Filling the Holes in the Leaking Cryptocurrency Hope
Money has come a long way from the time it did not exist. At some point, a chain of beads, a disk of iron, a slab of silver, a bar of gold, and even a slip of paper served to be the most valuable thing in human societies around the world. All these forms of currency are worthless at face value. After all, you cannot eat them when hungry, they cannot light a fire to keep you warm in the dead of the night, and they cannot cure a disease when you feel unwell. But still, their value comes from the simplest belief that they can be exchanged for almost anything else — food, warmth, medicine.
Whether you believe cryptocurrency to be the future of money or not, you will agree that since barter trade, every type of currency in history has, at some point, been the greatest invention that societies ever came across. If you familiarize yourself with the details of how it came to be accepted, you will also come across one or groups of influential people resisting it on the basis of it being new and strange. It is no wonder, however, that you will still come across some bigwigs, top on the list being economist Nouriel Roubini, billionaire Warren Buffett, and author David Gerard.
Most banks were initially anti-crypto, but gradually, many have invested greatly in the development and acceptance of these digital assets as money. JP Morgan Bank, one of the largest banks in the world, was on the frontline dismissing Bitcoin, but a short while later they were launching JPM Coin. Predictably, just a short while after getting into the cryptocurrency business, JPMorgan was caught engaging in underhand Bitcoin price manipulation in Sweden. You can read about it here.
Cryptocurrency and human emotion
It is an open secret that Cryptocurrencies are highly volatile currencies that like any other money, rides on its global demand. Bitcoin is not immune to the political, social and economic elements that are in turn driven by other factors whose outcomes are determined by human emotions and need (or greed). This means that although a currency is distributed, it can still be manipulated and used as a tool of modern-day slavery that has defined every other currency in history. Hackers are always on the prowl to steal and brag, and many people just do not care about the technical know-hows of keeping digital assets safe from them.
Cryptocurrencies are the new hope of money — the currency that may finally liberate humanity from the tight grip of banks and the families that control them. There are, however, a number of concerns that have to be addressed regarding cryptocurrency because it is still far from being the perfect money that will replace USD-backed paper and plastic money. This article will attempt to unravel cryptocurrency, in particular Bitcoin, so you can decide whether it is the currency of the future or not.
A world without money
Before the arrival of the Spaniard Conquistadores, the people of the Inca Empire, the largest in the pre-Columbian America, did not have a real concept of money. Their expansive political and administrative structure, then considered the most sophisticated in the new world, was powered by labor money. While the empire was rich in gold, had mountains of silver, harvested a lot of coca and other foodstuffs and made the finest textiles and buildings, they had no marketplaces. Instead of paying taxes in commodities, the subjects provided labor to the state. This was a world that functioned and thrived well without ‘real’ money.
Picture a world without money. Is it possible to consider the modern world functioning as it does, or even differently, without money? If the bond traders of the 16th century were to appear in modern times, it would be impossible for them to wrap their heads around the concept of a commercial world that operates without gold, yet it does. As we usher in an age of cryptocurrency, and considering how unique this kind of money is, one cannot help but wonder, is it just another fad whose end we are too blinded by profits to see? Considering that the world cannot fall back on to paper money, what happens would cryptocurrency not work out as promised? What comes after cryptocurrency?
Understanding the Crypto craze deception
More than 82,000 digital asset projects that run on the blockchain technology have been launched around the world since Bitcoin, but about 92 per cent of them have failed according to the China Academy of Information and Communications Technology (CAICT). Since blockchain became a buzzword, and an entire industry arose to utilize and exploit it, but each of the failed projects had an average lifespan of just a year. Millions of investors and speculators have lost a lot of money in what is now dubbed ‘Crypto Craze’, which has had worse effects than the money lost: many people’s faith in cryptocurrency as a viable currency of the future was seriously eroded.
Pessimists are quick to point out this fact to back up their narrative that the future has no place for cryptocurrency. However, to understand why those cryptocurrencies failed, and why those that have survived this far may hold the key to the future of money, there are three facts you need to know:
- There were just too many cryptocurrencies launched within a short time that saturated the market, and the frauds took advantage to compromise its integrity and get rich. There is only room for so many forms of money — crypto coins, smart contracts, and privacy coins — in the digital sphere. Besides, out of the over 82,000 cryptocurrencies that saw the light of day, a good number of them were fraudulent. Those that were legitimate got lost in the fray, and coupled with the founders’ limited technical know-how and delicateness of the market, they had little chance to succeed.
- Most cryptocurrencies, although launched and traded, never really got to grow far enough to be considered ‘money’. This means that although they had value, they lacked most other properties that would have qualified them to be considered currency. They did not produce any revenue, they were not a commodity, they were too speculative, and most importantly, barely stored any value. The traditional money we use today is what it is because it is protected by the issuing country; these cryptocurrencies launched and traded with no protection or backing of any kind.
- Finally, there is the Cryptocurrency paradox. Since crypto is money, it should have value, a property which makes it useful in buying things. The irony is, most investors in the industry initially hopped on to the crypto craze, not to obtain the currency to purchase things, but to keep it until it accrues value before disposing of it. As a result, most cryptocurrencies were never used to make any meaningful purchases during their lifetime, and that spelt their demise. A currency that is not used to buy anything cannot be widely accepted, and as such loses value due to minimal use. Investors who bought into ICOs and hoarded their assets contributed to their own losses.
Renowned economist Nouriel Roubini still believes that all cryptocurrencies, including Bitcoin, will lose their value and cause a lot of suffering to the global economy largely because of the cryptocurrency paradox. However, with more and more wallet owners using their cryptocurrencies to make and receive payments, there is no reason to fear Bitcoin, Ether, or any other major cryptocurrency will fail due to minimal usage. Investors no longer need to be persuaded to actively use their assets and most have it to store value rather than speculate that its value increases at a near future date.
The centralization risk problem of crypto
One of the reasons that Bitcoin took the world by storm when it launched was because it is a decentralized kind of money — no single authority had absolute power over its production or circulation. That said, cryptocurrency is not the perfect currency — yet. Even Bitcoin, the most popular and oldest crypto, has its weaknesses, most of which non-believers never tire of reminding us. We covered the most notable of these concerns in the last article in this series. However, as cryptocurrency evolves, there have been emergent choke points in their lifecycle that risk undermining the decentralized nature of this currency, the only thing that promises to make it better than the money we use now. They are mining, distribution, and exchanges.
The problem of centralized cryptocurrency mining
The difficulty of mining cryptocurrency is adjusted with time, based on the average time it takes to mine a specified number of blocks that form the blockchain. This means that it takes more hashing power to produce cryptocurrency coins, hence requiring more powerful mining computers. This explains why it was possible to mine several coins of Bitcoin with a desktop CPU in a day a decade ago, and this allowed anyone to mine it. Today, Bitcoin mining is only feasible when done on multiple dedicated ASIC equipment set up in a network called a mining farm.
The biggest problem with Bitcoin mining today is that it is only decentralized among large mining farms that stand out, not only because of the huge investments they make in the mining equipment but also because of the huge amount of power they need. As a result, it is easier for authorities to identify and single them out if they wanted to. Going by the history of the tyrannical governments around the world, this could spell a big problem to the future of Bitcoin and other cryptocurrencies should they are targeted by central powers.
There have been many attempts by governments around the world to stifle and take out miners, especially as the cryptocurrency ecosystems grew and became more popular. The Russian government tried to register miners to regulate and tax them and large scale farms had been banned at some point in upstate New York. The Chinese government has been particularly successful in keeping cryptocurrencies from being used freely within their borders and it wouldn’t be difficult for them to pick out mining farms if they wanted to.
Crypto distribution could have been better
In this evolution of money series, our focus has been on the most controversial ways in which modern money grew to become the core of modern financial systems. The entry of cryptocurrency, though greatly phenomenal, has been undermined by how it is distributed. Bitcoin promised to be this new kind of money that is produced by the masses but it wasn’t long before those people with the most modern money bought the most coins, and are now the richest owners of these new monies. The problem here is that even though cryptocurrency is decentralized money, it wasn’t long before they were being distributed through the same traditional channels that traditional money use.
The new economic ecosystem enabled by cryptocurrency could have been more successful if the coins were distributed at the moment of creation for verifiable events, just as virtual money is awarded in modern games. Since cryptocurrency is programmable money, the developers of the Bitcoin and major cryptos should have factored in how the coins should be distributed to prevent the potential future problem when new money may just replace old money in every way — including who owns and controls it.
There is currently a big emerging problem with cryptocurrency exchanges. Just the other day, one of the world’s top cryptocurrency exchange Hong Kong-based KUCoin and other exchanges around the world, including LATOKEN were implicated in volume-boosting scams. These exchanges would find pick out crypto assets with low trading volumes and threaten to delist them from their exchange, essentially rendering them worthless and untradable, unless they parted with a certain amount of money to have their trading volume numbers manipulated to appear to be active. This is a typical banking behavior that we see being carried on from old money to new money.
Exchanges have also been the targets of hackers, uninformed regulators, and overzealous lawmakers. Since they are the main interaction point between different cryptocurrencies and between cryptocurrencies and the old financial systems, they are an easy target when individuals and organizations with a bone to pick with the new form of currency. The realization that the world needs these exchanges, just as it needed foreign exchanges in the old system is raising some concerns regarding the independence of the crypto industry.
To prevent crypto exchanges from turning into new kinds of banks that have ripped off people and manipulated the global financial systems over the last 500 years, steps need to be taken to decentralized them. This may be the only solution to prevent them from evolving into the monsters cryptocurrency promised to liberate the world from. It will also go a long way in minimizing damages caused by hackers and central governments. Someone just has to figure out how.
The stable coins question
There are many questions over what the future holds for cryptocurrency that only time will answer. The problem of 9 in every 10 cryptocurrencies that reached the ICO stage failing between 206 and 2018 may have shaken the faith that the world had in these digital assets, but they are not dead. Instead, newer kinds of crypto assets that aimed to solve the problem that led to the failure emerged. One of the is stable coins.
A stable coin is a term that refers to cryptocurrency whose value is stabilized by other non-digital assets, such as traditional money. As we pointed out earlier, one of the main reasons that led to the failure of many cryptocurrencies was that they barely stored any value — their prices fluctuated so badly that they would not be practical for use in buying and selling. However, when the value of a coin is pegged to something else such as traditional money, holders of these assets would be assured of the cryptocurrency value tomorrow or next year.
Many stable coins have been launched in the recent past. Some have been successful and are in circulation, while many others failed. The specific mechanics behind each of them varies, just as the reasons for their success or failure. The question of whether stable coins are the answer to the value fluctuation problem of cryptocurrencies can only be answered with time.
The future of centralized cryptos
Some ‘experts’ have predicted that eventually, the most successful cryptos will be those that are issued and controlled by central authorities, especially governments. Cryptocurrency is not built on real-world economics, which makes them very unique. Some argue that their slow adoption problems, and the resistance of some governments that see them as a threat to their grip on power, would be best solved by centralized cryptos. The Petro, issued by the Venezuelan government, is a good example of a centralized stable coin crypto, whose value is backed by the value of oil.
There are, however, important considerations that would bar these centralized cryptos from ever seeing a bright future, top among them being that the value of any money, regardless of who mines or issues it, is ultimately determined by how much the market is willing to pay for it. Therefore, the money market is essentially a zero-sum game where an asset is traded on the expectation of the value it may represent and not necessarily its actual value. As the world tries to move away from centralization of the economy, centralized cryptos are at a great disadvantage because they are just like traditional government-issued money — except that they are digital.
Is cryptocurrency freedom fallacy?
When it was still a very young currency, Bitcoin survived its darkest test in 2011 when it was mostly associated with the black-market Silk Road and all the evil that was traded there. Since then, it has worked its way up people’s hearts and won their trust, but every time it has proven short-lived or disappointing. It has also proven just how human elements can easily upset the volatile market, and how quickly ordinary people lose money when a crash or a hack happens.
Just in 2018, Bitcoin price dropped by 50% from its record high of $20,000 to $10,000 over a period of 3 months! Many optimists who made massive investments in the hope of getting quick returns lost a lot of money. But those were not even the biggest investment losses in the history of Bitcoin.
In February 2014, hackers made off with 850,000 Bitcoins when they hacked Japan-based crypto exchange Mt. Gox contributing to a 93% plummet of Bitcoin value from $29 to $2. Bitcoin value also crashed from its peak by 73% in April 2013 and again by almost 85% in December all revealing how the get-rich mindset so many investment decisions. The rise and fall of bitcoin in each of these has been influenced by human behavior.
Innovation around Blockchain, the base technology on which cryptocurrency exists, has been tremendous so far. It has proved its potential to revolutionize every industry. It is proving difficult to become an obvious alternative to cash and gold money, but new developments are looking to circumvent that minor requirement of having actual Bitcoins before making buying or selling contracts. Bakkt, a company founded to ‘enable you to buy, sell, store and spend digital assets simply, safely and efficiently’, is expected to introduce Bitcoin Futures whose value is backed by real physical bitcoin (really expected). Others such as CME and CBOE have already launched futures and have active participants, with futures that are settled in cash (perfect for manipulators though). The introduction of a derivative to such a market is highly indicative of progression and maturity in a market.
As cryptocurrency continues to evolve, perhaps futures, taking the same evolutionary path as the gold ounce futures of the old money, may be the next way to own and transfer assets in contracts. With Bakkt’s expected physical delivery, the purchasing party will not have to directly buy, sell or store Bitcoin in the wallet to transact at the exchange. Just like derivatives of the 2008 crash, Bitcoin Futures will offer the potential to make money during a downtrend when the market is falling. They have also been widely compared to the schemes that banks use to create money out of thin air that we already talked about.
There is a remedy, though. In the same way you cannot buy physical gold, buying Bitcoin futures is a new approach to trade in Bitcoin without actually having it. However, do not forget it may be damaging the price of Bitcoin. Perhaps in the future, Bitcoin Futures will be settled in real, physical Bitcoin, to give it more legitimacy and win the consideration of more people over cash.
The optimists argue that future of money lies in cryptocurrency, or whatever is better that comes after it. One thing you can be sure of is that unless the modern civilization or the internet collapses, there is no way the world is discarding the new money for the old, evolution never starts from scratch. Many articles and opinion pieces have been published online speculating when governments around the world will finally ditch USD-backed money for crypto, some estimating 2030 as the magic year and others reckon 2050 will be the do-or-die year.
However, there are rumors (at times backed by confiscations and leaks) that the same Governments, banks and some very shady rich individuals have been secretly buying up all the Bitcoins since 2017 — perhaps to attempt a 51% attack on a massive scale, or just to manipulate the market in the future.
Just like the industrial revolution created the modern economies we have today, the Bitcoin revolution will set people free from the banks that have held them captive for decades. That will not come on a silver plate; the human race need to first accept and trust BTC and other coins for that to happen. This will only happen when the people realize they do not need the banks, and that the power lies in our hands.
The years 2017 and 2018, people were learning and exploring the potential of cryptos, 2019 going forward will see the general public slowly accepting cryptos as their way of life. It is apparent, however, that the biggest weakness of Crypto lies, not in the money itself or its properties, but in the force that lies within the human race, a natural drive of ignorance and apathy that is so difficult to overcome yet posing such grave danger to the current revolution of money. Perhaps cryptocurrencies (especially Bitcoin), a new kind of product that is ‘more agreeable’ to the human nature, offers a ray of hope that humans will recognize and embrace the new currency with greater enthusiasm, and even use it break free from the enslavement of banks while we still can.
We can already see some governments and institution jumping in; however, the dam will only burst open when finally the whole human race realizes the potential decentralization offers, and are smart enough not to give away their power to corporations, pseudo-governments, or powerful individuals.
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