Bitcoin’s Meteoric Rise Hurts Crypto As a Form of Currency
A truly decentralized coin requires stability, not volatility.
It’s the star child of cryptocurrencies. The first to break into the mainstream with its value rocketing to $57,723 (as of March 18th), Bitcoin is now a household name. From a currency used primarily for purchasing illicit goods on the now-defunct Silk Road (a black market on the dark web) to a shining beacon of individual financial freedom, Bitcoin has undergone a truly incredible transformation in the last five years. ETFs (Exchange-Traded Funds), trading desks, futures markets, and dedicated news channels focused solely on measuring every dip and rise of Bitcoin surfaced in 2018 and have grown with every boom since. Now, “everyone’s talking up Bitcoin.”
While BTC’s media coverage accelerated general awareness and kickstarted blockchain and cryptocurrency development, its fame could also lend it to become a massive liability to the same industry it helped grow into 3.67 billion USD in 2020. In this article, we’ll explore how BTC’s (and other cryptocurrencies’) preeminent position as a speculative asset could lead to more significant problems for public acceptance of cryptocurrency as a whole.
Bitcoin’s growth has led cryptocurrencies to become vehicles for high-risk speculative investment, focusing on their price volatility and potential for growth over their original purpose as a means of transaction.
Imagine paying for groceries with crypto, and by the time you get back to your car, the value of crypto has risen so much it would be better to return everything and buy it all over again. Imagine your apartment complex charging a different amount for rent each month. Gas station prices update in real-time, and locked-in contracts and payouts can be rendered insignificant with a single movement in value.
Now, currency instability isn’t solely restricted to cryptocurrencies. They, in theory, act as a bulwark of stability in countries experiencing massive inflation. Venezuela is the most commonly cited example of a country where Bitcoin adaptation has increased as locals seek to maintain stable value sources.
“People living in Venezuela suffer from extreme inflation and general economic instability. And here’s a censorship-resistant, inflation-proof asset, so it’s very attractive to people who are looking for a way to maintain value.” — Coindesk
However, USD has not suffered similar inflation rates to the Bolivar (Venezuela’s national currency). The ability for BTC to fluctuate 5–10% day-to-day may lend itself to replacing the latter but certainly not the former. Of course, looking at only currency stability does not get the complete picture — otherwise, we would still be using gold for our daily purchases. Before we get into BTC’s other characteristics, let’s first understand why it, and other cryptocurrencies, are unstable in value.
When early adopters first used ten thousand bitcoins to purchase a pizza, they were not doing so out of greed or a belief in bitcoin as a speculative vehicle — things are different now. Institutions and hedge funds day trade cryptocurrencies, and based on a single tweet, the value of a single coin — or many — can shoot up faster than you can say “market manipulation.” Speculative investors are hoping to “ride the wave,” perusing social media forums and Telegram group chats for hints about whether they should sell everything they have and jump onto the next big coin where they could 100x their initial investment.
Bitcoin’s mainstream media popularity has created a boom of new investors and attracted frauds who target their inexperience for personal financial gain.
BTC’s rise in price has attracted a large crowd, and not all of it is healthy for the long-term growth of cryptocurrency. Many of the current adopters of crypto are less concerned about the whitepaper behind the coin or using it to facilitate real-world transactions and more about how much its price will appreciate in the short-term. When a complicated technology is combined with the potential of massive profits, non-existent regulation, and a new influx of inexperienced purchases looking to strike it big, fraud and scams run rampant. Let’s start with the simplest one: the “pump and dump.”
“Pump and dump” is when a large number of individuals purchase in mass a cryptocurrency coin, often low-volume, to make its price shoot up — the “pump.” Once the price crests a particular mark, the in-group of scammers sell everything at once to lock-in profits (the “dump”), leaving the unaware “holding the bag” with a significantly devalued currency. To maximize the price spike, pump and dump groups ask members to spread the news far and wide. Social media is flooded with hot buzz, and members are told to tell their friends, their family, anyone on Twitter. Newcomers to the crypto sphere are bombarded with these, often receiving conflicting information from various sources. Pump and dumps and related Ponzi schemes have been around since time immemorial. Even the stock market’s most prominent players are not invulnerable to it.
However, the sudden catapult of BTC into the mainstream has created a large audience of newcomers more vulnerable to these scams, and platforms not ready to handle the massively-increased flow of online assets. Mt. Gox is the example most point to when referring to hacked crypto exchanges where users lost millions of dollars in cryptocurrency, but it certainly is not the only one. Kucoin, Livecoin, CryTrEx, Coinnest — dozens of foreign and domestic exchanges have faced hacks and theft over just the last few years. Though the cryptocurrencies themselves have security hard-coded into their system, the exchanges and digital wallets they are stored in do not have any such standards.
This fear of fraud is why the current most popular exchanges can demand high fees in exchange for ease of use and a promise of security. Coinbase, for example, charges one-half of one percent (0.50%) and an additional flat fee for each purchase. On top of surcharges such as these, there are growing miner’s fees resulting from Bitcoin’s scalability issues. Backlogs of transactions generate processing delays and force users to pay increased transaction costs or see their payments not go through as miners become overwhelmed by demand. Mining as a whole is problematic, with the recent shortfall in silicon and scalping for graphics cards and processors attributable to miners hoping to take advantage of new technology to mine cryptocurrencies faster while also contributing to the terrible energy waste and environmental impact that doing so has.
Many will say that these issues are growing pains and not significant problems with the overall system — and they are not incorrect. Pegged cryptocurrencies, for example, are specifically designed to maintain a value at an exact ratio with another currency — say gold or USD. Proponents will also bring up different coins, each one fixing a single issue or a set of problems with BTC that I’ve mentioned. Nano has no transaction fees and no mining. Ethereum provides a platform for blockchain-based smart contracts and decentralized apps. Litecoin is four times faster than Bitcoin. Ignoring their own flaws and controversies (one of the largest pegged cryptos, Tether, has been accused of fraud), plenty of altcoins and forks have emerged in an attempt to create the perfect coin for their respective niche.
The problem is, how can an ordinary consumer tell which altcoin has real potential? The current education system surrounding altcoins is quite bad, with newcomers finding it challenging to figure out which YouTubers, online forums, or personalities provide genuinely great advice and which are there to shill for a coin they may have a personal stake in (sometimes it’s both). Even if they identify a coin they want to use, how can they trust that its value, which already fluctuates at a level unsafe for a daily currency, will not lose value or become worthless once some controversy surrounding its founders or backers emerges? If a flaw or vulnerability is discovered? If the exchanges that host it suffer a security breach or hack, or even an exchange that doesn’t? Every single scam and case of fraud for any cryptocurrency is an attack on the entire system, one that depends on the public trusting a currency backed not by a government or bank but by its users and its design. You can see it in how a case of fraud or controversy causes the market for all coins to fall, not for just the coins affected.
Bitcoin’s price growth has made it, for better or worse, the face of blockchain as a whole, with its every rise and fall in value reflected across the system. From environmental to scalability to security, the issues it faces are seen as problems all cryptocurrencies face by the general public. The potential to generate massive profits has led to incredible growth in the cryptocurrency and blockchain sectors. Still, it has also attracted the attention of less-scrupulous con artists and scammers who degrade the reputation of crypto and undermine the trust and stability which is required for a currency to truly flourish past a speculative asset. Ordinary consumers do not want to read 30 pages of a whitepaper or conduct a background check to make sure a YouTuber or forum poster isn’t going to scam them out of their money. The longer BTC and other cryptos remain in this “Wild West” of huge profits and colossal risk, filled with danger and excitement, the less likely it will transition smoothly into what a currency should be: boring and accepted.
Users of cryptocurrency need to hold on to their coins for longer and seek to educate the general public about avoiding scams and finding genuine unbiased sources. The primary goal should be to promote coins with real-world applications beyond a speculative vehicle and focus first on security about all else. High prices and variation are exciting for day trading and speculation, but not for stable transactions crypto is supposed to supplant. BTC’s rise broke crypto into the mainstream — now it’s the time to reflect on how we can best reform it and the industry to become the currency of the future and not a short-term investing phenomenon.
Kevin Fang is a freshman studying business at Tepper. Whenever he’s not struggling in 15–122, he enjoys spending time with friends and family, singing and songwriting, losing money on Robinhood, and playing the guitar. His specialties include geopolitics, literature, blockchains, and music.