“Cryptocurrencies basically have no value and they don’t produce anything. I don’t have any cryptocurrency and I never will,” Warren Buffet, CEO and Chairman of Berkshire Hathaway
“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,” John Paulson, president and portfolio manager of U.S. investment firm Paulson & Co.
"Honestly, cryptocurrencies are useless. They're only used by speculators looking for quick riches, people who don't like government-backed currencies, and criminals who want a black-market way to exchange money." Bruce Schneier, Harvard Cryptography and Computer Security Professor
In a previous blog post, we got a glimpse into the crypto optimist’s mind and covered five problems in the banking and payments industries that cryptocurrencies promise to solve. Now we will take a look at the major counterarguments to cryptocurrencies from the perspective of a crypto contrarian.
1. There is no real value
Some people say that fiat money (which are the normal currencies that we all use today) also does not have real value since we moved off of the gold standard. This is incorrect. Fiat money has the value of the guarantee of the government that issues it; on the US dollar, you will see the words “legal tender". Governments have the power to tax their people and businesses, the ability to sell public assets, issue bonds and other ways to guarantee their currencies. The dollar, therefore, is something of a promissory note from the government that indicates they have the means to convert every dollar in circulation into real wealth in some way. The full faith and credit of the government of the United States is not a trivial thing.
Stocks have real value because of the companies’ ability to create profits from the goods and services that they sell. Commodities have real value because industries purchase them as raw materials to use in the production of goods and services.
The only value that most cryptocurrencies, including bitcoin, have is that somebody else might be willing to pay a price for it.
2. Competition from government currencies
Supporters of cryptocurrency say that it will replace fiat money. If this has the possibility of becoming true, it means that cryptocurrency is in direct competition with national currencies. It’s hard to imagine the central banks of China, the US and the EU canceling their currencies and just using bitcoin, which they cannot control. This would be fatal to their monetary systems; proponents of central banks say they are vital to the economy to maintain employment, stabilize prices, and help keep the financial system going in times of crisis.
As we have seen, China has banned bitcoin trading and mining and several other countries have followed suit.
It is more likely that countries will issue their own versions instead and then ban bitcoin. Central banks are borrowing elements of bitcoin’s design and technology to build central bank digital currencies (CBDCs). Whatever advantages that bitcoin might have over fiat money, such as speed of transactions, will be eroded when fiat money becomes fully digital. China’s central bank has been testing its digital yuan and has it on showcase at the 2022 Winter Olympics.
3. It is not trustless
Bitcoin and other cryptocurrencies are not really trustless. Crypto users still have to trust cryptocurrency exchanges and wallets when they trade or otherwise make transactions. Also, there is no human safety net, so if you lose your keys or password, there is nobody to call.
In a keynote speech, Harvard Cryptographer Bruce Schneier put it this way, “If your bitcoin exchange gets hacked, you lose all of your money. If your bitcoin wallet gets hacked, you lose all of your money. If you forget your login credentials, you lose all of your money. If there’s a bug in the code of your smart contract, you lose all of your money. If someone successfully hacks the blockchain security, you lose all of your money. In many ways, trusting technology is harder than trusting people. Would you rather trust a human legal system or the details of some computer code you don’t have the expertise to audit?”
Furthermore, there is also a human element to cryptocurrencies that is not completely trustworthy. These peer-to-peer networks are run like democracies rather than monarchies, and for now these democracies have behaved themselves reasonably well. But in democracies, it’s majority rule, and the majority can do anything it pleases, especially at the expense of the minority.
We’ve seen this already with crypto’s hard forks, such as the one that split off Ethereum Classic (ETC) from Ethereum (ETH). After hackers took advantage of a flaw in a smart contract and stole $50 million worth of ETH, the community decided that the network would create a hard fork to revert that transaction. The new blockchain that reverted the transaction is the more popular Ethereum and the old blockchain that still recognizes the transaction became known as Ethereum Classic. In this case, they were recovering stolen money, but it shows that if the majority of the network agrees, then they can vote to take all your money.
4. Cryptocurrencies are highly centralized by early adopters
Just 0.01% of Bitcoin holders control 27% of the currency in circulation. The centralization of wealth for other cryptocurrencies is equally as bad. Bitcoin mining is also centralized as it is controlled by a small number of companies and pools and cannot be practically attempted by individuals.
Do you really want to start using a currency whose wealth is already highly centralized around a handful of people who heard about it first? Sure, people are unhappy about the existing wealth disparity in the United States where the top 1% of households hold about a third of all wealth, according to the Federal Reserve. But at least we can recognize that most of the ultra-rich have contributed to our society by bringing us things like personal computers, smart phones, and free same-day shipping. It just doesn't seem like a very fair start to the new world currency if a handful of people hold the majority of Earth’s wealth for computing random hashes on their computer before anyone else.
Conclusion
Ask a crypto contrarian and they will tell you that crypto is backed by nothing and you are putting your trust in a technology that has only been around for 14 years. They’ll say, whatever benefits it offers can be implemented by the government itself and we won’t have to restart the wealth game with a few randoms as the ultra-rich.
Final Thoughts
Now you’ve seen both sides of the argument. Truly only time will tell if crypto replaces fiat, goes to zero, or ends up somewhere in between. Hopefully these two articles have given you a more well rounded context to have intelligent conversations about the technological phenomenon that is cryptocurrencies.