THE CRYPTIC PROBLEM WITH CRYPTO Brendan Boyd

In the human race’s ever growing thirst for technological advancement, there have been talks of a potential replacement for the physical currencies running the global economy today. Physical currencies such as the dollar or the pound are run by national banking companies that oversee basically everything that happens with those currencies: transactions, trades, income and more. This allows the government to impose taxes upon citizens based on what they do with their money. The proposed solution to that problem is something called cryptocurrency. In layman’s terms, cryptocurrency is a peerto-peer currency system, which means that all crypto transactions are traded directly between the two individuals taking part in the transaction. There would be no “middleman” overseeing crypto processes. On paper, this sounds like a dream come true to people looking for a different, more private way to use their money. However, in practice, there is a lot more to cryptocurrency than what it promises. There are talks of rampant fraud and theft within the crypto community, along with the absolutely devastating effects crypto processes have on our planet as a whole. The overwhelming amount of risk and power consumption involved in investing in cryptocurrency harshly damages its potential viability as a form of currency.

Understanding how exactly cryptocurrencies and non-fungible tokens (NFTs) function as a whole is crucial in understanding why they are entirely illegitimate. Antony Lewis, ex crypto trader and author of the book The Basics of Bitcoin and Blockchain, explains cryptocurrencies as “digital assets

(‘coins’) whose ownership is recorded on an electronic ledger that is updated (almost) simultaneously on about 10,000 independently operated computers around the world that connect… [to] each other” (150). This means that cryptocurrencies are not created, issued and, most importantly, regulated by the government. They are entirely maintained by the Bitcoin holders themselves. This allows the holders to create their own Bitcoin wallets, which are essentially apps that do everything related to Bitcoin, including transactions, address creation, balance, and more. Addresses are Bitcoin accounts that serve as the main storage compartment for cryptocurrencies. These addresses are split into 2 “keys” to function: the public and the private key. Lewis explains addresses and keys more in depth:

Bitcoin addresses (accounts) are derivatives of public keys, and when you make a Bitcoin transaction, you use your private key to sign, or authorize, the transaction which moves bitcoins from your account to someone else’s. Most blockchain schemes operate this way. Digital assets are held in accounts made from public keys, and the respective private keys are used for signing outbound transactions. (135)

The electronic ledger Lewis mentioned is what is referred to as “the blockchain”. Lewis explains the blockchain as a database that is maintained and replicated on the 10,000 computers mentioned earlier. He goes on to say that this database contains records of every single Bitcoin transaction that takes place, which allows Bitcoin wallets to function, as the blockchain doesn’t store wallet balances, it stores transactions. For example, a typical crypto wallet doesn’t calculate the amount of bitcoin that is actually stored in the wallet. It goes through all of the transactions that are currently associated with that specific wallet and calculates the balance that way. It works this way to prevent users from simply copying their digital wallet and doubling their total amount of crypto. Essentially, this allows all cryptocurrency transactions to be entirely peerto-peer as opposed to the centralized banking system the economy revolves around today.

One might be wondering how cryptocurrencies are created. Crypto is created through a process called “mining”, which is the process of creating blocks on the blockchain, which is done through “recording transactions in batches, page by page instead of transaction by transaction. Individual transactions… can be passed around the network, then entered into the [database] in less frequent batches” (Lewis, 163). There are many bitcoin transactions created per second. As such, it would basically be impossible to take note of and verify every single one as it’s created as it would take too much time. Therefore, “blocks” are created which are batches of transaction data that get sent to the “bookkeepers”, which is essentially anyone with “a computer, adequate storage, and access to internet bandwidth” (Lewis, 161). The bookkeepers then verify all pending blocks of transactions, which get sent to all other bookkeepers to show that the block has now been verified.

A block gets verified through a process called “proof of work” (PoW). Lewis describes the PoW process:

Each block-creator takes a bunch of transactions that they know about, but which have not yet been included in any of the previous blocks, and builds a block out of them, in a specific format. The creator then calculates a cryptographic hash from the block’s data. [...] The rule of Bitcoin’s proofof-work game of chance says, if the hash of the block is smaller than a target number, then this block is considered a valid block which all bookkeepers should accept. (167)

Many will notice the wording of “game of chance” and wonder what exactly makes this process a game of chance. There is a chance that the hash of the block will end up being bigger than the target number of that block. This doesn’t necessarily mean that the block creator is out of luck if this happens. They can simply try the process again by altering the “nonce” (number once), a “special part of the block that block-creators can populate with an arbitrary number” (Lewis, 167). The nonce has nothing to do with the actual data inside of the block. Its only purpose is to allow the block creator to “change the input data for the hash function” (Lewis, 168). Once they finally reach a number below the target number, the block has now become validated and rewards the original bookkeeper with bitcoin as a commission of sorts for completing this work. This cryptocurrency can then be used as legal tender for any participating establishment.

Cryptocurrencies have built their own asset-fueled economy through the use of things called non-fungible tokens (NFTs). In his article NFTs: crypto grifters try to scam artists, again, cryptocurrency analyst David Gerard describes NFTs as “a crypto-token on a blockchain. The token is virtual — the thing you own is a cryptographic key to a particular address on the blockchain — but legally, it’s property that you can buy, own or sell like any other property.” An NFT can be anything, be it a video, document, screenshot of a tweet, or most commonly, an entire line of algorithmically generated artwork that gets distributed on a virtual market, such as OpenSea. Most people would probably be thinking that when they purchase the NFT, they are purchasing the actual asset itself. However, Gerard reveals that when someone purchases an NFT, they aren’t actually purchasing the asset. They are purchasing the link that leads them to wherever the asset is stored on the blockchain. These links have become investments to crypto enthusiasts, with the perceived value of some NFTs growing to over thousands upon thousands of dollars worth of crypto. They then trade these NFTs with other crypto investors, regaling each other with promises of riches when these NFTs eventually grow in “value” in the future. Many people would look at this model and say “Wait a minute, that just sounds like some kind of Ponzi or pyramid scheme”. They would be right.

One of the main proponents behind the value of NFTs is the demand for it. Obviously, demand only grows if more people want the product. Well, due to NFTs being entirely virtual products with absolutely no physical financial backing and no initial demand to begin with, the only way that crypto investors can increase the demand for their NFT is through something akin to recruitment. Many NFT lines market their NFT series as “the next big thing” in the crypto space. They overhype their product in hopes that investors will get pulled in and invest in their NFT. The investors then proceed to also hype up the NFT series, mostly through social media, in order to generate new investors, increasing the value of the NFT and, in turn, generating more profit on the investors’ end once they attempt to sell it. This leads to these investors being fooled into investing into these NFTs, only for the proverbial rug to be pulled from under their feet, and the original people behind the NFTs shutting down the project and running with the money. The word “rugpull” has become synonymous with crypto as a whole due to the sheer amount of them happening, with the biggest reason behind their numbers is the fact that more often than not, they can’t be stopped or protected against.

The decentralized nature of cryptocurrency allows for theft and fraud to easily run rampant throughout the crypto space, with the worst part being that victims of scams can’t be compensated in any way. An example of this can be seen in a recent Ponzi scheme covered by the U.S. Department of Justice, in which a man named Satishkumar Kurjibhai Kumbhani, the founder of a cryptocurrency company called BitConnect, was found guilty of stealing over $2 billion dollars worth of crypto in a Ponzi scheme. The case review states that this was accomplished through “earlier BitConnect investors [that] were paid with money from later investors to promote the fraudulent scheme.” This is just one of many Ponzi schemes that have been recorded under the crypto umbrella, which is already a massive pyramid scheme as a whole. There have quite possibly been many more of these types of schemes that have fallen under the radar, scamming many investors out of their funds.

Many might say that these kinds of schemes also happen all the time with regular currencies, such as the ongoing trend of multilevel marketing schemes lately, but they fail to realize that crypto scams are tremendously more damaging to investors. Kaleb Davis explains why in his article “The Economic Impact of Cryptocurrency”: “Because the sites are against using a third party to delegate transactions, some buyers are left scammed. Currencies such as Bitcoin are only accepted by a very small group of online buyers.” It’s entirely in the decentralized nature of cryptocurrencies. Many crypto investments very easily fall through, leaving nothing for the investor making the purchase. There is no middle man managing the transaction, so this leaves the investor with no options to potentially get that money back as opposed to potential compensation options that regular banking offers, which further adds to the sheer volatility of investing in crypto over other assets.

These schemes are just a smaller part of what makes crypto so volatile as a whole, which would be the value of the bitcoins themselves. Yes, there is inherent risk in investing in assets with regular currency, but the money being used to invest has a fixed value. 1 dollar is worth 1 dollar. This is not true for the vast majority, if not all cryptocurrencies currently available. The massive, frequent fluctuations in crypto value prevent it from being a viable alternative currency even without all of the other ramifications surrounding crypto. Nathan Reiff delves into the volatile history of cryptocurrencies and their less than stable value in his article “Where Is the Cryptocurrency Industry Headed in 2021?”:

Heading into 2018, Bitcoin traded for close to $13,500 after reaching an all-time high of $19,783.06 in December of 2017. It subsequently dropped as low as $3,400, a loss of about three-quarters of its value— and other digital currencies weren’t faring much better at the time. Ethereum (ETH), for example, fell from an early-year high of $1,300 to just $91 by December 2018 before rallying back to over $450 by the end of 2020.

The nature of cryptocurrency (and non fungible tokens) means that all of their value is perceived. While that may be true for all forms of currency, as we can see here, that perceived value is the only driving factor behind the value of cryptocurrency, meaning that their value is infinitely more volatile than even the most unstable stock investments. This is simply not sustainable for longer than a few years as there will always be the looming likely possibility of crypto value becoming so volatile that the economy could see an accelerated inflation/depression, losing investors and eventually coming to collapse.

The downfalls of crypto don’t just stop at the financial level; their processes (PoW minting and transactions) are actively doing harm to the planet. In Hadas Thier’s article “Cryptocurrency Will Not Liberate Us: Deflating the egalitarian fantasies of digital currencies”, he explains exactly how, stating that “[a] single transaction requires 707 kilowatt-hours of electricity, emitting half a ton of CO2. According to Digiconomist’s Bitcoin Energy Consumption Index, one Bitcoin transaction uses as much power as an average U.S. household uses over 73 days” (17). Just a single transaction is all it takes to send half a ton of CO2 into the air. There are reportedly thousands of crypto transactions that take place every day. This absolutely does not bode well for the planet in the continual climate change battle as the atmosphere gets filled with more greenhouse gasses. Thier also reveals some more concerning stats: “A study published in Nature in 2018 estimated that the process of verifying and mining Bitcoin could on its own raise global temperatures above 2 degrees Celsius by 2048” (17). This isn’t even accounting for the minting of NFTs and the 15,000 to 50,000 NFT transactions (Carter) that also take place alongside regular bitcoin transactions every week, which also consume a ludicrous amount of power. If cryptocurrency makes it past the next 5 or so years, it spells grave consequences for the health of the planet.

Many crypto enthusiasts insist that there are some tangible benefits to crypto over regular currencies. For example, the editors at the NACD Directorship explain in their article “Weighing the Pros and Cons of Cryptocurrency” that one of the benefits cryptocurrency has over traditional currency is that crypto transactions can be transferred in mere seconds, compared to the three full days it takes for a bank payment with traditional currency to clear. Yes, this does allow money to be transferred faster, and allows investors to reach international markets rather than just staying within their own nation’s economy. However, this potential benefit gets canceled out by the sheer volatility of crypto. It doesn’t matter if one is able to send money overseas in seconds if that money isn’t worth nearly as much the next day. This could potentially serve to shake the trust between international investors, shaking the economy and further segmenting economies rather than unifying them.

Cryptocurrency, as a whole, sounds great. It is a peer-to-peer currency system which allows for speedy and private transactions without interference or taxation from the government. However, its execution is so blatantly horrible that there is simply no upside to it that outweighs the myriad of downsides that come with it. Peer-to-peer currency relies practically entirely on trust in order to function. Clearly, that is a… less than reliable currency model due to the overwhelming amount of scams that take place under the crypto umbrella, investors losing billions of dollars worth of crypto over a relatively short amount of time. Even outside all of that, the harm crypto as a whole is doing to the planet is an extreme cause for alarm that should not be ignored. Crypto by itself has the potential to raise the global temperature within the next 20 years, not even accounting for every single other pollutant contributing to climate change right now. As it stands, cryptocurrency is simply not a viable alternative to regular currencies and should be sifted out of the mainstream as fast as possible to avoid further damages to unfortunate investors’ wallets and the Earth.

Works Cited

Carter, Rebekah. The Ultimate List of NFT Statistics (2022). Findstack. 18+ Fascinating NFT Statistics &amp Facts for 2022 (findstack.com)

Davis, Kaleb. The Economic Impact of Cryptocurrency. globalEDGE Blog, 21 Nov. 2021, globalEDGE Blog: The Economic Impact of Cryptocurrency >> globalEDGE: Your source for Global Business Knowledge (msu.edu)

Gerard, Davis. NFTs: crypto grifters try to scam artists, again. Attack of the 50 Foot Blockchain, March 25, 2021. NFTs: crypto grifters try to scam artists, again – Attack of the 50 Foot Blockchain (davidgerard.co.uk)

Lewis, Antony. The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology That Powers Them. Mango Publishing, 2021.

NACD Directorship. Weighing the Pros and Cons Of Cryptocurrency. Vol. 48, Jan. 2022, p48-49, EBSCOhost Academic Search Premier, Weighing the Pros and Cons Of Cryptocurrency: EBSCOhost (scottsdalecc.edu)

Reiff, Nathan. Where Is the Cryptocurrency Industry Headed in 2021? Investopedia, August 25, 2021. Where Is the Cryptocurrency Industry Headed in 2021?

Thier, Hadas. Cryptocurrency Will Not Liberate Us: Deflating the egalitarian fantasies of digital currencies. Vol. 358, Jan/Feb 2022, pp16-22, EBSCOhost Academic Search Premier, Cryptocurrency Will Not Liberate Us: Deflating the egalitarian fantasies of...: EBSCOhost (scottsdalecc.edu)

U.S. Department of Justice, Founder of Fraudulent Cryptocurrency Charged in $2 Billion BitConnect Ponzi Scheme. 25 Feb 2022, Founder of Fraudulent Cryptocurrency Charged in $2 Billion BitConnect Ponzi Scheme | USAO-SDCA | Department of Justice