Cryptocurrencies Have Failed, And Blockchain Still Has Yet To Be Proven Useful Posted on : Nov 12 - 2018

There are two common patterns in technological invention and its subsequent commercialization. The first is a technological breakthrough that sparks interests in commercializing it. The invention of the transistor in the legendary Bell Lab in the 1940s (which later gained the three inventors the Nobel Prize in Physics) fits this pattern. It took a while to work out the commercial applications of the transistor, beginning with the radio, then, in a powerfully transformative way, in computers. The second is an existing demand waiting for a new technology to be invented to meet the need. The invention of the internal combustion engine in the 19th century fits this pattern. The industrial revolution led to proliferating demand for a machine that can provide rotary power to move mechanical devices, including powering land and water vehicles, and eventually aircraft. The internal combustion engine was the answer.

The technology of blockchain and its application called Bitcoin, however, came as a single package. It is a digital currency without a central bank, with transactions verified and recorded in a distributed ledger, the blockchain. Along with the package also came the libertarian utopian hype that this is the beginning of a revolution that will make government, and indeed, any centralized authority, obsolete. And it was this hype, not any commercial success of Bitcoin, that powered an investment craze, pushing up the dollar value of Bitcoin to the stratosphere, spawning a whole host of other cryptocurrencies in the process. In 2017, schemers launched the so called initial coin offerings that attracted over $20 billions of investment, mostly from retail investors, according to the website Coinschedule. Since the beginning of this year, the dollar values of cryptocurrencies have collapsed. The two leading cryptocurrencies, Bitcoin and Ether, collapsed most spectacularly, losing up to 70% of their dollar value, and it appears that the retail investors are also the ones who got hurt the most.

So, what’s next for cryptocurrencies?

It is abundantly clear by now that cryptocurrencies have utterly failed in their purported function as money. The text book definition of money stipulates three criteria: it must be able to serve as a medium of exchange, a storage of value, and a unit of account. As many have pointed out, cryptocurrencies have failed in meeting all three criteria. For example, see the lecture delivered by Augustin Carstens, general manager at the Bank for International Settlements, given at the Goethe University on Feb. 6. Very few day-to-day transactions are conducted with any of the cryptocurrencies, the exceptions are in the so-called dark web where they are used as anonymous medium of exchange of large transactions, equivalent to suitcases full of unmarked large denomination dollar bills that are favored by drug lords and terrorists. Their dizzying volatility means their values are mostly speculative, not for storage. And the fact that cryptocurrencies continue to define their value in dollar terms underscores how useless they are as a unit of account. View More