increased risk as crypto developers have turned to celebrities to lure more people into investing in digital assets. According to a report by UK-based Action Fraud, investors have lost millions of euros to scams and fake coins.
When it comes to the sustainability of financial assets, it narrows down to two things. Evidence of contributing to a more sustainable future by investing in the real economy and a business model that can deliver financial sustainability As it is, digital currencies are prone to wild fluctuations and are not a financially sound investment option. While cryptocurrencies and the underlying blockchain technology can have positive effects on businesses, the lack of regulation, risk of exploitation, and potential for significant losses are too high