Cryptocurrency, the latest example of how one’s imagination can be practised in the world of reality. As stated by Frankenfield (2019) “A cryptocurrency is a digital or virtual currency that uses cryptography for security.” i.e. cryptocurrency is one of the securest currencies to buy, or is it?
The boom and the burst
Cryptocurrencies, with Bitcoin at the front, have seen a big spike in the last couple of years with the value of some increasing by more than 200%! But like every hype or a bubble as called by sceptics, crypto values have seen a dramatic plunge from which they have not recovered as yet. While the crypto market was becoming a mess, it exposed three fundamental problems: the extent of its usage is exaggerated; the technology does not scale well and thirdly, fraud may be endemic. (The Economist2019)
The crash showed that the coins, especially Bitcoin, were not fully used as a payment system and were rather seen as an investment. The main problem was time. Because of the short period in which the Bitcoin bubble inflated, it was not yet considered a fully understood coin and it probably is still the case. Although large corporations like Microsoft, Subway and Expedia adopted the currency in their payment systems (Chokun, 2018) and corporations like Amazon, Starbucks and eBay are set to enter the market (Terenzi, 2018), the unfamiliarity and lack of understanding of such coin means that the suppliers and the consumers around the globe are reluctant to use it as a payment system. Off all the Bitcoin transactions that occurred in 2018, nearly 0.5% were used to make payments of which 35.7% went for spending on gambling sites. Even as an investment, enthusiasts see Bitcoin and other currencies as a long-term asset instead of a payment system. Above all, day traders of cryptocurrencies have to deal with price manipulation due to occurrences such as coin dumping. .
The second problem that arose is related to technology. cryptocurrencies are made through blockchain and cryptography, two difficult terrains to be skilful and well-established in. Nicholas Weaver, a computer scientist at the University of California, Berkeley, claimed that: “Cryptocurrencies are unlikely ever to achieve mass adoption.” The main purpose of cryptocurrencies is to be a new financial system instead of an extension of the current one like WeChat Pay and AliPay of China. The big flaw of the coins during the inflation period related to the lack of advanced technology for the processing of transactions of coins. The demand exploded beyond the limits of the maximum transaction load that the platforms could handle. As a result, some buyers of these coins had to pay unprecedented amount of transaction fees. In order to gain or regain trust in these currencies, the platforms and the exchanges have to redesign the technology platform to get rid of such damaging flaws. (The Economist, 2019)
Bitcoin is one of the few coins that are limited in production whereby it is one of the most speculative assets one can have in his or her portfolio. As a result, Bitcoin mining is going to halt at one point in the future which leads to two potential scenarios. If mass adoption is not achieved before this event, the coin can suffer great losses and even deflate. If mass adoption is achieved or nearly achieved before the end of Bitcoin mining, the coin can rise as the best asset of the 21st century with an ever-growing demand and a limited supply. At that point, Bitcoin can be seen as a limited production car, whose price only increases over time. Not only Bitcoin, but even coins like Ripple, Ethereum and Litecoin will be booming in prices.
The final problem with cryptocurrencies is fraud. Sceptics use the argument that transactions of Bitcoin and other currencies are irreversible, a boon for con artists. Exchanges of cryptocurrency are often attacked by hackers or sometimes the whole platform collapses at once. The problem with hackers and collapsing is solely due to security thus they have no impact on the fact whether the currency is fraudulent. Like all corporations and financial service providers, crypto exchanges need to secure and update their platforms frequently to prevent any damages or hacks. This means the only way fraud can be committed is through the irreversibility of the transactions. Whether a transaction is irreversible or not is up to debate. One of the main purposes of Bitcoin was to prevent double spending. In the centralized market one has to follow several rules and regulations as well as some procedures for verification in order to reverse a transaction. Since Bitcoin is a decentralised currency, it is very difficult to reverse any transaction. First of all, there should be zero confirmation of the bitcoin transaction in the blockchain. Once there is a confirmation of even one Bitcoin in the network, it becomes impossible to reverse the Bitcoin transaction. When the possibility arises to reverse a transaction, there are two kinds of methods to reverse it. One can choose between “Replace by fee” and “Double spending”. (Kojo Kumi, 2018) Thus, in reality there is a way to reverse BTC transactions.
Although criticism is slammed at Bitcoin and other cryptocurrencies from all across the globe, some have opined otherwise. Individuals like John McAfee, Jack Dorsey, Mark Zuckerberg and even celebrities like Lionel Messi, DJ Khaled and Mike Tyson support the currencies. (TokenStars, 2018) They are spreading awareness of the beneficial usage of the cryptocurrencies and the blockchain technology.
At time the post-bubble period for the crypto market is seen as an “AI winter” or a “crypto night” what many cryptocurrency enthusiasts would call it. They view cryptocurrency as the future of the financial world. As the saying goes: “It is always darkest before the dawn”.
1. Frankenfield, J (2019). Cryptocurrency. Investopedia: https://www.investopedia.com/terms/c/cryptocurrency.asp
2. Chokun, J (2018). Who Accepts Bitcoins As Payment? List of Companies, Stores, Shops. 99bitcoins: https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/
3. Terenzi, C (2018). Are Corporate Cryptocurrencies Coming? Amazon, eBay and Starbucks. Blockonomi: https://blockonomi.com/corporate-cryptocurrencies/
4. The Economist (2019). Cryptocurrencies The madness of crowds. The Economist: March 30th 2019.
5. Kojo Kumi, J (2018). Is A Bitcoin [BTC] Transaction Really Irreversible? Zycrypto: https://zycrypto.com/is-a-bitcoin-btc-transaction-really-irreversible/
6. TokenStars (2018). 25 Celebrities Who Are Into Cryptocurrency for Real. TokenStars: https://medium.com/@TokenStars/25-celebrities-who-are-into-cryptocurrency-for-real-187ff89d83a7