Cryptocurrencies like Bitcoin have lost over half their value so far in 2018, and more than that since late 2017. These virtual currencies have crashed before, but this time they seem in no hurry to gain back lost ground, largely because recent evidence has revealed problems with the new technology.
In one recent study, a team of academic researchers said that market manipulation might have been behind Bitcoin’s steep increase in value in 2017. And a recent report by the New York attorney general’s office found substantial risk that consumers who invested in cryptocurrency could lose access to it, either temporarily or permanently, if there were problems at their exchange. The report also uncovered that many of the exchanges had traded on their own markets, essentially creating a conflict of interest in which they were trading against their own customers.
It wasn’t supposed to be like this. Cryptocurrencies like Bitcoin were started not as a way to get rich but to provide an electronic payment system that was more secure and resistant to fraud than credit cards and eliminated the need for trusted intermediaries like financial institutions. Because cryptocurrencies were not controlled by a central institution like a government or even a governing nonprofit, they were supposed to give the holder the reliability of gold, without the inconvenience of having to transfer a physical item to make a transaction.
Large organizations and technically savvy users may have valid reasons for using cryptocurrencies, especially for transactions between governments or large multinational corporations. However, for the ordinary citizen, cryptocurrency is in fact less secure, more vulnerable to sudden drops in value and — surprisingly — more dependent on trust in an intermediary institution than fiat currency like the United States dollar.
In the world of cryptocurrency, there are two categories of intermediary institutions. The first category contains the exchanges where users buy, sell and store their virtual currency. These exchanges include Coinbase, which the New York attorney general’s report claimed traded on its own platform, and the now-bankrupt Mt. Gox exchange, which lost over 700,000 of its users’ Bitcoins to hackers in 2014. The second category is made up of the people and companies who create and sell their own cryptocurrency, using initial coin offerings. This year, two founders of a virtual currency called Centra were arrested and charged with “conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud and wire fraud.” In May, The Wall Street Journal found that hundreds of initial coin offerings were “using deceptive or even fraudulent tactics to lure investors.”
More recently, social networks such as Facebook promised to connect everyone in the world and give users a platform to speak freely. As we’ve seen, they did not make things free; they opened us up to manipulation by anyone, anywhere. There is a feeling I get when I log in to Facebook and am assaulted by clickbait news, overly intrusive ads and a confusing inability to configure my feed to show me the updates from friends that I came here to Facebook to read. “Free” is not the word for it. Facebook has become less free than an ordinary real-life conversation, not despite the ability to connect to to anyone but because of it.
We saw something similar in peer-to-peer lending, where people could take the savings of one person who needed to invest and transfer it to another person who needed to borrow. The system was supposed to make the economy work more fairly, by removing the arbitrary and inefficient banker middlemen. Instead of following through on its promise, peer-to-peer lending in China has resulted in a lot of lost money for ordinary citizen savers, creating an unstable financial sector.
In software engineering, we have a phrase for this: “That’s not a bug, it’s a feature.” Established systems (such as customs, regulations or software) are the way they are, for many reasons, some of them now forgotten. Sometimes we never know all the reasons a system needed restrictions or limitations until we discover a way to make new systems without them and discover (for better or for worse) what happens without those constraints. Cryptocurrency, peer-to-peer lending, and anonymity and pseudonymity in communication are all impressive feats of engineering. They are also all excellent at showing us the value of a society that requires a stable identity, government support of a currency and oversight of its financial systems.
Bitcoin’s first commercial transaction was in 2010; by late 2017 it had grown to a value of over $100 billion. Facebook grew to one billion users in about the same amount of time. The word “viral” is often used to describe such exponential growth, but viruses grow exponentially for a reason, and it has nothing to do with a benefit to the host. If a new technology grows exponentially, that ought to make us wary, not excited.
We need time to discover and address the problems in any new system. We also need time to revisit the restrictions and limitations of established systems, and see if they still apply. The underlying danger is that some of these new systems and technologies have grown too fast and have been adopted for general use before we recognize the problems caused by their lack of restrictions.
Many of the so-called limitations of government-regulated currencies are features, not bugs. There is a place for cryptocurrency, though I don’t believe it’s for the average, nontechnical user. In general, cryptocurrencies are not a replacement for ordinary currencies. That’s not in spite of their freedom from government control but precisely because of it.
Ross Hartshorn is an independent software developer.
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