After the relentless hype about Bitcoin and other cryptocurrencies such as Ethereum, Solana, Dogecoin, LUNA, etc., for the last couple of years, we are now witnessing their complete meltdown. The hype was primarily driven by eye-popping increases in valuations of all the major cryptocurrencies. Bitcoin had gone from around USD 4,000 to USD 64,000, a sixteen fold increase, in 20 months. Other cryptocurrencies had even more ridiculous price increases in the same time period – Ethereum had a 50 fold increase, Solana 500 times, and LUNA had a 1,000 times increase. Now, these cryptocurrencies are crashing down. Bitcoin has dropped by 55%, Ethereum by more than 60%, Solana by 85%, and LUNA has gone all the way to 0.
So, how does one make sense of these complex and mysterious things which have seen their combined valuations grow to trillions of dollars? And are being touted as the future of currencies in the digital age? Are these merely highly speculative Ponzi schemes? Or do they have legitimate use in a world where digital transactions are increasingly widespread?
Let’s start by examining the justification for having cryptocurrencies. In theory, they are supposed to enable electronic payments with no intermediary, i.e., peer to peer cash transactions. The problem with transferring money electronically between two parties is how to determine the balances after the transaction. To start with, the party sending the money should have the required amount….
