Cryptocurrencies such as Bitcoin and Ethereum have been among the most debated topics over the last few months. Supporters argue that these digital coins represent the future of money by offering numerous advantages over more traditional currencies. Detractors compare them to a classic scam in which you offer your hard-earned money in exchange for fool’s gold. The entire space is so new that the average individual has little comprehension of it, rendering them susceptible to misinformation on both sides of the debate. What follows is a presentation of the facts pertaining to digital currencies, sorted by arguments for and against.
The Potential Value of Crypto
Supporters cite numerous arguments in defense of cryptocurrencies. One of the most popular is the blockchain, a public ledger that records every crypto transaction. The technology is called blockchain because a new block is added to the transaction record at set intervals of time. For example, Bitcoin adds a new block to its blockchain every 10 minutes. Each block is checked against previous blocks to protect against hackers and theft, a fact that may make digital money less vulnerable to cyber attack than traditional banking.
This verification process is handled by volunteers through a process called “mining,” or using a powerful computer to solve complicated math equations and verify the transaction. Successful miners are paid in whatever digital currency they mined, adding new coins to the marketplace up to a known limit. This allows cryptocurrencies to be run in a completely decentralized manner, as there is no equivalent of the United States Federal Reserve overseeing the money supply.
The blockchain also allows the development of smart contracts, or contracts that automatically fulfill themselves once certain conditions are met. Consider any merchant as an example. If they know what product they want to order three months from now, they can place the order immediately and pay up front or wait until they are ready to receive it and pay later. A smart contract would allow them to purchase the goods today and automatically pay for them when they ship, a process currently requiring several intervening steps to complete. It’s worth noting that not all blockchains have this capability. Ethereum’s does, but Bitcoin’s does not.
Crypto-supporters also cite the universal potential of digital currencies as an argument in their favor. While an American or European has little trouble finding a currency merchants will accept, many areas in the developing world lack access to reliable currencies. This effectively locks them out of the global marketplace. If everybody embraced digital currencies, supporters argue that international trade would immediately become more fair.
Finally, cryptocurrencies have the potential to process transactions considerably smaller than those allowed by traditional monies. For instance, it is impossible to pay any amount less than $0.01 in USD because there is no corresponding coin. Bitcoin can be broken into units as small as 5,430 millionths of one Bitcoin, enabling microtransactions worth much less than an American penny.
The Case Against Crypto
Detractors may or may not acknowledge the potential advantages described above, but argue that the problems with crypto easily overwhelm them. The biggest issue is that digital money has no underlying guarantee of value. Gold has been highly valued throughout human history, and the American dollar is supported by the government that issued it. Bitcoin could theoretically be rendered obsolete tomorrow.
These fears are compounded by the wild price fluctuations that categorize cryptocurrency. Bitcoin went up 10,000 percent over the course of 2017, but lost roughly 25 percent of its total value during one bad period in December. Ethereum lost 50 percent of its value at one point in 2017 as well. These dramatic price swings make it difficult for any business to accept crypto as payment because the effective price changes on a day-to-day and even hour-to-hour basis. As a result, very few vendors allow the use of crypto to purchase goods and services, an important litmus test for any currency.
Some individuals simply lack faith in the code that drives crypto. For example, Bitcoin was invented in 2014 by a person or group using the alias “Satoshi Nakamoto.” It never came out who or what Mr. Nakamoto was, and it is unknown how much control they retain over the cryptocurrency. If there is something in Bitcoin’s coin that ultimately transfers all Bitcoins back to their origin point, its current holders would be left looking very foolish.
Crypto “experts” can also profit easily from the ignorance of others. If an individual buys a lot of a cheap token and then starts talking it up, they may be able to produce a temporary price spike and profit handsomely off of their initial investment. Anybody who fell for the scheme by listening to a perceived expert is just out of luck. There is currently very little regulation of the digital currency market, and scams such as this one are frighteningly common.
Finally, cryptocurrencies have not proven as hack-proof in reality as they are theoretically claimed to be. For example, an exchange called Mt. Gox was once the leader in cryptocurrency trading. It was forced to file for bankruptcy in 2014 when a hack was discovered that siphoned off nearly 750,000 Bitcoins (valued at $473 million at the time) owned by its users over a period of years. Mt. Gox had a security team in place to prevent this sort of attack, but it was not enough to save the company or its customers from losing a fortune. The current leader in crypto trading is CoinBase, itself temporarily closing down in December of 2017 when insider trading concerning the brand new Bitcoin Cash offering was suspected. What’s stopping Mt. Gox from happening again?
Are the potential advantages of digital currencies enough to outweigh the risks of investing heavily in a relatively new technology? Only you can make that choice for yourself.