Crypto cash: digging for digital gold

Ten years ago, a Bitcoin could be bought for around a dollar. Today the complex industry surrounding it is worth billions. Adrian Imms finds out how Sussex is looking to the future of cryptocurrency and its potential to spark a cultural shift towards renewables

Infographic of a crypto currency mining machine

In remote warehouses around the world, a game is afoot.

It's being played by giant computers and the goal is Bitcoin – arguably the best-known of the many cryptocurrencies now in circulation.

Conceived in 2009 by a person (or group) named Satoshi Nakamoto, Bitcoin emerged as an alternative to the traditional currencies of online banking, cutting out big banks and allowing people to transfer money directly to one another.

As well as trading Bitcoin, anyone with the means to do so can set up a ‘mining rig’ – powerful computers designed specifically to process Bitcoin transactions. This process, carried out by a large community of ‘miners’, is the bedrock upon which cryptocurrencies function.

Without a central bank to make sure people don't double-spend their money, it's down to others to validate (or ‘prove’) transactions added to a massive online ledger, called a blockchain. Anyone can view transactions on the blockchain, and once a miner proves a transaction is genuine, it gets added (and securely encrypted) into the blockchain forever.

The miners’ reward for proving transactions is newly ‘minted’ Bitcoin.

As awareness and confidence around Bitcoin grew, it also became an investment. More people started not only trading Bitcoin but proactively mining it. Giant hangars grew in places like Siberia and Alaska, where mining rigs could churn away algorithmically and stay cool.

Towards the end of 2017, the market reached fever pitch and Bitcoin was worth almost $20,000 a piece. But then it fell sharply and many miners withdrew from the process. With Bitcoin's value falling, the rewards reaped for ceaselessly mining Bitcoin were outweighed by the expense of doing so.

However, despite the volatility, the financial technology industry (dubbed FinTech) is keenly monitoring cryptocurrencies and their underpinning blockchain technology. Carol Alexander, Professor of Finance at the University of Sussex Business School, says: “Because conventional digital currencies are not built on a blockchain, there's still a need to trust a central bank to make sure people don't spend the same digital record twice. With cryptocurrencies that record is distributed on machines all over the world.”


Dollars can be printed and used to manipulate financial markets. But you can’t just print new cryptocurrency.Carol Alexander
Professor of Finance at the University of Sussex Business School

As every block is mined, more cryptocurrency is created, albeit at diminishing levels, so that in about 20 years' time, the market will have theoretically matured.

“Dollars can be printed and used to manipulate financial markets,” says Professor Alexander, “but you can't just print new cryptocurrency. No one yet knows how the value of, say, Bitcoin, will be affected [by new coins being mined over the coming years].

“The question is,” she adds, “what is a fair price for Bitcoin? There's no intrinsic value. There's only value insofar as people think there's value.”

It is possible that, with proper regulation of cryptocurrency exchanges (which is likely to happen this year), prices could stabilise. This would mean that in the future, price manipulation would be less blatant.

Aside from concerns over the fluctuating value of Bitcoin and other cryptocurrencies, there's also the issue of energy consumption. With Bitcoin, the power needed to run mining rigs has outstripped the energy required to mine physical metals from the ground. Bitcoin’s energy consumption is now higher than the electricity used annually by countries the size of Denmark.

It’s important to note though that Bitcoin is not the only game in town. Other cryptocurrencies use less energy-intensive algorithms to mine blockchain transactions.

Cryptocurrencies are a hot topic at Sussex. Aside from FinTech, researcher Steve Huckle suggests they may herald a new era of socialism. He claims that, by nullifying central banks in financial transactions, cryptocurrencies could indirectly put an end to capitalism. Furthermore, although cryptocurrencies might use a lot of energy themselves, they could be the driver behind a cultural shift towards renewables.

Whatever the potential of cryptocurrencies, the finance industry isn't fazed right now. “I don't think banks regard cryptocurrencies as a threat,” says Carol. “They control the economy and they decide what currency we use.”

Carol was a Mathematics with Experimental Psychology undergraduate at Sussex in the 1970s, where she also did her PhD in Algebra. Later, she turned her skills towards econometrics (applying statistics to economics), returning to Sussex in the mid-1980s before a second spell in the City spent delving into financial risk. Now, with her colleagues in the Business School (in particular banking expert Malgorzata Sulimierska), she is pioneering a new BSc in Finance and Technology with the aim of developing tomorrow's industry leaders.

“FinTech is the interface between AI and financial markets,” she explains. “Sussex is ideally suited to offer such a degree, with its strong interdisciplinary focus. Because blockchain applications cut across informatics, law and sustainability, as well as more traditional finance and business, we can build on the traditions of Sussex to become one of the first movers in this space.

“In the future, students who understand FinTech will have better career prospects, and not only in financial markets,” she adds. “New job opportunities will be everywhere.”

Bitcoin's price history

2009


launch at around $1 USD

2011


value rises to $29.58

2017

price peaks at almost $20,000 before crashing.

 


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