In just over a decade, cryptocurrencies have grown from digital novelties to trillion-dollar technologies that are now used for a wide range of purchases. But despite their extraordinary popularity, there is still scepticism about whether they can replace more traditional payment methods or national currencies.
Cryptocurrencies are virtual tokens that allow people to make payments directly to each other through an online system. Unlike national currencies such as the Australian dollar, which derive part of their value from being legislated as legal tender, Bitcoin and other cryptocurrencies have no intrinsic or official value; they are worth only what people are willing to pay for them in the market. The underlying technology behind these systems is complex, and requires substantial computing power to verify transactions and keep track of the “blockchain” (a public record of all cryptocurrency activity).
Much of the interest in cryptocurrencies is speculative, with investors hoping to trade them for a profit. And the wildly volatile prices of some cryptocurrencies (nearly $1 trillion was wiped out of the value of Bitcoin alone in 2022) have raised concerns about their riskiness.
Some governments have begun to regulate cryptocurrencies, but the challenge for regulators is to craft rules that limit traditional financial risks and don’t stifle innovation. For example, many cryptocurrencies are mined using powerful computers to solve complicated algorithms, and this activity can use up enormous amounts of electricity. These concerns have prompted calls for regulation, including from Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen.
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