Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet.
Block rewards
Proof-of-work cryptocurrencies, such as Bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.[90]
The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.[91]
The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities.[92] In 2018, Bitcoin's design caused a 1.4% welfare loss compared to an efficient cash system, while a cash system with 2% money growth has a minor 0.003% welfare cost. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment. However, the efficiency of the Bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.[93]
Transaction fees
Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction.[citation needed] The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest.[citation needed] Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.[citation needed]
For Ethereum, transaction fees differ by computational complexity, bandwidth use, and storage needs, while Bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. In February 2023, the median transaction fee for Ether corresponded to $2.2845,[94] while for Bitcoin it corresponded to $0.659.[95]
Some cryptocurrencies have no transaction fees, and instead rely on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.[96][97][98]
Exchanges
Main article: Cryptocurrency exchange
Cryptocurrency exchanges allow customers to trade cryptocurrencies[99] for other assets, such as conventional fiat money, or to trade between different digital currencies.
Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, as of 2020 it was possible to arbitrage to find the difference in price across several markets.[100]
Atomic swaps
Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.[101]
ATMs
Jordan Kelley, founder of Robocoin, launched the first Bitcoin ATM in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.[102]
Initial coin offerings
An initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ether.[103][104][105]
According to PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.[106]
Price trends
The market capitalization of a cryptocurrency is calculated by multiplying the price by the number of coins in circulation. The total cryptocurrency market cap has historically been dominated by Bitcoin accounting for at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as blockchain rewards coded into the architecture technology of Bitcoin itself. The cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of a halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.[107]
By June 2021, cryptocurrency had begun to be offered by some wealth managers in the US for 401(k)s.[108][109][110]
Volatility
Cryptocurrency prices are much more volatile than established financial assets such as stocks. For example, over one week in May 2022, Bitcoin lost 20% of its value and Ethereum lost 26%, while Solana and Cardano lost 41% and 35% respectively. The falls were attributed to warnings about inflation. By comparison, in the same week, the Nasdaq tech stock index fell 7.6 per cent and the FTSE 100 was 3.6 per cent down.[111]
In the longer term, of the 10 leading cryptocurrencies identified by the total value of coins in circulation in January 2018, only four (Bitcoin, Ethereum, Cardano and Ripple (XRP)) were still in that position in early 2022.[112] The total value of all cryptocurrencies was $2 trillion at the end of 2021, but had halved nine months later.[113][114] The Wall Street Journal has commented that the crypto sector has become "intertwined" with the rest of the capital markets and "sensitive to the same forces that drive tech stocks and other risk assets", such as inflation forecasts.[115]
Databases
There are also centralized databases, outside of blockchains, that store crypto market data. Compared to the blockchain, databases perform fast as there is no verification process. Four of the most popular cryptocurrency market databases are CoinMarketCap, CoinGecko, BraveNewCoin, and Cryptocompare.[116]
Social and political aspects
See also: Crypto-anarchism and Cypherpunk
According to Alan Feuer of The New York Times, libertarians and anarcho-capitalists were attracted to the philosophical idea behind Bitcoin. Early Bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for philosophical reasons. We saw Bitcoin as a great idea, as a way to separate money from the state."[117] Economist Paul Krugman argues that cryptocurrencies like Bitcoin are "something of a cult" based in "paranoid fantasies" of government power.[118]
David Golumbia says that the ideas influencing Bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.[119] Steve Bannon, who owns a "good stake" in Bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities.[120]
Bitcoin's founder, Satoshi Nakamoto has supported the idea that cryptocurrencies go well with libertarianism: "It's very attractive to the libertarian viewpoint if we can explain it properly." Nakamoto said in 2008.[121]
According to the European Central Bank, the decentralization of money offered by Bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined,[122] in which Hayek advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.[123]
