Why Do Cryptocurrencies Have Such a Bad Reputation?
For most people, cryptocurrencies have mainly negative associations — words like scam and bubble often come to mind. The reason for this is that the coverage of cryptocurrencies by the mainstream media has largely been negative — not without reason. Many high profile investors and members of the tech community have also been critical of cryptocurrencies.
Warren Buffet, famed investor and third richest man in the world, has referred to Bitcoin as “rat poison squared”, while Bill Gates has stated that he would bet against Bitcoin if he could.
While there are lots of great projects being built in the cryptocurrency community, there are also lots of scams and criminal activity. The three main reasons why there is so much illegal action related to cryptos is that they are anonymous, unregulated, and transactions cannot be reversed.
Lack of Regulation
As with all innovation, governments have been slow when trying to catch up with cryptocurrencies. Given the complex nature of cryptos and blockchain, it is hard for regulatory bodies to create legislation for them, let alone to enforce it. While the US government is now developing regulation for cryptos, the first ten years of their existence was like the wild west. Even when the SEC begins enforcing cryptocurrency laws, lots of cryptocurrencies and crypto applications are operated outside the US, which will limit their ability to prosecute crimes. Furthermore, the anonymity and irreversibility of payments likely means that there will always be some degree of criminal activity using cryptocurrency.
Hackers
While it is impossible to hack the actual blockchain and to create fake cryptocurrency payments, it is still possible to steal people’s cryptocurrencies. The reason for this is that many people store their cryptocurrencies in online exchanges. Online exchanges are marketplaces for purchasing cryptocurrencies with normal currencies like Dollars or Euros. They also offer digital wallets for users to store their cryptos in. The issue with storing money in an exchange is that they often store your private keys — your crypto password — online, which opens up the threat of hackers finding them. Back in 2011, Mt. Gox, a Japanese Bitcoin exchange which handled nearly 70% of worldwide Bitcoin transactions, was hacked and lost around $350 million worth of Bitcoin. Because it is impossible to reverse a Bitcoin payment, all the people who had their Bitcoins stolen never got their money back. Many other cryptocurrency exchanges have been hacked such as BitFloor, Poloneix, and BitStamp. However, this does not mean it is not safe to own cryptocurrencies.
Scams
Another source of cryptocurrency scams are ICOs — Initial Coin Offerings. ICOs were created as a new way for companies to raise money. Instead of going to a bank for a loan, or giving up ownership to a Venture Capital firm for money, startups could create their own cryptocurrency token. This token would be used by the customers to interact with the company. For example, Filecoin can be used to rent out file storage on other people’s computers. Users who purchase ICO tokens do not get ownership of the company like with stocks. Instead, they hope that the value of the token will go up as more people start using it. The problem with ICOs is that anyone can create them, and it is hard to tell if they are real of not. In 2017, when cryptocurrency prices were soaring, there were thousands of ICOs. However, it is now believed that nearly 80% of ICOs in 2017 were scams. The creators of these ICOs created worthless tokens and sold them to investors as if they had real value. They then took the money they made and ran of with it. While the US government is now enforcing more regulation on ICOs and beginning to prosecute previous schemes, many investors will never get their money back. Additionally, many real ICOs ended up losing all their money because, like most startups, they failed.
Criminal Activity
Cryptocurrencies are often used for illegal payments, such as buying drugs or fake ID’s, because they are anonymous and decentralized. Back in 2011, a website called Silk Road was created to be an illegal version of eBay mainly for drugs. Silk Road used Bitcoin for payments because it did not involve providing any personal information which makes it very hard to track. At its height in 2013, Silk Road had nearly a million users and handled hundreds of thousands of dollars monthly. The site was eventually shut down by the FBI who created fake accounts to catch the person who ran it, but Bitcoin is still the preferred payment for buying drugs online. A quick google search Google search of “how to buy drugs with Bitcoin” brought up a number of articles detailing how to use Bitcoin to buy drugs on the dark net, such as:
There are also reports of terrorist organizations, including ISIS and al-Qaeda, using Bitcoin for fundraising and international payments. Governments are working to crack down on criminal activity involving cryptocurrencies, but there is a long road ahead before that becomes a reality.
Volatility
Another reason why cryptocurrencies often get such negative attention, especially from institutional investors, is because the price is very unstable. Bitcoin, for example, jumped from around $1,000 in 2017 to nearly $20,000, back down to $3,400 and is now around $5,000 — this trend applies to pretty much all cryptocurrencies. As a result, many people who invested in cryptocurrencies at their height at the end of 2017 lost most of their money. While crypto enthusiasts believe that the price of Bitcoin will eventually surge back past $20,000, many investors maintain that cryptocurrencies were just a bubble and are basically worthless.
Fear of Change
The last reason why there is so much opposition to cryptocurrencies is a natural fear of change. At the moment, banks and credit card companies hold most of the power in our financial system. Bitcoin and other cryptocurrencies are a potential threat to that power. As a result, it is not surprising that many leaders in finance have come out strongly against cryptocurrencies. Behind the scenes, however, there have been many reports that institutions are now turning towards investments in blockchain technology and ICOs. A survey conducted by the Global Blockchain Business Council found that over 40% of polled investors expect to invest in ICOs in the next five years. A different survey found that over 90% of endowments allocated some money into cryptocurrency related investments in 2018. Hopefully, as they continue to develop, the tide will turn and cryptocurrencies will build a more positive reputation among investors and the general public.
While cryptocurrencies certainly have some problems, there are still lots of reasons to be excited by the technology. Check out these articles from On the Block to learn more about cryptocurrencies and blockchain!
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