It is not common for a facility to have a strength and a weakness in common but there is one item in our society that shares a common trait that is both a positive and a negative.
The greatest strength of using a cryptocurrency is that it is not controlled by any government or bank and the ‘people’ are in control. A transaction can occur that transfers value from one individual to another with no intermediary required.
The greatest weakness of using a cryptocurrency is that it is not controlled by any government or bank and value can transfer from one individual to another with no pesky government regulations in the way.
It would seem somewhat like having your cake and eating it too!
As much as no government controls a cryptocurrency, governments can still have influence. China has just declared all transactions illegal, effectively banning the use of all digital tokens, including Bitcoin.
Based on this announcement alone, Bitcoin dropped in value by more than US$2,000.
China has also made it illegal to mine cryptocurrencies. At the end of 2019, China accounted for 75 per cent of the Bitcoin energy use in the world as miners took advantage of low electricity costs and cheap hardware.
Is this potentially the beginning of the end for cryptocurrencies? It may be too early to call it that way, but some infamous scams have certainly rocked the confidence of people who want to invest in cryptocurrencies.
Undoubtedly the biggest was OneCoin. Dr Ruja Ignatova told audiences around the world that she had invented OneCoin, a cryptocurrency that would make people forget Bitcoin ever existed. On the promise of huge profits, investors poured in at least €4 billion – probably much more. The only minor problem was that there was no actual blockchain behind OneCoin and Ignatova disappeared along with all investor funds.
Not far behind was BitConnect with estimated losses of US$3.5 billion. This one was an actual cryptocurrency but some alarm bells should have been sounding when 1 per cent daily compounded interest was promised on your investment. It ended up being no more than a Ponzi scheme. The value of a coin hit a high of US$463 but had a spectacular fall to US$0.40.
The founder of Thodex, a Turkish crypto exchange, tricked investors in to placing US$2.2 billion of their crypto onto his exchange and, in return, they would receive free Dogecoin. Not surprisingly, investors handed over their crypto and received nothing in return, and of course cryptocurrency transactions are not traceable.
The list goes on. Security firm Kaspersky said it has detected more than 1,500 different scams aimed at cryptocurrency investors and miners operating in the first half of 2021 alone.
This is not to say that all cryptocurrencies are bad but scammers and con artists are drawn to the anonymity and complexity of cryptocurrencies like moths to a bright light. If someone is selling shares in an airline or a property trust, there is something of intrinsic value that people can touch and feel and possibly even understand.
With a cryptocurrency, understanding the concept of a blockchain and the way it is used in managing transactions is incredibly complicated and few people truly understand the technicalities. In 1837 Hans Christian Andersen wrote his folktale, ‘The Emperor’s New Clothes’ and I am sure he would have a wry smile on his face when applying that same logic to cryptocurrencies.
To hear me discuss more stories like this, listen to the number one locally produced technology podcast in all the land, ‘Tech Talk with Mathew Dickerson’, on your favourite podcast app.