This is a long read at an average time of 25 minutes. Check out this on my Medium account if you would rather have a reader tell the story with a voice. I know I am very detailed here; however, if you know nothing about crypto, this will definitely get your feet wet.
Cryptocurrency, which has garnered significant mistrust from the general public over the past year, is frequently misunderstood. The fact that many people experienced losses due to the substantial drop in the value of many currencies did not help matters. Just a little over a year ago, the price of a single Bitcoin was $65,000, but this weekend, people are celebrating the cryptocurrency’s rise above the $22,000 threshold. The scandal involving FTX has prompted many people to declare that they will never again put their trust in cryptocurrency. This article will discuss the history and specifics of the crypto market, what is wrong with the current banking systems, why governments and large banks would want to discourage people from using such currency, and what the future holds for crypto.
Bitcoin was the start of it all.
Bitcoin is a form of digital currency that operates without a central bank or single administrator. It was first introduced in 2009 by an anonymous individual or group working under the pseudonym Satoshi Nakamoto. Because there are no middlemen involved in the transactions, there are no banks involved. You can use bitcoin to make purchases on some websites or a typical purchase with a debit card issued by an exchange such as Coinbase or Crypto.com. A significant portion of the excitement, however, is centered on the possibility of becoming wealthy through investing in it.
Bitcoin was designed to be a decentralized digital currency enabling transactions between users without a central authority overseeing the process. Distributed ledger technology called blockchain is used to keep track of all of the trades that took place.
Satoshi Nakamoto mined the first block of the Bitcoin blockchain, known as the Genesis Block, on the 3rd of January 2009. This marked the launch of the Bitcoin network and the production of the first bitcoins. The first Bitcoin transaction occurred on 12 Jan 09, when Satoshi sent ten bitcoins to Hal Finney, an early Bitcoin enthusiast, and developer. This marked the beginning of digital currency.
Since then, Bitcoin has gained traction and has been adopted by users all over the world. Although it has been the subject of criticism and debate, it is widely credited with being the impetus behind the creation of other cryptocurrencies and technologies based on blockchain. Bitcoin is and will likely always be the most valuable and widely used cryptocurrency.
First Impression
When Bitcoin was first presented to the public in 2009, there were various responses to its introduction. Some people were immediately intrigued by the idea of a decentralized digital currency, while others were skeptical or dismissive of the possibility.
In its early days, Bitcoin was primarily used by a relatively small group of tech enthusiasts and libertarians interested in the concept of a currency that governments or financial institutions did not control. These pioneers anticipated that Bitcoin would cause widespread disruption within the banking and financial sectors and was eager to get their hands on the currency.
However, many people outside this community did not understand Bitcoin or how it worked. They viewed it with suspicion or outright hostility due to their lack of familiarity with it. Others warned of the potential for illegal activity, such as money laundering or drug trafficking, while others dismissed it as a speculative bubble or a Ponzi scheme. Speculative bubbles and Ponzi schemes are two common types of investment fraud.
As Bitcoin’s use spread and its value increased, it began to garner people’s attention from more traditional financial institutions. Numerous individuals started recognizing it as an investment opportunity, and some businesses began accepting it as payment. Despite this, some still considered it a potentially dangerous or unproven technology that was not yet prepared for widespread use.
The concept of a decentralized digital currency was foreign to many people, so they approached Bitcoin with a healthy dose of skepticism and caution when it was first introduced. Bitcoin was a novel and unproven piece of technology. It required time for individuals to comprehend the concept and its potential.
The Ethereum Difference
Vitalik Buterin, a Russian-Canadian programmer and cryptocurrency researcher, is credited with making the initial suggestion for Ethereum in 2013. Buterin envisioned Ethereum as a platform for developing decentralized applications (dApps) and smart contracts, which are self-executing contracts in which the terms of the agreement between buyer and seller are written directly into lines of code.
The pre-sale of Ether (ETH), the Ethereum blockchain’s native cryptocurrency, marked the official launch of Ethereum in July 2015. Buterin mined the first block of the Ethereum network, which went live on the 30th of July, 2015, when the Ethereum network launched.
Ethereum, in contrast to Bitcoin, which was conceived primarily as a digital currency, was developed as a platform for operating decentralized applications. Ethereum’s blockchain enables the development of smart contracts and decentralized applications (dApps) that can be deployed on its network and used for a wide range of purposes, including but not limited to financial services, digital identity, supply chain management, and more.
The emergence of Ethereum as a platform for dApps and smart contracts has significantly impacted the cryptocurrency and blockchain industries, and it has helped spur the growth of the decentralized finance (Defi) movement. Ethereum’s market capitalization is also substantial and it is considered the second most valuable cryptocurrency after Bitcoin.
The allure of virtual currencies
Because cryptocurrencies are decentralized, no government or financial institution can control them. Because each transaction is recorded on a publicly accessible blockchain, each transaction can be viewed and independently verified. Although your name and identity are never revealed during a transaction, once someone learns your wallet address, they can easily make public records of your purchases and balances. If you want to remain as anonymous as possible, consider using a cryptocurrency like Monero or DASH.
Because no middlemen are involved in sending and receiving crypto, international transactions can occur at a much higher speed, at a lower cost, and with higher efficiency. People who may not have access to traditional banking services may find cryptocurrency more accessible because it can be stored on a mobile wallet, and transactions can be made with a smartphone.
Cryptocurrencies give people greater control over their money and reduce the risk of government interference and financial institution failure. People who care about their privacy or wish to avoid government censorship may find this appealing, boosting trust and confidence in the system.
Since specific cryptocurrencies, such as Bitcoin, have significantly increased in value over time, there is a possibility for high returns when investing in cryptocurrency. Be aware, however, that this is a highly speculative investment and that the value of cryptocurrencies can also drop rapidly, so do your homework before putting your money into it. In 2021, the gains were substantial, but 2022 was unfavorable for cryptocurrencies.
Conventional banking practices facilitate inflation.
A banking system known as fractional reserve banking is one in which financial institutions lend out most of their customers’ deposits while keeping only a portion of those deposits as reserves. In this system, banks are only required to maintain a certain percentage of their deposits as cash or assets that can easily be converted to money. In contrast, the remainder of their deposits can be loaned to borrowers. This makes it possible for banks to become more competitive in the lending market.
It is typical for a central bank, such as the Federal Reserve in the United States, to be the one to determine the reserve requirement, also known as the percentage of deposits that banks are required to hold in reserve. The reserve requirement is typically relatively low, hovering around 10 percent in most countries. A bank can only lend 90 cents for every dollar deposited into their account.
Because of this system, there is greater availability of money because banks can produce new money by lending out the money that depositors have placed. This increases the money supply and allows banks to make loans and earn profits. Fractional reserve lending is the foundation of the modern banking system. But this also puts financial institutions at risk of collapse.
How much new money is there?
The amount of money created through fractional reserve banking in the US dollar system is challenging to estimate because it is constantly changing based on various factors. These factors include the number of deposits, the Federal Reserve’s reserve requirements, and banks’ lending activities. Estimating this amount of money is difficult because it is constantly changing based on these factors. Fractional reserve banking in the US has created a sizeable new currency.
The monetary base of the American economy is measured in several ways, including by M1, M2, and M3. These include hard currency, deposits made to checking accounts, and other types of deposits, such as those made to savings or money market accounts, and assets readily convertible into cash, such as Treasury bills.
M1 is comprised of cash and checking deposits; as of 2021, it is close to $4.9 trillion. M2 consists of M1 in addition to savings deposits, money market securities, and other time deposits; its total value is approximately $18.6 trillion. M3 comprises M2 in addition to large-time deposits, institutional money market funds, short-term repurchase agreements, and other significantly more valuable liquid assets. Since 2006, Federal Reserve officials have withheld M3 data from the public.
It is crucial to keep in mind that the expansion of the money supply is not only accomplished through the practice of fractional reserve banking but also through other methods, such as open market operations or quantitative easing, in which central banks purchase assets from banks, thereby increasing the banks’ reserves and allowing them to lend more money. These methods are examples of alternative ways money can be created.
The spiraling descent
In any event, fractional reserve banking is an essential component of the modern banking system because it paves the way for a sizable increase in the total amount of money in circulation. The use of fractional reserve banking comes with many significant drawbacks, although it has several benefits, such as allowing banks to make loans and earn profits.
There is always the chance of a bank run with fractional reserve banking because depositors could demand to withdraw more money than the bank has. This can result in the failure of individual banks as well as a loss of confidence in the banking system as a whole, both of which have the potential to have a detrimental effect on the economy as a whole. Banks have leeway in deciding how to invest customer deposits, and customers may be oblivious to the dangers of having their money lent out. Since banks aren’t entirely forthright, some customers may feel uneasy about putting their money in the institution.
The use of fractional reserve banking can give rise to a moral hazard, a situation in which financial institutions are incentivized to take on an excessive amount of risk because they are aware that they will not be held fully accountable for the results of their actions. There is a risk that this will encourage risky lending practices that will worsen the economy. Because fractional reserve banking makes it possible to increase the amount of money in circulation, it can result in price increases if the central bank does not appropriately manage the money supply. This can lower the purchasing power of the currency, which is detrimental to those who save money and those with relatively stable incomes.
Because it allows banks to lend out more money than they have on deposit, fractional reserve banking can increase the potential for financial instability. This is because the failure of one bank can cause a domino effect, leading to the failure of other banks and a general loss of confidence in the banking system. Because the banks and their customers are the first to get their hands on the newly created money, this form of banking can be seen as a form of wealth concentration.
It’s important to remember that fractional reserve banking isn’t a binary issue; it can be managed and regulated in several ways to mitigate its adverse effects, such as by increasing the required reserves, establishing deposit insurance, and enforcing rules to curb moral hazard and ensure sound finances.
Control from the State
Because of the large amount of imaginary money that can be created through fractional reserve banking, governments, and large banks may be concerned that the rise of cryptocurrencies could lead to significant collapses in both the government and the financial sector. Cryptocurrency provides a decentralized alternative to traditional fiat currency, which governments and financial institutions control. Additionally, cryptocurrency has the potential to disrupt traditional banking and economic systems.
It may be more difficult for governments to regulate the money supply and inflation if cryptocurrencies like bitcoin become widely used because of their decentralized nature. Using cryptocurrencies as a medium of exchange could reduce demand for traditional fiat currency, negatively impacting its value and the government’s ability to finance its debt.
In addition, cryptocurrency use may lessen the role of banks as middlemen, which could cut into the profits and influence of major financial institutions. Because of this, people may lose faith in the banking system and use alternative payment methods.
It is essential to keep in mind that governments and large banks take drastically different approaches to cryptocurrency. Some nations have gone as far as outlawing cryptocurrencies altogether, others have instituted stringent regulations, some financial institutions view it as a threat, and others have begun investing in cryptocurrencies and blockchain technology.
Can governmental action stop it?
No matter what happens in the cryptocurrency market, governments and central banks closely monitor the situation and weigh the pros and cons of adopting this new technology. Even though we still don’t know how cryptocurrency will affect the established financial system, it has the potential to both disrupt the status quo and pave the way for a new one.
Even though it is theoretically possible for a government to outlaw cryptocurrencies, it would be extremely challenging to enforce such a ban effectively. A single institution does not manage decentralized cryptocurrencies, and user transactions occur directly without needing a middleman. Because of this, governing bodies have a hard time keeping cryptocurrency under their thumb.
It would be challenging for a government to stop individuals from using cryptocurrencies like Bitcoin and Ethereum. Still, the government can impose restrictions on the use of cryptocurrencies in specific ways, such as prohibiting their use in physical storefronts or for certain kinds of transactions. For instance, a government could make cryptocurrencies illegal in brick-and-mortar establishments. Still, stopping people from purchasing cryptocurrencies over the internet or engaging in peer-to-peer trades would be difficult.
It’s possible that governments could try to regulate the IP addresses that cryptocurrency wallets can use to interact with one another, but this would be difficult to police and could be easily avoided with the help of virtual private networks (VPNs) or other methods of IP masking.
It is important to remember that certain nations have completely outlawed the use of cryptocurrencies, while others have imposed stringent regulations and restrictions on the transactions that can be made. While some countries may see a decline in cryptocurrency use due to government bans and regulations, others may see its use continue to rise in popularity despite these efforts.
In general, it may be possible for governments to impose some restrictions on the use of cryptocurrencies. Still, it would be difficult for them to ban the use of cryptocurrencies or effectively regulate them completely. As a decentralized digital currency that facilitates peer-to-peer transactions, cryptocurrency is challenging for governments to regulate.
A Comparison of Centralized and Decentralized Systems
Traditional cryptocurrency platforms run by a centralized organization are known as centralized exchanges (CEX). Users can store their digital currency on the exchange and make transactions with other users. Before a user is allowed to begin trading on one of these exchanges, they will typically be required to provide personal information and identification to comply with the exchange’s stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. Many of these services also limit the amount of cryptocurrency that can be withdrawn at once and require users to go through a multi-step verification process before accessing their funds.
On the other hand, decentralized finance wallets, also known as DeFi wallets, are non-custodial wallets that give users the ability to hold and manage their own cryptocurrency. Users are solely responsible for the safety of their own private keys and seed phrases, unlike in centralized exchanges. Wallets that use the DeFi protocol are typically open source and transparent, as they are constructed using blockchain technology. Users are not required to go through a KYC or an AML process, and there are no overly restrictive withdrawal limits. In addition, they provide a vast array of financial services, including lending, borrowing, and trading.
Compared to centralized exchanges, decentralized wallets provide users with increased safety and control over their assets; however, these wallets also carry a greater risk of losing their funds in the event their private key is stolen or misplaced. A considerable advantage to the DeFi wallet is your money cannot be stolen from a corrupt or failing centralized market. Before using a DeFi wallet or decentralized exchange, users should do their due diligence and become familiar with the associated risks.
Inside a store, cryptocurrency payments are accepted.
Using a cryptocurrency payment processor, like BitPay or CoinPayments, is one option for retailers who want to accept cryptocurrency payments. These processors sit between the store and the blockchain, allowing instantaneous conversion between cryptocurrencies and fiat currencies like the US dollar. This makes it possible for the merchant to accept cryptocurrency as a form of payment while simultaneously accepting payment in the merchant’s native currency.
To set up a point-of-sale (POS) system capable of accepting cryptocurrency, the retailer must create an account with a cryptocurrency payment processor. Then they will need to integrate the processor into their existing POS system. To accomplish this, most payment processors offer corresponding plugins or APIs that can be integrated into a website. Using a point-of-sale (POS) system to accept cryptocurrency in a retail storefront can be relatively simple. However, this method does require some initial setup and integration, and retailers must be aware that the value of cryptocurrency can be highly volatile. After the integration has been completed, the retailer will be able to accept payments in cryptocurrency using their POS system, just as they would receive payments using conventional payment methods such as credit cards or debit cards.
PundiX’s XPOS product, which resembles a credit card terminal, enables customers to quickly and easily pay with a wide variety of cryptocurrencies at brick-and-mortar stores, with transactions taking, on average, only half of a second to complete. Moreover, because the settlement will be made in a stable currency, the risk of currency volatility is also eliminated for the merchants. Wallets can be refilled with cryptocurrency at these retail locations. These devices are already used worldwide and are especially useful in regions with volatile fiat currencies using a stablecoin. The term “fiat currency” refers to money issued by a government that can be used as a form of legal tender.
If a store’s customers have a crypto wallet that can read QR codes, they can send cryptocurrency to the store’s address by scanning the QR code of the store’s crypto address.
It’s essential to remember that the confirmation times for different cryptocurrencies can vary, potentially affecting the speed of transactions and the user experience. Furthermore, fluctuations in the value of the cryptocurrency may affect the final amount the shop receives.
Mining
Miners verify and record transactions on a blockchain network through specialized computer hardware in exchange for new cryptocurrency. Most blockchain networks organize transactions into blocks, and miners use a competitive process to validate these blocks by solving complicated mathematical equations. Miners are rewarded with additional cryptocurrency units if they are the first to solve the equation and validate the block. This method is referred to as proof-of-work (PoW) mining.
There are other methods of mining besides PoW, such as proof-of-stake (PoS), which rewards miners in proportion to the amount of cryptocurrency they “stake” (put up as collateral). Another variation is Delegated Proof of Stake (DPoS), which allows token holders to vote for a group of validators responsible for verifying transactions on the network.
Mining requires a significant investment in specialized hardware, and the difficulty of mining varies depending on the blockchain network. Some networks are more challenging to mine than others, and mining rewards can also vary. The mining process becomes more complex, and the reward for each block becomes less lucrative as more miners join a network. Mining is a competitive process whose profitability can fluctuate based on current market conditions and electricity costs.
Earnings from Cryptocurrency through Liquidity Mining
By rewarding participants in a decentralized exchange (DEX) with the platform’s native token for providing liquidity, a practice known as “liquidity mining” can encourage users to join the DEX. The goal is to raise the total amount of liquid assets that can be traded on the DEX. This will, in turn, make the exchange more appealing to market participants. On the DEX, users provide liquidity by depositing pairs of tokens in equal amounts into a liquidity pool. These tokens are commonly known as the “quote” and “base” tokens. For instance, if a user deposited equal amounts of Ethereum and USDC into a liquidity pool, the pool would be referred to as “Ethereum/USDC” liquidity.
The DEX then uses a smart contract to keep the ratio of the tokens in the liquidity pool equal, regardless of the prices at which the tokens are currently trading. To achieve this, the supply of each token in the pool is dynamically adjusted to reflect current market conditions. For instance, if the price of Ethereum rises in comparison to USDC, the smart contract will automatically sell some of the Ethereum that is held in the pool and buy more USDC to maintain the same proportion of Ethereum to USDC. This is done to maintain the same ratio between the two tokens. This method is referred to as “rebalancing” the pool.
Users who contribute liquidity to the pool are typically rewarded in the DEX’s native token, which can be staked or sold on the open market. The rewards provided to liquidity providers are proportional to the amount of liquidity they have provided and the length of time they have participated in the liquidity pool. In addition, the rewards are also influenced by the total volume of trades within the pool. Mining for liquidity is a novel concept still being explored in the cryptocurrency industry. It has yet to be determined how successful it will be in the long term, but it has the potential to become a key driver of liquidity in the ecosystem of decentralized finance (DeFi).
Staking your cryptographic assets
Holding a specific amount of cryptocurrency in a wallet and using that cryptocurrency to validate transactions on a proof-of-stake (PoS) blockchain network is referred to as staking. As a thank you for keeping the network safe and the consensus stable, users can stake their coins and receive a reward.
To be eligible to stake coins, a user will typically need to possess a predetermined minimum amount of the cryptocurrency in question and operate a node on the network. The node’s job is to confirm transactions and add them to blocks. A user’s potential payout increases in proportion to the number of coins staked and the duration of the stake. This encourages coin holders to put their coins to work, which strengthens the network as a whole.
Delegating is an additional feature that is made available by some projects. This feature enables users to hand over control of their staked coins to a validator (an individual who is running a node) in exchange for a portion of the rewards that the validator earns. Users can earn staking rewards even if they do not run a node themselves.
Staking and liquidity mining are related in that they both incentivize users to hold and use a particular cryptocurrency; however, they do so through different mechanisms and have other goals. By rewarding liquidity providers (LPs) for increasing the amount of cash available in a given market on a decentralized exchange, liquidity mining encourages the growth of that market (DEX). Payments to LPs for their role in maintaining market liquidity are made in the form of trading fees and the platform’s native token. Liquidity mining, in contrast to staking’s transaction validation and block creation, is used to incentivize users to provide liquidity to a DEX, improving the DEX’s health and liquidity.
Other methods of financial gain.
A freezer account, also known as a lockup account, is a particular cryptocurrency holding account that, for a predetermined amount of time, restricts the cryptocurrency’s holdings from being spent or transferred in any way. It easily could be compared to a Certificate of Deposit (CD) account at a standard bank. Lockup accounts are used by some projects to stagger the release of funds throughout the project’s duration. Because of this, market manipulation and price fluctuations are less likely to occur. In some instances, institutions may use freezer accounts to store their crypto assets securely, reducing the risk of hacking and theft.
You can earn interest on your cryptocurrency by lending it to others who need it. This can be accomplished through the use of centralized or decentralized lending platforms. Decentralized lending platforms allow for direct interaction between borrowers and lenders, while centralized lending platforms have a third party manage the loans. When you lend your cryptocurrency to another party, the recipient will typically use it as collateral for a loan denominated in a stablecoin or traditional currency. The borrower will then make interest payments to the lender on the loan, which will result in the lender earning a return on their cryptocurrency holdings. The loan terms are typically negotiable, including the interest rate, loan term, and collateral requirements.
Cybercriminal Crypto-Scams
In the realm of digital assets, cons and forgeries involving cryptocurrencies are becoming an increasingly widespread problem. These cons can take various forms, including phishing emails, Ponzi schemes, and fake cryptocurrency exchanges. The Ponzi scheme is the most common form of fraudulent activity involving cryptocurrencies. In this type of scam, early investors are paid returns using the money invested by later investors. This gives the impression of a profitable investment, but as more and more people try to cash out, the scheme inevitably falls apart.
Another prevalent fraud is the fake cryptocurrency exchange, such as the recent FTX scam. These con artists create a website that looks like a legitimate cryptocurrency exchange but steals money from unsuspecting victims. Social media and other online forums could be leveraged to spread the word about the scam exchange and lure in gullible users.
One of the most dangerous characteristics of crypto scams is that they can be challenging to detect and trace. Once you have provided your digital assets to a con artist, it is typically impossible to get them back. It’s also important to note that many people need to be aware of the risks associated with crypto scams and may need to learn how to safeguard themselves.
When investing in cryptocurrencies, exercising extreme caution and research is critical before sending any money to a person or organization with which one is unfamiliar. Research any company or individual you consider conducting business with, and never rely on unsolicited offers or emails. Influencers on social media and celebrities who promote cryptocurrency investments should be avoided at all costs because there is a possibility that they do not have your best interests in mind. In addition, it is essential to safeguard your digital assets by storing them in a secure wallet and employing strong, unique passwords.
Therefore, what can we deduce from this?
Cryptocurrencies are the way of the future; however, they come with a great deal of associated risk. The most significant danger is that embracing and using cryptocurrency will have substantial repercussions for the existing organizational frameworks of our government and financial institutions. My hypothesis is that when we transition to a society that uses cryptocurrencies, we will be exposed to the possibility of a fiat currency disaster, and we will have no choice but to accept the risks associated with this; on the other hand, the massive printing of currency out of thin air will ultimately fail in the long term anyway, so we may have to transition to a system that is significantly superior regardless.
In the meantime, however, central banks, governments, and the elite run the risk of finding ways to discredit crypto and make it seem like a joke or too risky. I have no doubt that numerous governments (I purposely used a referral link that will easily be considered taboo because there must be some truth in here somewhere with all the money funneling we have seen) were behind the FTX scam, which was used to launder billions of dollars and undermine consumers’ faith in the cryptocurrency markets. A major government revolution is long overdue in many countries worldwide, including the United States, Canada, and many European countries; consequently, we will all need a common currency once the dust settles. With cryptocurrency, governments would be forced to rely on borrowing and would be more disciplined in maintaining an actual budget rather than one that can be created out of thin air. Smaller governments should adopt this method more readily than large ones that tend to abuse their power.
Since your money can be lost in cryptocurrency, I am not here to offer investment advice. I do not deny that I will be devastated if I lose all of my cryptocurrency, but the funds in my accounts are not essential to my survival, and I only deposited them when I had extra cash. Among the many things I recommend is spreading out your assets. I engage in activities like liquidity mining, delegation, staking, and locked accounts to maximize returns on my cryptocurrency holdings. My primary holdings are in Bitcoin, Ethereum, Litecoin, Solana, FX, PundiX, Stellar Lumens, XYO, and Zilliqa. Throughout the summer, I pay for all my business-related travel expenses with XYO because I can earn rewards in a different currency. For this purpose, I use a Coinbase debit card, which enables me to use a coin or token to make standard purchases in cryptocurrency. The card functions very well for this purpose. I also plan to do some crypto mining this summer.
The most crucial point I want to make is that cryptocurrencies are here to stay, and I believe that the past year demonstrates this. We’ve had a major crash and a multibillion-dollar scam that should have destroyed the markets, but instead, we’ve seen such a positive turnaround in the last couple of months that shows people still have faith in the system. You need to get a solid education on cryptocurrency because there is a possibility that you will have to use it in the future!