Cryptocurrency — claims and reality — Newspaper

Even after a decade, Bit­coin has not been accept­ed as a medi­um of exchange glob­al­ly by gov­ern­ments, cen­tralised author­i­ties and finan­cial insti­tu­tions. The Euro­pean Union has warned the mass­es against invest­ing in cryp­tocur­ren­cies, declar­ing it high­ly risky, spec­u­la­tive and unsuit­able for most retail cus­tomers as an invest­ment or a means of pay­ment or exchange. 

But the ques­tion is, what’s wrong with cryp­tocur­ren­cy? The answer is sim­ple: Bit­coin lacks decen­tral­i­sa­tion, with a few enti­ties monop­o­lis­ing the Bit­coin economy.

Bit­coin (BTC) was launched in 2009. Before this, Satoshi Nakamo­to — a pseu­do­ny­mous name — sent an email to a cryp­tog­ra­phy mail­ing list on Nov 01 2008 stat­ing: “I’ve been work­ing on a new elec­tron­ic cash sys­tem that’s ful­ly peer-to-peer, with no trust­ed third par­ty.” While explain­ing Bit­coin in his white paper, he claimed that Bit­coin is a decen­tralised cur­ren­cy and does not require a trust­ed third par­ty, ie, a bank or any finan­cial insti­tu­tion, for its operation.

How­ev­er, in the first few years, lit­tle inter­est was devel­oped in Bit­coin, which is evi­dent from the num­ber of trans­ac­tions includ­ed in the blockchain in the first year(s). Lat­er, when enor­mous pay-outs in BTC — up to 10x, 100x, and even 1,000x — were giv­en through the gam­bling web­site SatoshiDice DApp, peo­ple took an inter­est in Bitcoin. 

The belief that no gov­ern­ment, insti­tu­tion, or per­son can influ­ence Bitcoin’s price seems incorrect

A time came in June 2012 when more than 60,000 trans­ac­tions were tak­ing place each day through this gam­bling web­site. This results in hun­dreds of trans­ac­tions added to the Bit­coin blockchain — the major­i­ty of which were due to the use of Bit­coin in gam­bling. After­wards, the inter­est in Bit­coin gained momen­tum due to its open-source nature and wider inter­est by the inter­na­tion­al community. 

Despite the ini­tial claims, some stud­ies argue that Bit­coin is not a decen­tralised cur­ren­cy — a few enti­ties con­trol the Bit­coin econ­o­my, and min­ing pools are among those. Min­ing pools con­trol the major­i­ty of the com­pu­ta­tion pow­er, and if they col­lude, they could con­trol trans­ac­tions in the Bit­coin blockchain. 

More pre­cise­ly, a ran­dom snap­shot on Aug 05, 2022, of Blockchain.com’s data on the mar­ket share of the most pop­u­lar bit­coin min­ing pools shows that six min­ing pools con­trol 55 per cent of the com­pu­ta­tion pow­er. This con­trol increased to over 65pc when analysed over the year’s data. This indi­cates that a small frac­tion of min­ers hold most of the wealth and power.

Cryp­tocur­ren­cy exchanges influ­ence the prices of Bit­coin by con­trol­ling its demand and sup­ply. One recent exam­ple is Cel­sius Net­work, a cryp­tocur­ren­cy lend­ing pri­vate com­pa­ny that froze with­drawals and trans­fers of 1.7 mil­lion accounts of its cus­tomers. This action result­ed in a 60pc price drop in Bit­coin and Ethereum. 

This is against the prin­ci­ples of decen­tral­i­sa­tion and the promis­es made by Bit­coin. Addi­tion­al­ly, wal­let ser­vice providers can also manip­u­late the Bit­coin prices and con­trol the Bit­coin you possess. 

A study, ‘Char­ac­ter­is­ing Wealth Inequal­i­ty in Cryp­tocur­ren­cies’, reveals that 0.01pc of Bit­coin address­es con­tain over 58.21pc of all Bit­coins in cir­cu­la­tion. Thus, Bit­coin also fol­lows the typ­i­cal Pare­to dis­tri­b­u­tion of real-world economies ie, 20pc of the pop­u­la­tion con­trols 80pc of the wealth. 

How­ev­er, cryp­tocur­ren­cy is worse than real-world economies. A study, ‘Coop­er­a­tion among an anony­mous group pro­tect­ed Bit­coin dur­ing fail­ures of decen­tral­i­sa­tion,’ also ref­er­enced in the New York Times, reveals that for two years — from the launch of Bit­coin to BTC price reach­ing $1 — 64 key play­ers mined most of the Bit­coin. This is once again con­trary to Bitcoin’s promise of egalitarianism. 

Ide­al­ly, every­one can par­tic­i­pate in the Bit­coin min­ing process and earn Bit­coin as a min­ing reward and trans­ac­tion fees. How­ev­er, due to the increased hash Rate [a mea­sure of the com­pu­ta­tion­al pow­er used to mine and process trans­ac­tions on a proof-of-work blockchain net­work] and the dom­i­nan­cy of min­ing pools, the chances of win­ning the cryp­to­graph­ic puz­zle for a nor­mal per­son are almost neg­li­gi­ble. Thus, the fate of Bit­coin is not in the hands of an aver­age person.

Due to cryptocurrency’s high­ly spec­u­la­tive nature, econ­o­mists believe that nei­ther it can be treat­ed as a medi­um of exchange nor store val­ue. Above all, Bit­coin does not have any intrin­sic val­ue, and even as such, Bit­coin does not dig­i­tal­ly exist — it is just an entry in the Bit­coin ledger. In sim­ple words, when Alice trans­fers Bit­coins to Bob, it is only an entry in the dis­trib­uted ledger that is being updat­ed in the form of transactions. 

Trans­ac­tions show the own­er­ship rights of Bit­coin and can eas­i­ly be tracked through Unspent Trans­ac­tion Out­put (UTXO) and Spent Trans­ac­tion Out­put (STXO) in the pub­licly avail­able ledger of Bitcoin. 

The gov­ern­ment does not back cryp­tocur­ren­cies thus, they do not have a finan­cial ser­vices ombuds­man. If you invest in cryp­to and lose, you may lose a large amount or even all the mon­ey invest­ed, and you have nowhere to go and fight for your cus­tomer rights. 

Social media influ­encers have their own vest­ed finan­cial inter­est, so one should beware of such biased mar­ket­ing about cryp­tocur­ren­cy. Fur­ther, one should be care­ful as a lot of scams and fake cryp­to assets exist. One can even cre­ate one’s own cryp­tocur­ren­cy. Some stud­ies argue that black mon­ey hold­ers use cryp­tocur­ren­cies to make their mon­ey white. Cryp­to can also be used in mon­ey laun­der­ing because Know-Your-Cus­tomer rules are not applic­a­ble here. 

Though cur­rent­ly, Bitcoin’s mar­ket cap­i­tal is more than $400 bil­lion and togeth­er with Ethereum, it is among the top two cryp­tocur­ren­cies, it is still used for gam­bling and as a medi­um of invest­ment instead of as a means of pay­ment or exchange. 

Bit­coin was the hope of many because it allows to send mon­ey direct­ly and chal­lenges the monop­oly of gov­ern­ments, cen­tralised author­i­ties, and finan­cial insti­tu­tions. Nev­er­the­less, a few enti­ties con­trol Bitcoin’s econ­o­my. The claim that no gov­ern­ment, insti­tu­tion, or per­son can manip­u­late a cryptocurrency’s price or influ­ence Bit­coin prices seems incorrect.

The writer teach­es Com­put­er Sci­ence at Mun­ster Tech­no­log­i­cal Uni­ver­si­ty (MTU), Ireland.
X (for­mer­ly Twit­ter: @MRehmani)

Pub­lished in Dawn, The Busi­ness and Finance Week­ly, Sep­tem­ber 18th, 2023