by Patrick McCullough | published Oct. 20th, 2021
Digital currency is not a new technology, but it is a rapidly evolving one.
Ever since the person, or group of people, operating under the moniker Satoshi Nakamoto released Bitcoin for public use in 2009, new cryptocurrencies have sprung up like mushrooms to take advantage of the new technology, and new financial opportunities.
Under the Hood
Cryptocurrency is decentralized by design. The entire financial system lives on a blockchain, a distributed ledger that records every transaction that has ever happened.
“Anyone who wants to be a part of it can be a part of it. It’s impossible to discriminate, and everyone is essentially on equal footing,” explained Ethan Witherington, the acting president of RIT’s Blockchain Technology Club.
Computers, participating in the network compete to verify transactions on the blockchain, are arranged in sets called blocks. They do this by trying to solve sophisticated cryptographic problems until one machine gets it right.
Once a block is solved, or ‘mined,’ it is added to the blockchain which is shared across the rest of the network. The miner that does this first is rewarded with a payment in cryptocurrency.
Everything about a cryptocurrency, from the supply of coins to the rate they’re released to the public, is fixed in the codebase. Changing anything requires the consensus of the majority of people hosting the blockchain.
This leads to a form of currency with a stable supply and a volatile demand.
“The true value of Bitcoin is very stable, but it’s public perception is not stable at all.” Witherington explained. “The price to USD is incredibly volatile. People see a 50% drop and they say, ‘Welcome to crypto.’”
Hardware Wars
Between monumental odds, a shrinking supply of coins up for grabs and a massive network of machines racing each other to verify transactions, the cryptocurrency mining scene has only grown more competitive.
In 2014, the private equity firm Atlas Holdings spent $65 million to convert the abandoned Greenidge power plant in upstate New York into a dedicated bitcoin-mining operation.
By the end of 2021, the Greenidge plant plans to have 18,000 machines mining bitcoin with an additional 10,500 on the way. The expansion plans intend to achieve at least 500 megawatts of mining capacity by 2025.
Companies like Atlas Holdings have access to resources that hobbyists and smaller groups can’t compete with. Mining cryptocurrencies has become more difficult over time without access to sophisticated hardware and cheap electricity.
So what happens if a group wants to get involved in cryptocurrency, but can’t afford a down-payment on a power plant? They make their own.
Alternate Markets
According to the count on cryptocurrency tracking website Coinmarketcap, the number of blockchain-based currencies has leapt from around 1,000 to more than 11,000 active listings since Bitcoin’s initial surge in December 2017.
These ‘altcoins,’ a term that refers to cryptocurrencies that aren’t one of the major coins like Bitcoin or Ethereum, have seen a spike in popularity in recent years. They represent the wild west of cryptocurrency — unregulated, decentralized and wide open to anyone with the knowledge to create one.
“Everybody wants to be the first one into a coin. If Dentacoin is going to hit a single cent one day and I can accumulate ten million of it, I’m a rich man,” Witherington explained, referencing Dentacoin, the self-proclaimed “Bitcoin of Dentistry.”
“If Dentacoin is going to hit a single cent one day and I can accumulate ten million of it, I’m a rich man.”
The market around alternative currencies fluctuates wildly for a number of eclectic reasons, but the most common is attention.
Dogecoin is an “open source peer-to-peer digital currency” created by software engineers Billy Markus and Jackson Palmer to poke fun at the wild speculation around cryptocurrencies at the time.
What started as a satirical coin soon grew beyond its creator’s control. The meme-based cryptocurrency currently sits at number seven on CoinMarketCap with a market cap of $36,419,630,400.
Dogecoin’s price movements are usually attributed to the amount of attention the coin is getting on the internet. On Dec. 20, 2020, Tesla CEO Elon Musk tweeted the phrase “One Word: Doge.” The resulting surge of attention sent the value of the coin up nearly 20 percent.
This cemented a pattern that would repeat itself over the coming year: Musk tweets, and Dogecoin follows. This has caused some critics to compare his social media campaigns to market manipulation, but because cryptocurrencies are unregulated, Musk’s activities are technically not illegal.
Dogecoin’s volatility is not unique among altcoins, but its history underlines the fact that surges in attention can lead to surges in price, since the only thing determining an altcoin’s worth is what people are willing to pay for one.
$hitcoins
The explosion of interest in cryptocurrency since Bitcoin’s rise to the top has led many new eyes — and wallets — to the wild world of cryptocurrency trading.
The staggering heights and sudden drops make altcoin investments particularly vulnerable to the whims of the market. This vulnerability is compounded by the fact that some developers are less interested in cryptocurrency’s technological applications and more its financial ones.
‘Shitcoin’ is a derogatory term that refers to a cryptocurrency with little to no value or discernible purpose that is cynically manipulated to make a profit. Carlos Bindert, a second year Supply Chain Management student at RIT, explained this phenomenon.
“With [cryptocurrency], especially with smaller market cap coins, it’s easier to artificially control the supply,” Bindert said.
Newer currencies are especially vulnerable to supply-side manipulation, since creation and distribution are left entirely up to the cryptocurrency’s creators.
“As part of the token creation process you can mint a predetermined amount of the coin. Because it’s not based on anything, you can put in whatever number you want,” Bindert said.
An example of the erratic state of the altcoin market is the recent ‘Save the Kids’ scandal, where a number of influential internet influencers promoted a token to their audience only to dump it en-masse, crashing the value of the Save the Kids token while allegedly cashing in on its short-lived success.
Anyone who bought into the coin during its rise would see its price drop by several orders of magnitude, sinking from $0.004416 to $0.002913 in a matter of days and even lower in the coming week.
“It is difficult to know when something is a rug-pull and when the token developers truly want to do good,” the white paper on the organization’s site read. “That’s why we’ve partnered with several ambassadors to give investors the social proof and confidence that we are in it for the long haul.”
“It is difficult to know when something is a rug-pull and when the token developers truly want to do good.”
The cryptocurrency has yet to rebound, and it is not the only sinking ship on the market. The speculative nature of investing in altcoins makes for a wild scene, with high highs and crushing lows.