Though the rise and fall of cryptocurrencies is part of a relatively new phenomenon, it’s a full decade since bitcoin was launched on an unsuspecting world. What have we learned in that time?
My first lesson is that it’s all based on the largely incomprehensible blockchain technology that almost nobody understands, and blockchain is a neat solution that’s still looking for a genuine problem to solve.
The thing is, bitcoin is pretty much useless as a currency.
Currency
The intention was to create a currency system that’s independent of any central controller, like banks, which could be used as a payments system with nobody creaming charges off the top. But who’s actually using it as a currency?
Cryptocurrency enthusiasts will tell you it’s booming and point to all sorts of novel ways in which it can be used. Did you know you can even use it to buy gift cards that can be used in shops that don’t take bitcoin? You know, like the way you can just use money?
A number of retailers will accept bitcoin, but actual sales volumes are tiny, with the true scale masked by the volumes of speculative investment transactions.
The uselessness is largely down to volatility. How does saving a tiny cost on a transaction help, when the value of the thing itself is gyrating wildly?
No, whatever faults it has, the banking system actually provides a very efficient payments system — and competition really is keeping transaction costs down.
Investment
Bitcoin is pretty useless as an investment, too. Unless by investment you mean gambling, because that’s all it is. Unlike publicly quoted companies providing real goods and services which can be valued in a rational manner, bitcoin has no rational underlying value whatsoever. It’s worth only what the next gambler will pay for it, be that the few dollars around the start, the peak value of over $19,000 in 2017, or today’s price of $6,200.
It’s a bit like gold in that respect, though a lot more volatile — and gold isn’t a very good currency either.
No, bitcoin and all the other hordes of cryptocurrencies, as an investment, are nothing more than a fad, a bubble. And if it hasn’t completely deflated yet, I’m convinced it will.
Regulation
The almost daily initial coin offerings we hear of bring me to the massive potential for fraud, and that’s something I’ve written about previously. Even though conventional finance is heavily regulated, investment fraud is still rife — and the potential in an almost entirely unregulated system is close to unlimited.
That’s changing, and I can see heavier and heavier regulation of cryptocurrencies in the future. And despite the somewhat anarchic motivations of many followers, I rate regulation as a very good thing. Can you imagine the scale of the banking crisis had the industry been based around unregulated cryptocurrencies rather than government-controlled money systems?
Crooks
That’s another sad lesson — that crooks with their scams, their phishing, their Ponzi schemes… they’ll always be in the vanguard of new financial developments, and the honest regulators will take time to catch up.
There will certainly be genuinely beneficial applications for blockchain technology, but they’re still a long way off. And I can’t see it replacing centralised financial systems in my lifetime.