In recent months, cryptocurrencies such as Bitcoin, Ethereum and Ripple have received national media coverage due to reaching all-time highs in December 2017 before suffering historic crashes over the past few days. Stemming in part from a suspicion of stock markets, these currencies have proven attractive (especially to younger generations) because of their ability to bypass modern financial institutions and their “trustless” nature. Their practical use, however, remains limited — and despite claims from cryptocurrency enthusiasts of their world-changing possibility, there is little reason to believe that cryptocurrencies will one day replace the modern-day financial system.
Cryptocurrencies are, in the simplest terms, “digital assets that are constructed to function as a medium of exchange, premised on the technology of cryptography, to secure the transactional flow, as well as to control the creation of additional units of the currency.” These digital currencies utilize the blockchain, a publicly accessible ledger that contains the currency’s entire transactional history, which is theoretically impossible to manipulate in one’s favor. Hypothetically, the technological foundation of cryptocurrencies offers numerous benefits. Users could bypass waiting times and transaction fees at traditional financial institutions, conducting fraudulent activity is nigh-impossible due to publicly available, uneditable records and data breaches which have affected the financial industry in recent years would have no effect on cryptocurrency adopters.
Despite these theoretical benefits, proclaiming cryptocurrency as the so-called “currency of the future” — capable of overturning established financial institutions or even bringing forth a new world order — is gross exaggeration at best. The currency is most infamously known for its volatility; Bitcoin, for example, has had no less than six crashes in the past seven years, with the most recent crash this month causing a 70 percent plummet from its top value in December (when it was worth around $20,000). Excessively high transaction fees up to $28 have made small-scale transactions infeasible, resulting in numerous organizations like Steam, Stripe and — ironically enough — the North American Bitcoin Conference ending support for Bitcoin payments in recent months.
Bitcoin’s alternatives have proven no more stable, either. Tether, which proclaims that “Every tether is always backed 1-to-1, by traditional currency” (i.e. one tether is equivalent to one U.S. dollar) was served a subpoena by the U.S. Commodity Future Tradings Commission in December of 2017, and critics of Tether have suggested “that these new tethers might not be backed by anything at all.” There is the distinct possibility that cryptocurrency’s meteoric rise in price is simply a giant bubble, similar to that of the 17th-century Dutch “tulip mania,” which is widely described as one of the first economic bubbles in history. Fundamentally, the overwhelming majority of retailers and merchants simply do not accept cryptocurrencies — essentially relegating the so-called “currency of the future” to be used in black markets or speculative trading.
Cryptocurrency exchanges, which allow people to trade their cryptocurrencies for other currencies or legal tender, have proven themselves to be as vulnerable and volatile as the currencies they transfer. Hacks against marketplaces like Mt. Gox and NiceHash resulted in the combined loss of over $500 million in cryptocurrency. Other exchanges face regulatory scrutiny; Bitfinex, which occupies roughly 34 percent of the exchange market, provides “no information on its website about where it is or who operates the company” and has been accused of Tether price manipulation, was the second target of the U.S. CFTC subpoena in December 2017. Some exchanges, of course, are essentially Ponzi schemes — like BitConnect, which shut down in January 2018 after receiving cease and desist letters from security boards in Texas and North Carolina.
The realm of cryptocurrency — and the technology underlying it — could prove to have benefits for society. However, the theoretical benefits of cryptocurrencies thus far have lived up to their name — “theoretical.” Rampant volatility and exorbitant transaction fees have made cryptocurrencies anathema to major retailers and marketplaces — the field faces an influx of speculative traders hoping to “strike it rich” despite a lack of financial knowledge and numerous scams and hacks have made the integrity of crypto exchanges questionable at best. Cryptocurrencies are great for those seeking to gamble or conduct underground trades. For every other financial transaction, however, the modern-day financial system, despite its flaws, will continue to prove more stable and usable.
William Wong is an Opinion columnist for The Cavalier Daily. He can be reached at opinion@cavalierdaily.com.
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