Cryptocurrencies are not digital novelties anymore. They have trillion-dollar capitalization and the potential to disrupt global finance. Over 10,000 altcoins now accompany Bitcoin. Proponents praise them as a democratizing force, critics claim they empower criminals, and regulators scramble to respond. Here are the key things to know in 2021.
Defining Cryptocurrencies
Virtual minting is based on the principles of cryptography. The coins are exchanged on computer networks, where they circulate between holders of virtual wallets. Cryptocurrencies are used for payments, trading, lending (for example, Salt crypto loans), and investment. Here are the basics:
- All transactions are recorded in public blockchains — ledgers that are distributed and cannot be tampered with.
- Validation is performed without a central regulator.
- The pioneering cryptocurrency launched in 2009, Bitcoin is still the most prominent coin with a capitalization of over $1.2 trillion.
- Bitcoin transactions are validated by “miners,” whose computers solve mathematical problems and get bitcoins as a reward.
- Thousands of other assets operate on similar principles, although validation methods vary.
- Transactions are anonymous, as the ledgers do not contain names or physical addresses. Every transfer from one wallet to another is recorded into a block and verified across the network.
Why Are They Popular?
Today, one Bitcoin is worth over $60,000. The popularity of cryptocurrencies stems from their decentralized nature. They can be sent anywhere quickly and anonymously, without the middleman.
However, wild volatility limits the applications. Payments in an asset whose value changes are risky, so only some businesses accept Bitcoin. For some investors, it is a speculative asset comparable to gold. Others see it as a hedge against inflation.
As the supply is limited to 21 million bitcoins, they may not be generated indefinitely like the US dollars. However, the valuation of other coins is more difficult to explain. For example, Dogecoin, created as a joke, has surged in price mostly due to the support of high-profile investors.
Key Challenges in 2021
Cryptocurrencies have created unique challenges for governments around the world. Their anonymity makes them attractive to criminals and rogue states. Besides, mining consumes enormous amounts of electricity. Finally, the advent of DeFi (decentralized exchanges) has raised questions about consumer protection, volatility, tax evasion, and the ability of central banks to carry out their policies. Even the U.S. Federal Reserve is considering launching its own central bank digital currency (CBDC) to provide crypto benefits without its risks.
Many regulators have realized that a hands-off approach is unacceptable due to the fast growth of the market and DeFi. Laws around the world vary, and they are largely a work in progress. China has cracked down on cryptocurrencies, while El Salvador has made Bitcoin legal tender. The U.S. Securities and Exchange Commission regards cryptocurrencies as a “Wild West” in urgent need of regulation. While the exchanges must comply with KYC and AML requirements, this is clearly not enough.
