Future for Advanced Research and Studies (FARAS) hosted a discussion on November 13, 2024, titled "The Economy of Crypto Currencies: Trends and Future Outlook." Dr. Medhat Nafei, a faculty member of the Faculty of Economics and Political Science at Cairo University, led the session, which was moderated by Dr. Ehab Khalifa, head of Technological Developments Program Coordinator at FARAS.
During the session, participants delved into various aspects of digital currencies, also known as virtual or crypto currencies. The discussion encompassed the nature of these currencies, their developmental phases, distinctive characteristics, potential advantages, and associated risks. Key points from the session are outlined in the following sections:
Unprecedented Surge
The cryptocurrency market experienced an unprecedented surge following Donald Trump's victory in the U.S. presidential election. Bitcoin's price soared to a record $87,500, marking a significant milestone in the history of cryptocurrencies. This major shift represents a groundbreaking development, reflecting the nature of the coming era as Trump's campaign embraced digital assets.
The phenomenon was further reinforced by the influence of Elon Musk, who has become a key figure in the new Trump administration and one of the prominent supporters of cryptocurrencies. Their approach contrasts sharply with past trends, when there was a prevailing narrative seeking to demonize cryptocurrencies as a means for money laundering.
Digital currencies are now viewed as the natural evolution of money, eliminating the need for physical cash. Consequently, the shift towards digital currency issuance is seen as a logical progression. However, despite the existence of approximately 14,000 digital cryptocurrencies on the market today, with 9,000 of them active, they still lack widespread acceptance. These digital assets do not yet fulfill all the functions of traditional money, nor are they issued by a central authority.
Digital currencies are characterized by scarcity, decentralized transactions, and the absence of a third party or intermediary. They are also not suitable for secure investment or as a substitute for money due to several factors. Their volatility and exposure to sharp value fluctuations make them impractical as a medium of exchange and unreliable as a store of value or "reserve."
The concept underlying cryptocurrencies bears similarities to a Ponzi scheme, where early investors, such as those holding Bitcoin, benefit from the inflow of new participants. When viewed as a medium for investment and speculation, alternatives like gold prove to be much more stable and reliable, with considerably less fluctuation and risk than digital currencies.
Consequently, investments in digital currencies cannot be considered secure. However, their extreme volatility not only reflects the magnitude and limits of the risks involved but also indicates the potential for substantial profits in short periods, as risk and reward are inherently linked.
Digital currencies could potentially gain the characteristics of traditional money if issued by central banks or under their regulation, adding transparency and stability. China and other countries have begun moving in this direction, and the International Monetary Fund has started encouraging policymakers to assess the need for digital currency issuance. In this context, Dr. Nafei suggested that any proposed digital currency should be backed by a different reserve, based on energy rather than the U.S. dollar.
If central bank-backed digital currencies become a reality, they would likely undermine traditional cryptocurrencies. This shift could limit the use of existing cryptocurrencies to speculation, illicit activities, and dealings with sanctioned countries, such as Russia and Iran, which rely on them for trade.
The Need for Energy-Based Digital Currencies
The energy consumption in digital currency mining is currently wasteful, despite claims from some miners about developing mechanisms to convert this energy into artificial intelligence-related products during periods of lower cryptocurrency prices. Energy remains a primary challenge for digital currencies, with mining operations consuming as much power as several countries combined. This massive energy usage yields few tangible benefits, resulting in significant environmental and economic challenges that necessitate more sustainable alternatives.
In response to these concerns, Dr. Nafei proposed the development of "energy-based digital currencies" backed by energy units, such as the British Thermal Unit (BTU). Unlike traditional cryptocurrencies, these energy-based currencies would be directly linked to the energy consumed rather than being subject to energy market fluctuations. This approach could lead to wider acceptance and increased stability, enhancing their potential for global use and trade.
The discussion concluded by emphasizing that those who can efficiently and effectively generate eco-friendly energy will wield broader economic and political influence. This observation underscores the crucial role of controlling energy resources in shaping global power dynamics. As the world transitions from reliance on traditional currencies to digital ones, these new forms of currency are poised to play an increasingly significant role in an economy moving towards digitalization.
