Starting as a novelty and later turning into a global mania, cryptocurrency has taken the world by storm as an alleged alternative to regular currency. But despite the hype and the overinflated values that caused cryptocurrencies such as Bitcoin to be valued at up to $64,000 last year, reality has struck in the plummeting prices of all cryptocurrencies and the total crash of some of them.
Cryptocurrencies rely on the illusion that they can be exchanged outside the boundaries of conventional banks transactions or governments restrictions, both of which have seemed alluring for shady or underground businesses. But the reality is that the process of acquiring this kind of currency is flawed, and they cannot be the source of any valid form of production.
While all international currencies are issued under the authority of governments, the production of cryptocurrencies relies on “mining” them through computers and computer graphic cards that work around the clock to make these highly coveted currencies available to their users. The mining is done through solving complex algorithms, and the longer a computer stays on the job, the larger chunk of Bitcoins it can gather.
Similar to the gold rushes that took place in countries such as the US and Australia in the 19th century, a cryptocurrency rush has occurred over the last decade aiming to build wealth through these currencies simply by having computers produce them. Crypto-mining farms have been built around the world with millions of computer processors and graphic cards stacked together to produce enormous amounts of cryptocurrencies at ever faster rates.
Billions of dollars have been invested in setting up farms with ever greater processing capabilities. One farm stationed in Iceland called the Genesis Mining Farm is regarded as the largest in the world and consumes more energy than any other company in this small country.
Billionaires coming out of the crypto-mining business include the Cameroon and Tyler Winklevoss twins in the US. The latter was one of the people behind the founding of Facebook, and he is believed to have turned to the Bitcoin market after Facebook founder Mark Zuckerberg was forced to settle a court case in 2004 for copying his original source code as the main idea behind the social-media platform.
Today, this dream of amassing riches beyond imagination has been coming up against reality, and the entire crypto-mining market crashed this year, losing over $2 trillion from its market peak at over $3 trillion in November 2021. Rising inflation rates across the globe along with the economic crisis that has hit the world’s major economies following the Covid-19 crisis and the Ukrainian-Russian war have also contributed to the sharp fall in the value of various cryptocurrencies.
Bitcoin, the most famous, has taken one of the worst hits and shaken investor confidence in the entire market. The currency is now valued at around $19,000 from an all-time high of $64,000 in April 2021. These incredible losses have delivered a knockout blow to other lesser-known currencies such as Terra Luna. This lost 99.99 per cent of its value after dropping from $117 in April to $0.02 in May this year, wiping out $40 billion of investments. Its Korean founder Do Kwon is being hunted by investors, and an investigation by the Korean government was launched last month.
Old school billionaires and financial experts refrained from indulging in the cryptocurrency mania that is now bursting and causing billions of dollars in losses for its investors. US billionaire Warren Buffet stated that he would not buy all the cryptocurrency in the world for $25 if it were offered to him. At the same time, he stressed that if he were offered one per cent of the farmland or apartments in the US for $25 billion, he would not hesitate to write a cheque for that amount, since unlike cryptocurrency these are productive assets.
US billionaire Bill Gates, the founder of tech giant Microsoft, also said cryptocurrency had failed for the same reasons. As formerly the richest man in the world and currently the fourth richest, Gates said that he did not invest in cryptocurrency because he would only invest in “things that have valuable output” and cryptocurrency projects are based on the “greater fool” theory.
An overpriced work of art might be bought by an investor expecting that another “greater fool” will subsequently buy it at an even higher price provided that the hype around the work continues, for example. The end result is the overly inflated prices of items that are not worth even a fraction of their estimated prices in reality. When the market falls, such things become almost worthless.
The same thing is true of so-called non-fungible tokens (NFTs), which are mostly digitally produced artworks and are only produced as single items in digital or animated form. Their sales witnessed a spike in prices before plummeting as a result of the effects of the fall in cryptocurrencies.
One of the most famous cases was the sale of the first tweet by Twitter founder Jack Dorsey at the whopping price of $2.9 million in 2021 to a Malaysia-based investor. Since it is an NFT, the buyer of the tweet, Sina Estavi, supposedly alone has the right to see it despite its being available through any Internet browser.
Estavi decided to sell the tweet last April for a massive $48 million, believing there was a “greater fool” out there to buy his NFT. Much to his dismay, after one week of trying to auction it online, he received bids for no more than $280.
Billionaires such as Gates and Buffet forged their financial empires through sound investments in various fields. If there had been a real fortune to be made from investments in cryptocurrencies, they would have jumped at the opportunity. But, alas, cryptocurrency has proven to be a flawed investment in an unproductive and intangible form of currency that is ruled by hype generated groups of computer programmers and hackers.
The fall of cryptocurrency is a natural outcome to a mania that swept the globe seeking financial gains and producing nothing. While some may still argue that this sort of currency has a future, logic and events suggest otherwise.
The writer is a political analyst and author of Egypt’s Arab Spring: The Long and Winding Road to Democracy.
*A version of this article appears in print in the 21 July, 2022 edition of Al-Ahram Weekly.