In this article we are going to discuss the real reasons behind the crashing of crypto market. We are going to examine the concept of crypto currency, the history, architecture, mining and come up with a conclusion.
What is a crypto currency?
Well, a crypto currency is a digital currency introduced to work as a medium of exchange through the internet. It is decentralized, meaning, it is not dependent on central authorities such as banks and governments.
Let's Delve Deep
One may think that it all started with Bitcoin, but the truth is rather different. In fact, an American cryptographer called David Chaum came up with an anonymous cryptographic electronic money called ecash. And that was in 1983. Later, in 2009, the first decentralized crypto currency was conceived by a developer named Satoshi Nakamoto, and it was Bitcoin.
The working schemes of crypto currencies may differ from one type to another. Major work schemes are: proof-of-work which is used in Bitcoin, and proof-of-stake which is used in Peercoin.
The concept of decentralization made the internet censorship very difficult, so many countries ordered studies of crypto currencies.
In June 2021, El Salvador was the first country to recognize and regulate crypto currencies such as Bitcoin. After two months, in August, Cuba followed in accepting crypto currencies as legal tender.
The Alternative Crypto Currencies
Many types of digital assets like Tokens and different alternative versions of Bitcoin emerged. All these were known as alternative crypto currencies, and the named was shortened to “altcoins” or “alt coins”.
These altcoins were designed based on Bitcoin as a model protocol. There are over 9,000 different crypto currencies worldwide, Ethereum and Litecoin are two major examples to name a few.
These altcoins and their markets often have rallies which are referred to as “altseason”.
Some developers noticed that upon usage, some crypto currencies tend to lose its purchasing power so they invented the Stablecoins. The aim here, as the name suggests, is to preserve the purchasing power, but ironically, most designs were not foolproof. Numerous Stablecoins crashed or lost their values like what happened with Terra in May 11, 2022.
First, the rate of unit production is stated publicly when the system responsible for creating a crypto currency is launched. And that is because the currencies at question here are decentralized. Speaking of decentralization, governments and companies cannot produce new units and cannot back entities hold asset value measured in them.
Second, to understand the architecture fully, we must first familiarize ourselves with some concepts like miners, blockchains, etc..
A community of untrustworthy parties that maintain the integrity and balance of ledgers within a proof-of-work system. These parties add transactions to the ledger after a validation process and a timestamping scheme.
A blockchain provides validation for each coin in any given crypto currency. It is a list of records, sometimes referred to as blocks, which is ever growing, these blocks are secured by cryptography. The block contains a hash pointer that links to a previous block, a timestamp and transaction data. The blocks are designed to resist any modification of data contained within.
This word in crypto currency refers to the computer connected to the crypto currency network. Every node has a copy of the blockchain of the crypto currency it is linked to. When a transaction is made, the node’s role is to send details of the transaction to other nodes.
Being one of the most important tools to run a crypto currency network, timestamping is the corner-stone in any system. It is a scheme that validates the newly added transactions to any given blockchain. Timestamping diminishes the need for a trusted third party.
The first timestamping introduced was the proof-of-work scheme. And the most popular proof-of-work schemes were based on SHA-256 and SCRYPT hashing algorithms.
What Did Really Happen?
So what did really happen? What are the real reasons behind the crashing of crypto market?
Well we can assuredly say that experimenting is a key factor in the crashing of any crypto market.
Investors and developers have been keen to come up with a Stablecoin that can overthrow Bitcoin and Ethereum. The very term “stablecoin” is an attractive aspect in the creation of an altcoin system. However, lack of transparency can lead to disastrous consequences. Consequences we witnessed when Luna’s Terra lost more than 99 percent of its market value over night.
As we said earlier, mining is a validation of transactions. Miners get crypto currency as a reward. But mining comes at a high price. Due to the wide spread of the mining process it started to consume more energy. This lead many investors to shy away from crypto market altogether.
A Final Word
In the end, although crypto currency is a unique and advanced monetary system, it was not always smiled upon. On the contrary, for many reasons governments banned crypto currency altogether. Crypto currency is not that stable, it can easily evade censorship, it can be used in the dark web transactions. Those reasons among many others drove the Chinese government to illegalize all crypto currency transactions in September 2021.
So if you are willing to invest in crypto market, do extensive research and consultation. Study the system you’re investing in thoroughly, and keep away from false promises and exaggerated claims such as “stablecoin”.