First a bit of history. A Japanese person named Satoshi Nakamoto started the first bitcoin sometime in 2007. Indeed, nothing is known about whoever started the concept apart from what they claim to be. No pictures. The name is a pseudonym (fake), and so also may be the nationality and the current age of 45. What is not in question though, is the bitcoin net worth of Satoshi, who could be a man or a woman. $8.8 billion is the figure, at 2020 prices. The fuzziness around founder-ship presents the first contradiction in the crypto saga for a system which seeks to achieve total transparency in transactions but was birthed on anonymity.
The idea was to create a different currency system – and if you like, entire financial system – that short-circuits the current traditional one. This was borne out of a need to rebel against current fiat currencies. Now, in Economics, we call today’s currencies ‘fiat currencies’ because they are created by fiat and command the value on their faces, because governments say they should. Fiat is force or command. Before the global adoption of fiat currencies, money was backed by other assets such as gold. The proponents of cryptocurrency believed that there is a need to push back and do something different, that will mimic the attributes of a gold-backed currency in view of durability and scarcity but do better than the current system by being smart, secure and not possible for central banks to issue at will. There are also other known failures of the current financial and currency systems, notably bank failures and bailouts, lack of transparency, inefficiencies, and excess charges which make a number of the bank executives and even regulators exceedingly rich. Nakamoto and co believe that there is a need to stop the exploitation of the masses (that is an irony today though, given Nakamoto’s net worth).
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So, from get-go we have to understand that cryptocurrencies declared a war on the traditional banking and financial system. And the uptake has been frightening even if the road is laden with booby traps which we may be able to discuss shortly. A friend, Nnamdi Nwizu, informed me that one of the first known bitcoin transactions was for the purchase of a pizza. 10,000 bitcoins was exchanged for a pizza. Today, 10,000 bitcoins are worth $300 million or anything like N14 billion. See the meteoric jump. This kind of phenomenon has attracted a lot of people to acquire and keep cryptocurrencies. But we have also seen much volatility in the prices of these cryptocurrencies, a number of which are said to be scams. Imagine an asset whose price could fall overnight by 60 per cent? Nigerians who are investing in it should be clear about something; they are merely riding the waves. Nothing underpins these cryptocurrencies. As a fact, far more cryptocurrencies have failed than have succeeded. There are about 4,000 cryptocurrencies around today with just a handful of them being real or successful. This article carries that 1,000 cryptocurrencies have failed, making away with billions of dollars from people who wanted to play the market https://theconversation.com/more-than-1-000-cryptocurrencies-have-already-failed-heres-what-will-affect-successes-in-future-127463.
The purpose is almost defeated because the focus is now simply on probable gains that people can make from getting in on the action. In 2019, a Canadian cryptocurrency Quadriga went down with $250 million of investors’ money when the founder, Gerald Cotten was said to have died while honeymooning in India. Those whom he duped are calling for his body to be exhumed.
So, just as the traditional banking and finance system is flawed, so also is the proposed replacement; cryptocurrencies. I will shed a bit of light below. No system is perfect. My concerns are:
- The anonymity it provides is a haven for criminality.
- What drives prices and is there any opportunity for abuse?
- If there is no regulator are a few people likely to take advantage?
- What causes volatility in prices?
- What happens when a coiner dies? This is very important in this age of a thousand deaths.
- How exactly are coins mined and who has ability to mine?
- Do we in these parts have the electric power and computing capability and speed to mine? Does that not skew the market already?
Starting with my last concern, I realised that the mining of these cryptos is the real work. I then realised that it takes about 10 minutes to mine one coin, but you require 72,000 Gigabytes of electricity to do this. I converted 72,000 gigawatts to megawatts and found it was a mere 72 million megawatts. The whole of Nigeria still tries to generate about 5,000 megawatts. So, obviously there is a disadvantage here. Apart from those who somehow have the capacity to mine these coins, aren’t other coiners just gambling or at best just disguising some of their wealth in the name of investing? On my concern with mining, Nnamdi opines that “You need super computers, set up all in a warehouse space or so to achieve the mining power, and it consumes a lot of electricity, which funny enough counts towards the cost of transactions. This is what makes it too hard to copy and no, we are not even close locally to the kind of mining tech required in Nigeria.
I also found out that when most coiners die, no one is able to access their investments which ab initio are encrypted with passwords, passphrases and whatnot. People don’t usually plan to die. Now, this is where regulation helps in the financial markets. Apart from deposit insurance which kicks in the event of collapse of an insured and regulated financial institution, the relations of a dead account holder in a traditional bank could still have access to their balances. This is also where we have to let the usually young revolutionaries behind and in support of cryptocurrencies that history matters, and the traditional banking system had benefited from centuries of experience, battles and dialogue. The single story that all the bankers are ripping the rest off may not be 100 per cent correct. The traditional system and indeed the fiat currency system, does have their own merits. In the case of Gerald Cotten the founder of Quadriga crypto in Canada, his newly wedded wife Jennifer Robertson (a Canadian real estate developer) said everything about him was encrypted and so she had no knowledge of what he did with people’s monies. He was said to have died en route doing some charity in India. An Indian doctor signed his death certificate but most of his 76,000 victims don’t believe he is dead.