Cryptocurrencies are hailed as one of the most significant financial innovations in modern history – some even say ever. Digital currencies are gaining popularity by the day. Proponents of this financial innovation bring up several reasons why cryptocurrencies, and especially Bitcoin as the one with the largest market volume, are going to be more important in the future. The statements range from scenarios that consider cryptocurrencies as viable payment methods in the future to views that firmly contest that cryptocurrencies will replace regular currencies one day. Next to that, many market participants try to profit from the volatile fluctuations of those digital currencies through speculative trading. In short, the so-called “crypto space” gains more followers and believers, while seemingly becoming more accepted in the world of finance. However, there are some major structural problems with cryptocurrencies which make their survival not only unlikely but almost impossible. In this article, those problems are going to be discussed as they will eventually lead to the collapse of cryptocurrencies, amounting to the biggest financial scam in history.
For believers of cryptocurrencies, the advantages are sheer endless. The main argument, however, is that they pose a decentralised alternative to regular currencies. In the discourse about the advantages, it is often stated that regular currencies are subject to government control, which makes them prone to risk through human mismanagement. Due to the management of currencies through the government, regular currencies perform in accordance with the decisions made by officials. In case of ill management, holders of those currencies incur losses in different forms. Cryptocurrencies circumvent this risk by not being tied to an authoritative entity that can control and manage them. They are functioning far away from the central banks and therefore provide a certain degree of freedom for the holder of a cryptocurrency.
Also, the proponents argue that because there is this lack of control, the market dynamics of the cryptocurrencies push them to be efficient. Central banks, on the other side, are viewed as inefficient and long-outdated institutions. The most emotional argument brought forward by proponents of digital currencies is that central banks simply print money at will, in order to achieve an often-unidentified goal. Due to the limited amount that some cryptocurrencies can be produced, like Bitcoin, those digital currencies are subject to pressures of scarcity, while regular currencies can be produced without limits. In the seldom cases, in which defenders of the crypto concept do provide an answer to the question of why a central bank would want to print arbitrarily, the answer is that “the central banks want to keep the masses poor”. Cryptocurrencies, in turn, are viewed as financial liberation tools that help people to gain wealth without being dependent on “the corrupt system”. The argument is deeply embedded in an underlying assumption that there is a struggle between makers of monetary policy (governments) and citizens. Cryptocurrencies, so it is contested, create a safe haven from arbitrary government actions.
Confrontation with Reality
Needless to say, the arguments above are purely emotional and have a heavy romantic note to them. Unfortunately, those arguments can all easily be invalidated. Beginning with the most basic differentiation that there are some cryptocurrencies, most prominently Bitcoin, that cannot be produced in an unlimited fashion, while regular currencies can be printed in the form of notes and coins, we will quickly that this just appears to be the case. Taking Bitcoin as an example, the units of Bitcoin became more fractured over time with the increasing prices of this digital currency. Today, Bitcoin can be bought and traded in very little fractions of a single unit, and the extension of decimals continues. This is not a strict limitation of Bitcoin supply because the minimum trading volume is decreasing all the time, which can also be extended unlimitedly. In this regard, there is no structural difference between the currency concepts.
This leads us to the second argument that central banks print money at will. In purely theoretical and physical terms, this is certainly possible, but it is not happening. Central banks fulfil a public mandate through the execution of government strategies. Though they operate independently on technical matters, central banks are an integral part of shaping and advancing economic conduct. Certainly, this might not always work well and currently, we are even experiencing a situation in which some collectively taken ill decisions led to global slowing of growth rates and increased inflation. However, central banks do not expand the money supply one-dimensionally. There are four types of money supply (M1, M2, M3 and M4). By decreasing and increasing the different forms of money, central banks can create favourable conditions for other macroeconomic factors to develop. As mentioned just above, this is not always happening in the most efficient way, but central bank policies are far from being as simple as portrayed by cryptocurrency believers. And therefore, cryptocurrencies do not solve any real-world problem – the opposite is true.
A Useless Case
In contrast to regular currencies, the volatility of cryptocurrencies leads to incredibly speculative actions which makes the use as a means of exchange impractical. Buying a cryptocurrency that can lose or gain a manifold of its price at purchase within a couple of hours is simply not a reliable medium for transactions. Therefore, cryptocurrencies are often just bought with the premise to sell them sometime later at a higher price. It means that there is no intrinsic value to this digital object that does not even deserve the label “asset”. Regular currencies, in turn, represent the political and economic stability of an economic area. In abstract terms, the fluctuations in the foreign exchange market can be said to be visualisations of ongoing power shifts in the political realm. As long as a nation exists, the value of a currency is given – even during reforms and resets of currencies. It is the very government that is being so criticised that provides its national currency with the necessary value to use it as a means of trade and settles disputes around the use of money.
Cryptocurrencies do not add anything to the realm of payments. One could then say that it they are only digital but that would be more of a shortcoming than an improvement. In the end, transferring money via credit cards or online is no less of a digital transaction than those made with cryptocurrencies. There is nothing that cryptocurrencies can do that cannot already be done much better by existing financial structures. Even the risk is much higher because the concept of those new currencies is so new that many already vanished, pulling incredible volumes of money with them into meaninglessness.
Finally, the main argument that they provide the average citizen with a tool of freedom by trading far away from government control is also a myth. The average holder or trader of cryptocurrencies is dependent on the existence of suitable trading platforms. Only a few people are sufficiently equipped to trade those digital pieces without a formal trading platform. However, those are regular companies that are subject to government regulation. If needed, governments could freeze assets, stop operations, control and monitor trades and even nationalise those trading platforms if needed. Yes, theoretically activities around cryptocurrencies can remain in the dark but in reality, this sector is just as regulated as any other.
But if we are already talking about romantic arguments, there is one from the Essydo Magazine side, too! In a financialised world, in which superpowers such as the USA, China, the EU and Russia engage in multi-layered conflicts, including military means, to protect pricing power and currency domination, is it really possible that a new form of digital product emerged of which the founder is unknown and that everybody hails as the liberation from central banks? Is it really that simple and would the often evilly portrayed governments allow for such a thing to happen? Did we forget that the whole Arab Spring was rooted in the USA’s attempt to hinder Muammar al-Gaddafi from establishing a pan-African reserve currency? And now, do teenagers have an easily accessible tool at hand to circumvent government control? If anything, the currency integrity of a nation is one of the most important requirements for its economy to function. Nothing that could endanger it can survive or even emerge in the first place.
In other words, cryptocurrencies are the biggest scam in economic history. Within the next 15 years, this bubble is going to burst with losses that amount to many trillion Euros. Until then, their massive gains can surely be made and the myth of financial liberation with strengthen, but eventually it will be clear that cryptocurrencies do not provide anything that would logically justify their existence.