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Dogecoin to the moon … and then back to earth

| Monday, May 10, 2021

At least twice a week over the past few months, I have received all-caps text messages from one of my best friends from high school saying something like, “BRO, CHECK BITCOIN!” or “DOGECOIN UP 40%!!” In the beginning, I would usually check out a cryptocurrency market report to see what he was talking about, and respond with a “That’s crazy, dude.”  Eventually, I decided to look more deeply into cryptocurrencies since they had garnered so much attention in the news. I did some research on blockchain and even tried to read Satoshi Nakamoto’s 2008 whitepaper, which thoroughly confused me. But I kept reading and trying to learn, and after a while, it started to make a little more sense. However, it also made me much more skeptical about digital money.

One of the main reasons for my skepticism was the crazy fluctuations that digital currencies can see in such a short amount of time. For example, take Dogecoin, a cryptocurrency first created in 2013 as a joke to make fun of cryptocurrencies. Yet, in the past week, Dogecoin has gone from 38 cents to 73 cents (a 92% increase) and back down to 43 cents (a 41% drop). Why such a big drop? Did it have to do with the pandemic or some other real problem? No. The reason for its most recent drop is attributed to Elon Musk’s appearance on “Saturday Night Live” in a skit joking about Dogecoin and other cryptocurrencies.

Large fluctuations in tradable assets are nothing new — even on highly regulated stock exchanges, share prices can rise and drop quickly based on company performance, world events, or social media influence. But where the crazy ups and downs become problematic is when people talk about widespread adoption of cryptocurrencies for regular consumer purchases. For example, what if you want to buy a car with Bitcoin? It will be pretty challenging if Bitcoin is worth $45,000 on Monday, $60,000 on Wednesday and then $50,000 by the weekend. Imagine the buyer’s remorse you would have if you bought on Wednesday! 

Another major concern with these digital currencies is their impact on the environment. In order to process transactions on the decentralized network, as well as to mine new coins, an exorbitant amount of electricity is used. In fact, a recent report from Cambridge University found that the whole Bitcoin system uses more electricity than the country of Argentina. David Gerard, a crypto expert, says, “Bitcoin is literally anti-efficient … This means that Bitcoin’s energy use, and hence its CO2 production, only spirals outwards.” While it may seem like an easy and efficient way to buy or sell things, the behind-the-scenes workings of cryptocurrencies are anything but efficient.

So, where does this leave us? Should everyone boycott crypto and hang on tight to the precious fiat-currency dollar? Well, there is not a clear answer in the long run. Cryptocurrencies offer a lot of benefits. Transactions are a lot more confidential and secure. In addition, cryptocurrencies have the power to increase access to financial services in developing countries where citizens may not otherwise be able to make investments. Perhaps increased regulation will help curb the wild fluctuations. With crypto professor and former Commodity Futures Trading Commission (CFTC) chair Gary Gensler taking over as chair of the SEC, someone with knowledge and experience may be able to harness the good while keeping the risks manageable. However, in the short run, the crypto market seems awfully similar to gambling — or as Elon said, “a hustle.” In other words, don’t bet what you can’t afford to lose.

The views expressed in this column are those of the author and not necessarily those of The Observer.

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