Lack of trust will doom crytpocurrency

Loss of crypto coins through hacks, fake trading and volatility destroy trust in cryptocurrency, but those aren't its only problems.

Bitcoin cryptocurrency falling.
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The promise of a cheap, anonymous, distributed, fiat cryptocurrency that is detached from any country’s sovereignty is a pipe dream. It will never happen. My opinion hasn’t changed since bitcoin first hit the market in 2009. People will play with it, some businesses will accept it, fortunes will be made and lost, but it isn’t a threat to any nation’s fiat currency on that level.

People lack trust in even the most established cryptocurrencies. Here’s why.

Cryptocurrencies are hacked too much

Cryptocurrencies are still being hacked to death. Blockchain in theory is nearly unhackable. In practice, not so much. Cryptocurrencies are built on software, and software always, always has bugs. Hackers have found some of those bugs and stolen millions of dollars.

That said, the underlying blockchain implementation is the least of traders’ worries. Hundreds of millions of dollars are still being stolen from exchanges and customer’s cryptocurrency wallets. Computers and digital devices are very hackable. That’s not going to change anytime soon.

Yes, money is stolen from VISA and bank accounts, but the stolen money is usually replaced so little financial harm is done. Even if the money is not replaced, law enforcement agencies and governments respect the value stolen enough that it’s treated like a real crime. Good luck with filing a theft report for your stolen cryptocurrency and trying to get it back. If getting back real stolen money is hard, it almost never happens with stolen cryptocurrency. Worse yet, with most cryptocurrencies you can see which node has taken the money and you still can’t do anything about it.

Most cryptocurrency trading activity is fake

Ninety-five percent of bitcoin trading is fake activity called “wash trading”, which is illegal in every real market. Even with most of it being fake, it’s not being traded at anywhere near the levels of any other real currency. Exchanges are dropping bitcoin, not adding it.

Cryptocurrency is too volatile

A single day can have 20% and bigger shifts in value. Yes, some foreign currencies have the same issue, but no one wants to use them. The fact that receivers almost always convert their cryptocurrencies to real world currencies tells you that even the hardcore supporters don’t trust cryptocurrencies in the long run. Those who keep a significant amount of value in cryptocurrencies are simply timing the cryptocurrency vs. fiat markets to maximize the value of the exchange. That’s not trust. That’s greed.

If the issues around trust and security don’t deter you from trading cryptocurrencies, then consider these points, too:

Cryptocurrencies are expensive to use

After claims of pseudo-anonymity and lack of centralized control, the most desired trait of a cryptocurrency is its supposedly cheap cost to use. Proponents claim you can send money to anyone anywhere without paying any exorbitant fees. Yeah, let me know when that happens. You may be able to send cryptocurrency to another cryptocurrency user for a relatively low cost, but the cost of getting that money into or out of the system (which is how it almost always occurs for most transactions) can cost $5 to $15 per transaction.

In comparison, when I buy something within my country using my credit card, it’s low to zero cost and I can convert to real cash for the same. I’ve bought dozens of items from foreign countries using credit cards the last few years and the most expensive foreign transaction fee I’ve paid is $0.85.

Laws, regulations and taxation

Many people pin their cryptocurrency dreams on an imaginary utopia where cryptocurrencies allow people to transmit value without any interference from laws, regulations and taxes. I can send money from America to Tehran without having to worry about export regulations and fees. How quaint!

There is absolutely zero chance that any long-term, popular currency will get away from taxes and regulation. The crypto-billionaire Winklevoss twins understand this. The world’s governments understand this. There is no way that the world’s governing bodies are going to let any cryptocurrency grow and be used without regulation. Each nation will have its own set of laws, regulations, taxes and fees. If there’s money to be made, it will be regulated and taxed. Welcome to the real world.

If the world can’t regulate and tax it, they will block it. It’s that simple. No supposedly fantastic, pseudo-anonymizing software system is going to be able to get around that fact.

No competitive blockers

The thousands of cryptocurrencies all live in bitcoin’s shadow. It seems everyone is trying to come up with a cryptocurrency solution better than bitcoin, and it’s easy to do. There is no competitive blocker that prevents any other person from creating a cryptocurrency that does exactly what your cryptocurrency does. Facebook’s Libra may have an edge because it can push it on its existing 2 billon-plus user base, but 10 other companies with over a billion users are trying to do the same thing. You’ve got entire countries with billions of people trying to do the same thing. None of them will be more popular than real money. Why? See above.

This not to say that some financial instrument of value won’t become what we or a marketer in the future calls a cryptocurrency. It won’t be totally secure, unregulated, untaxed, anonymous, or distributed. Whatever the winning cryptocurrency is it will look a lot more like VISA than bitcoin.


Copyright © 2019 IDG Communications, Inc.

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