A less than optimistic view

on cryptocurrency

Mihai-Alexandru Scutaru
BA Group I
 “Cryptocurrencies…everything you don’t understand about
money, combined with everything you don’t understand about
computers.”(John Oliver)

As the title and the opening quote I have chosen

suggest, I am skeptical about the concept of virtual money.
Thus in this essay I have decided to take a look at the subject
from its negative point of view, as I feel like sufficient warning
regarding the risks it involves is seldom given, if at all.

The very idea of a currency that practically exists only

as computer code, not under the regulation of any bank or
government is, to put it mildly, double-edged. The majority of
people like the how the idea of absolute freedom, with no
institution to influence the flow of things, however, when it
comes to money, I strongly believe a line must be drawn. On a
side note, the countries with the highest living standards and
happiest citizens for years now are either Scandinavian
countries, or the likes of Switzerland, in all cases, government
there controls a fair bit at least of all critical aspects, so perhaps
centralized control isn’t so bad and absolute freedom is a bit
over-rated, especially in cases that involve the persons involved
not knowing as much about the situation as they think.

One potential pro is the alleged potential profits, but

how many of the almost overnight fortune and success stories
revolving around cryptocurrencies are actually true and
verified? And how many people lose vs how many make any
sort of profit? Of course, any form of investment is risky by
nature, people who would venture into such a feat are at least to
some extent natural risk takers, but even such people take
calculated risks, and this isn’t the sort of thing the average
person can make educated guesses about. I understand that
there are people who are either finance buffs, or simply have a
flair regarding this sort of thing, but there are plenty of people
who have no idea how things work, and have invested or are
considering doing so because a “friend” gave them a tip.

An advantage also worth mentioning is that the

technology used to secure the ledgers (block-chain) is almost
impossible to hack, and even a skeptic such as myself has to
admit it’s a relevant point since cyber-crime is actually a
phenomenon that’s fairly present nowadays.
 However, the freedom of open source and the lack of a
control factor means that anyone with the appropriate skills can
create cryptocurrency, meaning well-meaning people and ill-
meaning people have equal chances. On a positive note, it
seems to have been possible for some start-up companies to
have issued cryptocurrencies instead of bonds to raise money,
though as interesting as it sounds, this may also be used as
foundation for scams (as just the same as a serious, well-
meaning entrepreneur can use the concept and return the value
of the tokens through future company services for example, just
the same a con artist could use the concept to take advantage of
people). An example of how this positive aspect can work is
Ethereum, a startup, which was created by a teenager from
Canada (Vitalik Buterin) through an initial coin offering. His
intention was to find an improvement on Bitcoin's blockchain
and create a platform for people to build unstoppable
applications. He started this in 2014, and raised 18 million
dollars. In January 2018 his business was valued at over 100
million dollars. But there are counter-examples like Homero
Josh Garza, who founded the cryptocurrency startups GAW
Miners and ZenMiner in 2014 and one year later he
confessed that the companies were part of a pyramid scheme,
and also pleaded guilty to wire fraud in 2015. Also, the
U.S. Securities and Exchange Commission separately brought a
civil enforcement action against Garza, which led to him being
forced to pay a judgment of $9.1 million plus $700,000 in
interest. In the complaint the SEC's stated that Garza, through
his companies, “had fraudulently sold investment contracts
representing shares in the profits they claimed would be
generated from mining”.

I will end this section of positive and or double edged

ideas with the Dogecoin example. Essentially, it’s a
cryptocurrency that started as a joke based on the popular Doge
internet meme and it ended up having high value for no real
reason aside the fact the people bought it because it was the
trend to buy cryptocurrency so might as well add some humor
to it. As harmless as it may sound to an extent, that sort of
mentality can leave a lot of room for exploitation.

Although I am a skeptic, I found it necessary to provide

a broader overview than just the negatives, but now that the
positives are out of the way, let’s take a look at the other side of
the story.
 For example, the value of some cryptocurrencies can be
manipulated through pump and dump schemes, which,
originally were a form of securities fraud that involved
artificially inflating the price of an owned stock by using false
and misleading positive statements, aiming to sell the cheaply
purchased stock at a higher price. However, now this has
transitioned to the crypto-market, where it is significantly
harder if even possible for any regulating element to intervene
(see video for example).

Another example of concerns regarding

cryptocurrencies is that they are often compared to Ponzi
schemes, which are defined as “a form of fraud that
lures investors and pays profits to earlier investors
with funds from more recent investors. The scheme leads
victims to believe that profits are coming from product sales or
other means, and they remain unaware that other investors are
the source of funds.” An example here would be the Bit-
connect case, an operation that was once worth 3 billion
dollars, that promised investors rates of return of up to 40% per
month, which ended up being labeled a Ponzi scheme and
collapsing completely.

Criticism regarding cryptocurrency networks also

revolves around the idea that the lack of regulations helps
criminals avoid taxes and launder money. Also it should be
noted that online black markets have started using
cryptocurrency due to its properties and their unclear legal
status that causes issues to law enforcement agencies. And
while Silk Road (online black market) has been shut down
spiritual successors, so to name them, still exist and still use
cryptocurrency which makes it even more difficult than it
already is for investigators to shut down such operations.
References
https://www.entrepreneur.com/article/308714
https://en.wikipedia.org/wiki/Cryptocurrency

https://www.youtube.com/watch?v=g6iDZspbRMg
https://en.wikipedia.org/wiki/Pump_and_dump
https://en.wikipedia.org/wiki/Ponzi_scheme