These days, everywhere you turn, you’ll bump into cryptocurrencies in some shape or form. They’ve been dominating the headlines for the last two years, with pundits either predicting their unstoppable rise or prophesizing their downfall – and they’re both right, depending on what day of the week it is. Billionaires and celebrities promote them, governments mostly try to regulate them, while regular Joes and Janes are left to wonder – what is it all for?
Here, we’ll try to answer whether cryptocurrencies serve any purpose in our current economic system, and if they’re solving the problems in the financial sphere their creators claimed they could.
Bitcoin and the Ideas Behind It
The most prominent crypto of them all is Bitcoin. Being the first to enter the public stage, Bitcoin is also the cryptocurrency with the highest value, whose fluctuations often directly affect the value of other cryptos.
To answer the questions we posed in this article, we’ll first look at the core ideas behind the world’s first cryptocurrency and probe their reasoning.
Bitcoin first saw the light of day in January 2009, along with the ideas outlined in Satoshi Nakamoto’s whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System. Satoshi Nakamoto is presumed to be a pseudonym, although it’s unclear whether one person or several are hiding behind it. Nonetheless, while Satoshi’s true identity is a mystery, his opinions about the financial system we live in are not.
In his early release notes, Nakamoto stated that the main problem of standard fiat currencies is that the central bank cannot be trusted not to debase them and that banks “must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” Privacy, transaction fees, and speed are identified as the other core problems of the fiat system. According to Nakamoto, cutting out the middlemen – banks and government institutions – and introducing a decentralized, deregulated currency based on cryptographic proof would solve all these problems.
As the ultimate signifier of Satoshi’s opinion on financial institutions, he included a reference to a Times article in the Bitcoin genesis block. The article in question is titled “Chancellor on brink of second bailout for banks” – a clear-cut commentary on Wall Street and the regulators that caused the 2008 financial crisis.
Deregulated and Decentralized
Deregulation and decentralization are flaunted as the main advantages of Bitcoin and other cryptocurrencies. This is one of the main reasons why cryptos are so popular among libertarians, who traditionally distrust any kind of regulation and centralized economy.
However, while no one in their right mind would describe banks as a force for good, the complete lack of regulation translates into the absence of consumer protection mechanisms.
For example, there’s no way to dispute or reverse cryptocurrency transactions. Once crypto moves from one wallet to another, there’s no way to get it back in case the transaction (or the deal behind it) was fraudulent. Additionally, if you lose access to your wallet – or someone illegitimately gains access to it – there’s no institution or bank you can turn to assist you: Your funds are lost forever.
Of course, thanks to that, the crypto world is rife with fraud, with faux crypto exchanges and straight-up fake or useless coins popping up every day. With fiat currencies, there really isn’t a possibility you’ll be using fake money unless someone hands you a counterfeit bill on the street.
Furthermore, the lack of centralized regulation for cryptocurrencies leads to huge daily fluctuations in their value. Bitcoin is infamously volatile, with its worth dropping and soaring by hundreds or thousands of dollars every day. As such, it – and others like it – has no hope of being genuinely usable in everyday transactions. Imagine not knowing if you’ll need $1 or $10,000 to buy milk the next day.
Cutting Out the Middlemen
Another argument cryptocurrency proponents use is that banks and payment processors charge exorbitant fees for transactions. While this is definitely true, and something to work on, to claim that cryptocurrency transactions are fee-free or at least significantly cheaper would be a lie.
Crypto transactions may not go through traditional financial institutions, but most of them go through crypto exchanges. These exchanges handle billions in daily trading volumes, and most everyday users rely on them to trade their coin of choice. And – surprise, surprise – exchanges often charge transaction fees.
On top of that, the Bitcoin ecosystem employs miner fees, which serve as an incentive for miners to add each transaction to the next block. The miner fee isn’t always included in the exchange transaction charge, so you might end up paying those, too.
Crypto exchanges also corrode the purported anonymity of crypto transactions, as most of them rely on the KYC (Know Your Customer) system, which requires users to provide personal details upon registering.
The Usefulness of Crypto
Cryptocurrencies can be quite helpful: They’re often used by people living in countries targeted by sanctions, such as Iran and Venezuela, to circumvent economic blockades. Journalists, dissidents, or freedom-fighting groups also use them for financing. Still, when fees rise due to blockchain congestion, crypto stops being a feasible long-term solution even in these cases.
What’s more, criminals use cryptocurrencies on a massive scale; some recent statistics claim that illegal transactions make up only a small portion of all crypto transactions, the much-lauded privacy of crypto traffic makes it extremely difficult to find accurate data on this topic. What we do know, on the other hand, is that most of the attacks in the latest ransomware wave relied on cryptocurrencies to extort payment from users and companies without revealing the attackers’ identity.
Outside of those mentioned above, there are no everyday uses for cryptocurrencies. Sure, you can find those willing to trade items or services for them, but widespread use is still very far off. Most crypto fans will tell you to wait, as further adoption will stabilize the currency. Still, cryptocurrencies have been around for more than a decade now, and we’ve yet to see any actual use for them. Even the meme-worthy Bitcoin pizza place does not actually accept Bitcoin payments.
All the while, cryptocurrency mining operations take an enormous toll on our environment due to extreme power usage. Before the crackdown, China’s crypto mining operations alone were expected to generate over 130 million metric tons of carbon emissions by 2024.
Even those that got rich off cryptocurrencies aren’t all happy – many of them lost their life savings in one of the numerous cryptomarket overturns. Additionally, and as is often the case with deregulated efforts, mining is now dominated by huge companies, mining pools, and people with enough capital to invest into powerful mining rigs, and Bitcoin whales currently hold over 40% of the currency. In other words, it’s becoming harder and harder for regular people to mine crypto and benefit from it.
Do We Really Need Cryptocurrencies?
All in all, while one could argue that there are positive applications, the predominant use cryptocurrencies have now is to endanger the planet further and make rich people richer. The crypto market is looking more and more like another version of Wall Street, with similarly devastating consequences for those who don’t participate in it, and yet suffer from its volatility.