3 Major Problems Facing Cryptocurrencies
The world of crypto has faced its fair share of ups and downs over the past year. Cryptocurrencies such as Bitcoin, Ethereum and Dogecoin have gone from being at an all-time high last November to now having collapsed in value by almost 70%. The gloomy market sentiment surrounding crypto has cast a long shadow over those who claimed that cryptocurrencies were the future of the financial economy, with doubts arising as to whether cryptocurrencies can indeed function as substitutes to domestic currencies or hard assets such as gold.
Now, this is not to say that all hope in cryptocurrencies is misplaced. Market corrections are normal, speculative bubbles can occur across all financial markets, and there is always lingering scepticism surrounding new technologies when they first enter the market. Perhaps the current market conditions in the crypto space are necessary to eliminate the bad projects from the good, thereby strengthening the market as it moves forward.
However, if the crypto market is to function as conceived by crypto enthusiasts, what becomes clear is that we need to address some of the lingering issues that have stifled progress with widespread cryptocurrency adoption. They are:
- A lack of use cases.
- Volatility and legitimacy.
- Cybersecurity risks.
Let’s explore these issues one-by-one.
A Lack of Use Cases
One of the biggest questions with cryptocurrencies is this: What do I actually do with them?
Perhaps most see cryptocurrencies as investments akin to shares in a company, where value is determined by capital appreciation. Unfortunately, this stifles the aim of crypto to begin with because intrinsic value involves more than mere speculation as to the cryptocurrency’s future value.
It also involves more than the design of the cryptocurrency itself. Although cryptocurrencies might have a fixed supply, people still need to see them as ‘worth the investment’. For instance, there may be a fixed supply of apartments in a particular city but unless the city is worth living in, the apartments don’t have much value.
This is one of the biggest issues plaguing cryptocurrencies today. Cryptocurrencies such as Bitcoin and Litecoin have not been widely accepted as universal forms of payment in businesses or across countries. Now, this is not to say that Bitcoin can’t ever be used as a method of payment. In fact, Bitcoin has been used in Zimbabwe as a more stable means of payment in circumstances where the domestic currency has collapsed due to rapid hyperinflation. However, use cases close to the original intent behind Bitcoin (or other cryptocurrencies) have still been quite scarce.
Fortunately, the current lack of use cases for cryptocurrencies does not stifle the entire crypto movement. Rather, it’ll just take a bit of innovation and ingenuity for people to develop sustainable use cases that bridge the divide between the world of crypto and the ‘real world’ in which we find ourselves. This is in the same way that the internet developed from a tool used by the U.S military for their operations into a tool used by all for use cases as broad as communication, research and online sales.
Volatility and Legitimacy
Cryptocurrencies still exhibit significant fluctuations in their price, this ultimately coming down to a lack of liquidity within crypto ecosystems and rampant investor speculation on the future value of crypto itself. Therefore, cryptocurrencies at present will struggle to be viable mediums of exchange because they do not have the stability required to function as a de facto currency.
For these reasons, cryptocurrencies are still perceived as ‘illegitimate’ by the broader public in these sense that cryptocurrencies are only seen as being highly volatile assets that are dangerous to invest in. The public’s perception of illegitimacy is only compounded by other issues, such as cryptocurrencies being difficult to regulate and crypto being synonymous with scams.
At present, the lingering question in the public conscience is this: Are cryptocurrencies even safe?
Cryptocurrencies also face significant issues with the security of the distributed ledger technology (‘DLT’) they are using. Although there is much talk of blockchain or DLT more broadly being secure because the recorded transactions are ‘tamper-proof’, the practical reality is that blockchain networks have been hacked with devastating consequences.
Take Ethereum as an example. In 2016, hackers exploited loopholes in the smart contract code of a prominent application running on the Ethereum network called ‘The DAO’. The response of the Ethereum Foundation was to implement a hard fork to ‘undo’ all transactions related to The DAO and allow them to recover their lost funds. The result: Ethereum forked into Ethereum as we know it today and ‘Ethereum Classic’, the latter fork of Ethereum running on the old system as if the roll-back of DAO-related transactions hadn’t taken place.
Another source of cybersecurity risk in the crypto space concerns the storage of private keys to peoples’ digital wallets. Protecting these keys becomes paramount because these keys are the gateway to peoples’ crypto funds. If your digital wallet or the trading platform you use get hacked so that the hacker has access to your private key, they have access to all your assets. And it’s not as if these attacks on digital wallets are entirely uncommon. In fact, the Wall Street Journal reported that $1.7 billion worth of crypto assets have been stolen in recent years.
Concerning? I think so.
As grim as this article has seemed, hope in cryptocurrencies is not entirely lost. The idea of having a private, decentralised currency as an alternative medium of exchange to domestic currencies is a powerful one and should be explored. However, for the crypto market to move forward and innovate, we first need to start by having an informed discussion on the issues plaguing cryptocurrencies. After this, we can then move forward by looking at solutions.
What has become clear is that the crypto market needs a giant leap forward for cryptocurrencies to develop in a way that fulfils their initial intent as mediums of exchange. Currently, use cases are scarce, volatility is rife and there is a lingering (albeit well-founded) stigma that crypto tokens are illegitimate scams. All of this is compounded by the fact that cryptocurrencies face significant cybersecurity threats that can devastate individual users and online communities alike.
Now that we have recognised this, it is time to continue innovating, to continue tinkering and to continue experimenting until these issues are solved.
1. David Gura, ‘Why Cryptocurrencies Have Gone From the Next Hot Thing to a Full-On Meltdown’, NPR (online, 17th June 2022) <https://www.npr.org/2022/06/17/1105343423/cryptocurrencies-winter-crash-bitcoin-celcius>.
2. Coinbase, ‘Ethereum Classic and the Ethereum Hard Fork’ (online, 2022) <https://help.coinbase.com/en/coinbase/getting-started/crypto-education/eth-hard-fork>.
3. Ben Hartwig, ‘Cybersecurity in Cryptocurrency: Risks to Be Considered’, Dataversity (online, 10th June 2021) <https://www.dataversity.net/cybersecurity-in-cryptocurrency-risks-to-be-considered/#>.
4. Eyesakov2123, ‘An Antidote to Central Bank Tyranny?’ BULB (online, 8th August 2022) <https://open.bulbapp.io/p/543f0a21-4b23-4631-ae13-ed8a7bc0fd84/an-antidote-to-central-bank-tyranny>.