PESTLE Analysis for Cryptocurrencies and Blockchain

Analysis: Cryptocurrency and the Blockchain Industry

WolfpackBOT Chief Marketing Officer, Rance Garrison, looks at the broader social and political challenges around Crypto and Blockchain.

One of the most innovative and potentially disruptive financial and technological developments of the twenty-first century has been the development and growth of cryptocurrency and blockchain technologies.  Spearheaded by the initial development of Bitcoin in 2008, the anonymous coder or group of coders who created Bitcoin’s source code, known only as Satoshi Nakamoto, sought to create a “purely peer-to-peer version of electronic cash” that would allow users to send payments directly from one party to another without an intermediary financial institution, such as a bank or credit card company.  Essentially, Bitcoin’s original intended purpose was to create “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party” (Nakamoto, 2008).

In addition to serving as a peer-to-peer electronic payment method, Bitcoin and other cryptocurrencies have also become highly speculative investment vehicles.  While Bitcoin traded for just pennies throughout the first few years of its existence, the price of a single Bitcoin saw explosive growth throughout 2016 and 2017, reaching an all-time high of just over $20,000 in 2017, more than a 1,000 percent increase in less than one year, with other major cryptocurrencies such as Ether and Ripple’s XRP following suit (Chu, 2018).  While the market has declined since the all-time highs of 2017, the price of a single Bitcoin has steadily traded between $6000 and $10000 USD throughout the first half of 2020, as shown in the chart below. 

With the arrival of the Covid-19 pandemic and the social and political unrest that has shaped much of the global socio-political and economic conversation in the first half of 2020, many are taking a second look at cryptocurrency and blockchain technology and are asking themselves what role, if any, will these burgeoning financial technologies play in the global economy in the years and decades to come.  This paper will explore the political, economic, social, technological, legal, and environmental issues surrounding blockchain technology, Bitcoin, and other cryptocurrency assets. 

POLITICAL / LEGAL

Because cryptocurrencies such as Bitcoin are only around a decade old, the ways in which cryptocurrency markets are affected by political and social events have not yet been studied with as much depth as one could expect in more traditional asset and financial markets.  Despite this, however, analysts have been attempting to place cryptocurrency and blockchain technology within a wider historical and political context (McIntosh, 2020)

One of the most direct relationships between cryptocurrency and politics involves the financing of political campaigns.  In 2014, Swedish Parliament candidate Mathias Sundin became the first person to be elected to Parliament through a campaign that exclusively accepted Bitcoin donations, and in 2016, Republican Senator Rand Paul became the first United States presidential candidate to accept cryptocurrency donations with the United States Federal Election Commission (FEC) first releasing campaign finance cryptocurrency guidelines in 2014 (Burcher, 2019).  In 2020, Democratic presidential hopeful Andrew Yang became the second United States presidential candidate to accept cryptocurrency donations, and his platform included the concept of allowing citizens to vote from their mobile devices, secured by immutable blockchain technology (Bambrough, 2019)

That being said, Bitcoin and other cryptocurrency assets are not without their critics.  President Donald Trump has famously derided cryptocurrencies as being ultimately “worthless” and “made of thin air” and while such accusations are not entirely without warrant given the massive price fluctuations of the cryptocurrency markets, it is worth noting that major cryptocurrencies such as Bitcoin, Ether, and XRP have usually benefitted from network effects following each crisis and short-term decline in value.  Given that Bitcoin is ultimately capped at 21 million units, the more users who buy, mine, and hold Bitcoin, the more valuable each individual unit of Bitcoin becomes (Krishnan, 2020), a concept that will be expanded upon in the following economic section.

ECONOMIC

Given the volatility of the price value of Bitcoin and other cryptocurrencies, it can be difficult to make an argument for Bitcoin as a long-term store of value for citizens of countries with more developed economies, such as the United States and many Western European nations; however, this is far from the case in countries that have been experiencing deep economic crises and rapid inflation in recent years such as Venezuela and Zimbabwe.  In these countries, many citizens have turned to buying Bitcoin as a means of protecting savings since Bitcoin is easy to store and sell (McIntosh, 2020). 

Whether the current economic crisis that has resulted from the Covid-19 pandemic will lead to greater mainstream network adoption of cryptocurrency and blockchain technology remains to be seen; however, Coinbase CEO Brian Armstrong has noted that given the push toward e-commerce and social distancing in the wake of the pandemic, greater adoption of digital currencies is likely and has argued that governments should enact cryptocurrency regulations that strike the proper balance between privacy, law enforcement and cyber security, and innovation and economic competition (Armstrong, 2020)

Blockchain architect John Kelleher notes that one of the keys to Bitcoin’s long-term value is scarcity.  As has been seen with many fiat currencies, a money supply that is too large can lead to rapid inflation and economic collapse, with many governments operating with a pre-set inflationary rate that serves to drive the value of fiat currency downward.  In the United States, the rate of inflation has historically been around 2 percent annually.  In contrast with fiat currency, Bitcoin’s source code only allows for 21 million Bitcoins to be “mined,” with the final Bitcoin expected to be mined around 2140, with mining difficulty increasing roughly every four years.  This would be analogous to the United States government gradually ceasing the production of new currency. 

As a general rule, scarcity tends to drive the value of an asset higher, as has historically been seen with gold and other precious metals (Kelleher, 2020).  The marginal cost of Bitcoin mining in the form of electricity tends to be equal to the marginal benefit in the form of Bitcoins mined.  Specifically, in the case of Bitcoin, the mining reward halves every 210,000 “blocks” leading to a supply path that continuously diminishes to zero (Harwick, 2016).  The implications of cryptocurrency mining will be discussed further in the Social / Environmental and Technological sections. 

SOCIAL / ENVIRONMENTAL

One of the biggest criticisms that has been levied against the cryptocurrency space involves the environmental impacts of the proof-of-work “mining” process through which new Bitcoins are generated.  Essentially, cryptocurrency mining is a process in which computers around the world connected via the Internet solve complicated mathematical problems and earn Bitcoin or other cryptocurrencies, commonly known as “alt-coins,” as a reward for solving the problem.  This system is supported by the blockchain, a distributed digital ledger that records all past transactions. 

It is estimated that in the case of Bitcoin, this process uses about 32 terawatts of electricity per year, an amount of energy that could power about 3 million United States households (Reiff, 2018).  Due to the amount of coal and gas used to produce this amount of electricity, environmentalists have argued that the mining of Bitcoin and other cryptocurrencies is a significant contributor to climate change (Reiff, 2018).  Having noted the negative environmental impact of proof-of-work mining, there may in fact be a solution that is both more environmentally friendly and more economically profitable in the form of newer, more efficient technology.

TECHNOLOGICAL

Obviously, cryptocurrencies and blockchain technologies are a relatively new development, but even within this industry technological change often rapidly occurs.  One of the more recent technological developments that has potential environmental and economic implications is the rise of “proof of stake” technology.  While Bitcoin remains driven by proof-of-work technology, Ether, commonly thought of as the “number two” cryptocurrency is expected to shift to a proof of stake protocol in the near future, and in April of 2020, Tezos became the largest staking network with $1.81 billion USD in assets (Hatzis, 2020).  So what is staking, and why is this new protocol so potentially disruptive to the cryptocurrency industry?

As previously discussed, traditional cryptocurrency mining involves a proof-of-work process, in which computers secure the blockchain network by solving complex mathematical algorithms and are rewarded Bitcoin, or other cryptocurrencies, in return for securing the network.  This process is expensive, both in terms of energy consumption and equipment, and brings with it negative environmental consequences.  In contrast with the proof of work process, staking allows cryptocurrency holders to earn interest on their cryptocurrency holdings, simply by holding a certain amount of coins in a verified cryptocurrency wallet secure the network.  This avoids both the large equipment expenses and electricity consumption of traditional proof of work mining. 

As of 2020, the total market cap for all Proof of Stake coins stands at $15 billion USD, with most staking coins giving an annual yield of 10 to 20 percent, depending on the coin (Hatzis, 2020).  Time will tell if the Covid-19 crisis and the rise of staking technology leads to increased cryptocurrency adoption and decreased environmental damage from proof of work mining, respectively. 

CONCLUSION

As the world moves forward into the post-coronavirus world, it is likely that the market will continue to develop many new technologies that will drive us toward greater decentralization and reliance on e-commerce.  What role cryptocurrencies and blockchain technologies will play in this world remains to be seen, but given the political, economic, social, and technological developments that continue to take place at a rapid pace within the industry, it is almost a sure bet that these technologies are far from a passing fad, and are likely just in their infancy.

Sources

Armstrong, B.  (2020).  Will Covid-19 Finally Usher in the Age of Cryptocurrency?  The New Economy.  Retrieved July 4, 2020, from:  https://www.theneweconomy.com/technology/will-covid-19-finally-usher-in-the-age-of-the-cryptocurrency

Bambrough, B.  (2019).  Andrew Yang Just Made Bitcoin and Blockchain a Big 2020 U.S. Election Issue.  Forbes.  Retrieved July 4, 2020 from:  https://www.forbes.com/sites/billybambrough/2019/08/27/andrew-yang-2020-us-presidential-election-issue/#1f18cc5a8b68

Bitcoin Price Chart.  (2020).  Coinbase.  Retrieved July 4, 2020 from:  https://www.coinbase.com/price/bitcoin

Burcher, C. (2019).  Cryptocurrencies and Political Finance.  International Institute for Democracy and Electoral Assistance.  Retrieved July 4, 2020, from:  https://www.idea.int/sites/default/files/publications/cryptocurrrencies-and-political-finance.pdf

Chu, D. (2018). BROKER-DEALERS FOR VIRTUAL CURRENCY: REGULATING CRYPTOCURRENCY WALLETS AND EXCHANGES. Columbia Law Review, 118(8), 2323-2360. Retrieved July 5, 2020, from www.jstor.org/stable/26542511

Harwick, C. (2016). Cryptocurrency and the Problem of Intermediation. The Independent Review, 20(4), 569-588. Retrieved July 5, 2020, from www.jstor.org/stable/44000162

Hatzis, I.  (2020).  The Rise of Staking.  Daily FinTech.  Retrieved July 4, 2020, from:  https://dailyfintech.com/2020/05/25/53856/

Kelleher, J. (2020).  Why Do Bitcoins Have Value?  Investopedia.  Retrieved July 5, 2020, from:  https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp

Krishnan, A. (2020). Blockchain Empowers Social Resistance and Terrorism Through Decentralized Autonomous Organizations. Journal of Strategic Security, 13(1), 41-58. doi:10.2307/26907412

McIntosh, R.  (2020).  How Could Political Change & Unrest Affect Bitcoin in 2020?  Finance Magnates.  Retrieved July 4, 2020, from:  https://www.financemagnates.com/cryptocurrency/news/how-could-political-change-unrest-affect-crypto-in-2020/

Nakamoto, S.  (2008).  Bitcoin:  A Peer to Peer Electronic Cash System.  Retrieved July 4, 2020, from:  https://bitcoin.org/bitcoin.pdf

Reiff, N.  (2018).  What’s the Environmental Impact of Cryptocurrency?  Investopedia.  Retrieved from:  https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/

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