Has the World Gone Crypto Crazy?

When a bitcoin is created, data about its existence and its owner are stored on a ledger that lives, in multiple copies, on many miners’ computers—a distributed ledger, in Bitcoin parlance. The technology that enables the ledger is blockchain, which uses math and processing power to encrypt information about each bitcoin and its ownership. It then batches up that information with other bitcoin transactions happening at the same time into a block and connects that block to every other transaction block in a chain. This creates for every transaction a permanent record that can’t be altered without changing the blocks before and after it in the chain of records. To trade a bitcoin, its owner needs to notify the miners who manage the chain about the trade, and their computers will verify and process the information about the current owner, new owner, time of the transfer, and amount exchanged—using complex math problems embedded in the blockchain technology. Finally, the miners will add the transaction to the distributed ledger on all the other miners’ computers. That level of distribution and connectedness makes the ledger secure.

The fact that the ledger is distributed rather than controlled by a central organization is what made Bitcoin so appealing to early users for online transactions. Payments don’t have to go through any banking system, aren’t tied to any specific offline currency or government, and are both anonymous and secure. This quickly made Bitcoin the de facto currency of the so-called dark web. According to Coinbase, a leading information service focused on cryptocurrencies, a mere five years after Bitcoin was introduced in 2009, transactions on six dark-web marketplaces topped $650,000 a day. Then the mass market adopted Bitcoin, increasing transaction fees and slowing down transaction speeds, and regulators woke up to this new currency, threatening the anonymity of the transactions. New cryptocurrencies such as Litecoin and Dash emerged to dilute Bitcoin’s hold on the underworld.

Blockchain, being a new technology, is proving itself not quite ready for prime time. Already, the original blockchain system is suffering scale issues. The network can process only about seven transactions per second, which is relatively slow. These transactions require so much processing power that Digiconomist estimates the current Bitcoin network is using enough electricity every day to power the entire country of Greece. That has set off alarm bells with environmentalists. It will take time for the technology to mature into a widely adopted, scalable infrastructure for new systems.

On the currency front, the problems are worse. There are now over 1,500 types of crypto coin and token. Bitcoin has a technology architecture that creates new bitcoins one by one, according to specific rules and through intensive computer processing, but other cryptocurrencies come to market through ICOs. In these, companies create their own tokens and simply sell them. Why would anyone buy a brand-new cryptocurrency that has neither a track record nor an established market value? Theoretically, the value of the token represents what you can do with it in the blockchain network issuing it. For example, to use an application built on the Ethereum platform, you buy tokens that allow you to access and use the Ethereum-based dapp. But ICOs are frequently offered before there is any software ready to use—and sometimes with nothing at all to drive value for the tokens.

According to its creator, Dogecoin was started in 2013 as a joke, a parody of the many cryptocurrencies appearing in the market on the heels of Bitcoin. Buying Dogecoin cheaply and joining the community became an affordable way to get educated about cryptocurrency, and until April 2017, the market value of all Dogecoin was only $25 million. Then the market was hijacked by speculators and uninformed crypto investors, and its market cap soared to $2 billion this past January—for a currency that began as a joke! Dentacoin markets itself as the blockchain solution for the dental industry. With its website promising a test launch in the fourth quarter of 2018 and integration with health-care databases in 2019, Dentacoin also saw a market cap that topped $2 billion in January. By March, it had come back down to $91 million, still a hefty price tag for a token with no current use. In the underregulated Wild West of crypto, self-proclaimed pump-and-dump groups brazenly advertise their membership opportunities. Get in, buy the designated cryptocurrency at a set time, then sell when the market thinks this is the next Bitcoin and jumps in.