Cryptocurrencies – How safe are they?


While there are multiple cryptocurrencies in the market, the one thing common among all is the blockchain technology on which it runs. Bitcoin, is probably the most popular of the various cryptocurrencies, having said to have been created in 2009 by Satoshi Nakamoto (a pseudonym). The concept of transactions that can be made through cryptocurrencies without any intermediaries, namely banks has led to its popularity. Just recently, bitcoins touched the $20,000 mark; and is expected to reach the $40,000 mark by mid-2018.

However, the start of the year has not been promising, especially given the news about South Korea rethinking its stance on cryptocurrency and possible closure of exchanges. In North America, Kraken Bitcoin Exchange, the fifth-largest exchange globally was shut for a long maintenance, making investors wary. The 28% drop in the value is also adding to the anxiety. This is not the first time.  Back in 2014 Mt Gox, one of the biggest cryptocurrency exchanges in the world, filed for bankruptcy, after 850,000 bitcoins went ‘missing’.

So, is this just another fad?  Most likely, not….

The positive buzz around the technology has generated more interest in cryptocurrencies and also prompted a discussion around their ‘legality’. With some countries legalizing cryptocurrencies (cautiously), the world is now coming to terms with them. While these developments are certainly interesting, cryptocurrencies come with their own set of challenges. In an AMA on Reddit, Bill Gates recently said that he is critical about a digital currency like Bitcoin that is also entirely anonymous.

It is still intangible in nature and there are several points to consider before jumping on the cryptocurrency bandwagon:

  1. Educating the masses: The future of cryptocurrencies depends on its acceptance by the masses, governments and economies. While renowned universities like NYU, Stanford, Duke, University of California-Berkeley, IT University of Copenhagen are offering courses on the subject, it is yet to become mainstream. Many third world countries are still to develop the infrastructure to support these transactions. Although it started a new digital economic evolution, it is still very early to gauge its acceptance amongst the masses.
  2. No defined regulations: With no real regulation to dictate the use of cryptocurrencies; there is a potential for black market transactions and money laundering. Since cryptocurrencies are outside the ambit of a bank or any regulatory authority, there is no scope for arbitration. There is also the possibility of governments not recognizing it, thus rendering digital wallets useless.
  3. Cybersecurity threats: The world wide web is vulnerable to security threats, more so now than ever before. Since cryptocurrencies are entirely digital, there is a possibility of investors losing millions due to a cyber attack. In 2016, $70 million worth Bitcoins (119,000) were stolen from the Hong Kong exchange Bitfinex. Recently, hackers also broke into Slovenian-based bitcoin mining marketplace Nicehash and virtually walked away with approximately 4,700 bitcoin worth about $63.92m at current prices. This sort of heist, with zero paper trail, makes investing in such currencies, a risky affair.
  4. Chances of tax evasion: The very foundation of cryptocurrency is that there are no intermediaries like banks involved in the transaction. Thus, any individual can transact worth millions without a ‘paper trail’. For instance, employers who pay their employees in Bitcoin and other cryptocurrencies, so as to avoid tax liability. It is a matter of concern for governments, which in turn could mobilize regulations that call to discourage or entirely stop trading in cryptocurrency.
  5. Chances of price volatility and manipulation: Many creators have direct control over their cryptocurrencies which makes it highly volatile in nature. They can effectively control the supplies of the currencies, which can lead to value swings and manipulation. Also, different exchanges reflect different values of the same cryptocurrency, again emphasizing on the volatility of the currency. Apart from that, bitcoins operate autonomously across international boundaries with no defined regulatory structure and without any consumer protection.

While cryptocurrencies are still in a nascent stage, and most predictions for the rise or fall of blockchain technology are conjecture, it is without a doubt that investors are treading on very thin ice. Though there’s a lot of talk about regulations and acceptance by the banking fraternity and governments alike, it’s still unclear on where the future of cryptocurrencies like bitcoin lie.

It might not be a question of “if” but “when” and hence, the need of the hour is to create a framework that makes using cryptocurrency stable, secure and accessible.

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