With Phoenician blood in their veins, Cypriots should be particularly wary of falling into the digital currency trap
By Christos P. Panayiotides
I have little doubt that part of the genetic material of Cypriots has a Phoenician origin. This explains the propensity of Cypriots to seek a quick and dirty profit; a habit that has accumulated so much suffering to so many of our compatriots over the past decades. The losers in these cases are, as a rule, the ignorant and the naïve, at whose expense the cowboys make fat profits.
We observed all this after the collapse of the real estate market that was followed by the equity market bubble and the banking bonds failure. Now, the prospect of seeing the same phenomenon recurring – this time cryptocurrencies — is visible on the horizon. Clearly, no speculative gains can materialise if market prices are stable. As a consequence, those chasing easy gain seek to generate substantial price swings (and they have numerous techniques at their disposal for doing this). This affords them the opportunity to generate substantial speculative gains for themselves, at the expense of the naïve and the uninitiated players, who are often persuaded to risk their savings by the lure of a quick and easy profit.
The most primitive form of trading is that of bartering: the delivery of goods or services in exchange for some other goods or services. An example of such a transaction would be the delivery by an olive oil producer of twenty litres of olive oil to a doctor in return for a gastroscopic examination. The bartering system is cumbersome because supply and demand must be matched in a single transaction. The oil producer, for example, has to find a doctor who is looking for 20 litres of olive oil and is prepared to perform a gastroscopic examination in return.
The first metal coins
The first metal coins date back to 2000 BC. They were made of gold, silver, copper or bronze and were minted by “state” authorities. These coins made a huge contribution towards the development of trade, by greatly facilitating the transactions that such trading entailed. Initially, but also at a later stage, these coins contained a specified value of the actual metal used in their minting (e.g. the gold sovereign). However, this condition was gradually relaxed and (along with the paper notes that arrived at a later stage) ended up in being units of measurement of the value of goods and services and, therefore, of the consideration paid in a sale/purchase transaction.
The modern traditional currencies
The modern traditional currencies (also referred to as “fiat” from the Latin word standing for “let it be”) are issued by sovereign states and, in particular, by their central banks. Depending on the issuer, a particular currency may be more or less reliable and, by extension, more or less stable compared to other currencies.
A key difference between the classic modern-day currencies and the cryptocurrencies is that the former are physically tangible while the latter exist only in digital form, hence, the term “cryptocurrencies”. Of course, this is not entirely valid because a significant portion of transactions denominated in the traditional currencies (e.g. most financial transactions) do not involve the physical movement of currencies; they merely require the involvement of a financial institution.
In recent years, cryptocurrencies or digital currencies have been introduced in the market place. The best known of these are Bitcoin and Ethereum, but there are three to four thousand other cryptocurrencies. An important point that must be noted is that these cryptocurrencies are not issued by a public or a state authority and – at least for the time being – are not supervised or regulated by any public body.
The blockchain technology
The blockchain technology and an international network of large computers form the operating infrastructure on which cryptocurrencies sit. The blockchain technology, which has been developed in the last decade, allows the generation of a decentralised but unified chain of time sorted blocks of transactions, which are verified and confirmed by the use of algorithms. The process of verifying the validity of a transaction is called “mining” and requires the use of huge computers distributed throughout the world. The process also absorbs a lot of energy in the form of electricity, to an extent that it is already creating a big environmental problem (which, of course, is a separate issue that cannot be addressed in the context of this article). The “miners”, who are involved in these verification processes, charge verification fees in respect of the transactions.
The infrastructure on which the cryptocurrencies sit is something analogous to the role the world-wide-web (www) plays in relation to emails, i.e. it is an infrastructure that is totally unrelated to the content of the information that is being processed.
There is no doubt that the concept of one global but decentralised chain of time-sorted blocks of information marked the beginning of a new technological revolution similar to that of the world-wide-web. This technology is still evolving, driven by the effort to address the technical problems which arise in practice but also by the need to serve the large economic interests that are involved in the whole process.
These developments have a direct impact on all the cryptocurrencies, the existence and functioning of which totally depends on the decentralised blockchain technology. There are concerns and worries as to the security of these systems, about the risk of the system being utilised for criminal purposes, about the possibility of the technology being exploited by opportunistic profit seekers.
These problems are under an on-going examination and evaluation process, which leads to further developments and modifications. In the past few months, there has been an increased interest on these issues on the part of regulators, in the direction of formulating and adopting a regulatory framework, which will govern the operation of the decentralised blockchain technology.
In particular, the European Union recently formally acknowledged the need for a legal and regulatory framework within which blockchain will be obliged to function. Thus, on September 24, 2020, the European Commission adopted a comprehensive series of legal proposals that concern crypto-assets. The realisation of these proposals is at the implementation stage. Furthermore, the European Central Bank, in cooperation with the European Commission, is looking into the issue of a digital euro. Corresponding thoughts and developments are being noted in all the technically developed countries of the world, in the West as well as in the East.
In the meantime, the market value of the cryptocurrencies exhibits dramatic fluctuations. The table, which follows, reflects the fluctuations exhibited by Bitcoin over the past three years (in thousands of euro):
The CFDs (Contracts for the Difference) is a form of forward contracts in which the speculative element focuses on the future market price of a specified asset and, in particular, of a specific cryptocurrency. These contracts, as they relate to cryptocurrencies, are illegal in the United States.
If you do not have money to lose, avoid – for the time being – engaging in sales/purchases of cryptocurrencies. If, however, you decide to proceed with this kind of an “investment”, good luck. But, if you incur losses, do not expect other taxpayers to compensate you.
Christos Panayiotides is a regular columnist for the Cyprus Mail, Sunday Mail and Alithia