By Vinh Vuong and Willie Costa
As you’re probably already well aware, cryptocurrency – and bitcoin in particular – are all the hype and rage today. To summarize, crypto markets have hit a market capitalization of over $1 trillion – half of Apple’s market cap – which is quite impressive for an overblown and inefficient science experiment in distributed computing that creates fictitious money with a value based on absolutely nothing… as opposed to fiat currency, which is also technically based on nothing, but which has (millennia ago, if we’re being honest) long since resolved problems that bitcoin will probably perpetually struggle with.
Note that while we specifically mention ‘bitcoin’ throughout this article, these arguments can in fact be applied to any cryptocurrency – including dogecoin. As far as we’re concerned – and as far as you should be concerned – either term is just a fancy, digital-age euphemism for uselessness.
So, let’s breakdown this fantasy and layout the realities.
1. It’s not secure.
One of the biggest draws of cryptocurrency is its decentralized nature. On the surface, decentralized finance (or DeFi, which is a linguistic shortcut that I would DeFi you to top) is a dream come true for millions of Americans who are unbanked or underbanked, or for the billions worldwide who live in countries without a stable economy, or under the rule of governments so corrupt that the ‘stability’ of the economy wouldn’t matter anyway. The central tenet of DeFi is that there’s no central bank, ruthless warlords, corrupt generals, or any other bureaucratic obscenity or unworthy lifeform controlling your wealth. Instead, your bitcoin resides in a wallet: a password-protected application that safeguards your digital currency.
But, to use a banking analogy, you’re not just the bank president – you’re also the teller, the manager, and the janitor. When you forget your PIN or lose your debit card, you go to the bank branch, show some ID, engage in some lighthearted Q&A, and you get a new card with a new PIN while the old card and PIN are disabled; or, if you’re technically savvy and still haven’t put on pants since March of 2020, you do all of this online. With a crypto wallet, if you forget your password you’re totally screwed.
What was the password to your email account five years ago? Chances are you’ve had to change it due to the numerous security breaches we now enjoy as a matter of course; if you haven’t, I have land to sell you…
Turns out, people are terrible at remembering passwords even when literally country-changing amounts of money are at stake. The New York Times estimate that about 20% of all bitcoins – worth just about $140 billion – are completely irretrievable, not due to socialist uprisings or military coups, but simply because the wallet owners lost their passwords. Inadvertent HODLers can enlist the help of recovery experts such as Dave Bitcoin, the pseudonymous founder of Wallet Recovery Services, to try and recover their inaccessible digital wealth, although the high price (20% of the wallet value upon successful recovery) and low success rate (about 35%) make it a risky gamble. And if you’ve lost your seed phrase, then your digital wealth gets to join the rest of the $140 billion worth of unrecoverable electronic funny money.
Or you can be like Stefan Thomas, a poor San Franciscan who gained internet fame not for creating gratuitous cat memes, but because he’s the proud owner of a wallet containing $220 million worth of completely unrecoverable bitcoin. See, to be secure, many people hold their crypto in ‘cold storage’ – saved offline onto hard drives, flash drives, etc. It’s the digital equivalent of money under the mattress. For the really security-minded, they’ll take extra precautions and store their wallet with a schema that prevents the type of brute-force attacks that people like Dave Bitcoin uses to unlock your wallet for you; unfortunately, these arrangements – like the IronKey that Stefan Thomas used – get triggered by multiple incorrect password attempts (typically caused by writing your secure password down on a piece of paper and then proceeding to lose the paper) and mulch the data into indecipherable garbage. In Thomas’ case, IronKey performed its function perfectly… to the tune of 7,002 bitcoin (over $400 million today) that will be impossible to recover before the heat death of the universe.
So, we’ve decided that cold storage merely invites the cruel jests of fate. Why not let a third party hold your bitcoin for you? That way you can always access your digital currency and you’re safeguarded against inadvertent password-related mayhem. Perhaps a bank an exchange will be a safe bet.
Anyone who’s walked into a real, brick-and-mortar bank at any time since 1933 has walked past a sticker on or near the front door that reads ‘Member FDIC.’ That’s not a social club where bank managers meet to discuss how to foreclose on innocent old ladies who are three days late on their mortgage. FDIC is the Federal Deposit Insurance Corporation, and they insure every account in every bank that agrees to play by their rules regarding risk and operations – and who also pay the FDIC to religiously audit their procedures using Financial Institution Specialists who examine all possible risk and compliance metrics to ensure that the bank is not playing fast and loose with customer deposits. So, if the worst ever happens and the bank is destroyed, gets robbed, etc., the customers are protected.
Unfortunately for crypto HODLers, there’s no equivalent of this. The customers of QuadrigaCX found this out firsthand, as the CEO of the exchange promptly died and took the only password to access the cold storage of bitcoins with him. No one else in the entire world – not even his widow – knew the password, and about 26,000 bitcoin ($1.56 billion in today’s money) were left unrecoverable.
Or consider the case of Mt. Gox, a giant ponzi scheme that was once the exchange for 80% of all bitcoins around the world. After allegedly ‘misplacing’ 850,000 bitcoin ($51 billion), Mark Karpeles, the former head of the exchange, was served thirty months of prison time after his shenanigans dissolved from even the slightest inspection by the police.
In the case of a real bank, if real money were ever lost or ‘misplaced,’ the FDIC would step in and make the depositors whole. This is especially true in cases such as Mt. Gox, which involve massive fraud, or in cases such as Nicehash and Coincheck, which experienced absolutely spectacular heists. Those kinds of protections can’t exist with crypto because it is completely, 100% peer-to-peer by design. There’s no government behind the blockchain manipulating monetary policy to its own advantage; but unfortunately, there’s also no government to protect the users, either.
2. It’s not easy to use.
All currency depends on infrastructure. You need to create the currency, you need to secure it against counterfeiting and theft, and you need to create legal procedures to define how that currency is used and under what circumstances it can be rejected.
The one aspect of currency that is often overlooked is speed and ease of use. Forget about the all-digital infrastructure of bitcoin – banks have digital infrastructures as well, and we’re just as dependent on those digital infrastructures (and just as screwed without them) to make transactions in dollars, euros, lira, or whatever other currency you desire. When a user inserts a credit or debit card into a POS terminal, they expect the transaction to occur in a reasonable amount of time. For the most part, that’s the case: credit card companies can process 38,000 transactions per second. With bitcoin, transactions are capped at five per second. Bitcoin’s decentralized architecture is a proof of work system, which means that all of the computers involved in mining are racing to solve insanely complicated mathematics before anyone else can, which lets them verify the transaction, append it to the blockchain, and collect bitcoin as a reward.
Remember that you’re appending a transaction to an ever-increasing blockchain – one, single, ever-evolving ledger recording every single transaction from all over the world – and each transaction must be verified by all participants (miners) in the chain. That’s the only way crypto can solve the double-spend problem. Right now, the 5 TPS limit is functionally irrelevant: aside from random ‘edgy’ establishments like tattoo parlors and HODLer parties, not a huge amount of people use bitcoin or any of the other cryptocurrencies. People buy bitcoin to have bitcoin, not necessarily to use it. It’s like buying a Picasso: you buy it to have it and tell others you have it, while hopefully watching it increase in value; you don’t cut out strips of it to buy groceries. But when you reach the level of transactions that use credit cards (16.6 billion transactions per year) or even checks (14.5 billion transactions per year), the cap rate of bitcoin makes its use as a currency all but impossible. Bitcoin transactions can take minutes or hours – or, in the case of some truly unfortunate souls, days – to complete. Yes, you can have ‘instant’ transactions via off-chain transfers, but that sort of defeats the entire purpose of the distributed ledger system. The crypto bulls will claim that transactions are instant, and it’s the confirmation that takes time. While this is true, an exchange without a confirmation is a claim, not a transaction. Confirmation is what makes the transaction secure and irreversible; in the meanwhile, enjoy your orphan blocks.
Spoiler alert: that’s not how money is supposed to work.
There’s an easy solution, of course: you can pay to essentially cut in line and have your transaction be the next one appended to the ledger. These transaction fees were never part of the original bitcoin architecture: they just evolved as a consequence of market dynamics. On the surface, this is a good thing and a strong argument for an efficient market, as a payment system designed with security and anonymity in mind might not be streamlined for use in the real world, where people are unlikely to want to wait two hours for their payment to be confirmed. But fees make transacting with bitcoin implausible: are you going to pay $5 in fees to move your transaction for a $4 latte to the front of the line, or would you rather hang out and make awkward small-talk with the barista for a few minutes (or hours, or days…) while your transaction gets verified and appended?
Meanwhile, with Apple Pay – or, heavens forbid, cash, that dirtiest and most arcane of payment methods – has me in my car and driving off while you’re still waiting for computers in the ether to approve your purchase.
For the moment, fees are probably the most direct way to make transactions on a blockchain reasonably quick. The problem comes when people start adopting bitcoin en masse and everyone wants to get to the front of the line. Recall the halcyon days before covid when you could go to a ball game. The person in front of you stands up to get a better view, so you also stand up to get a better view, because you paid $50 for that seat and aren’t about to let some rando enjoy the game more than you can. The people around you realize that standing up is a pretty good idea – they also want to get their ticket’s worth – so they stand too. Eventually you reach a saturation point where no one’s view is any better than it was before: you’re all seeing the same partially-obstructed view of the game, but now you’re standing instead of being marginally more comfortable in the steel plank of a seat behind you.
So what can you do to get around this? Should transactions be conditionally approved and moved into a distributed queue, so that they can be appended to the ledger as computing power allows? What happens if you don’t actually have enough bitcoin for that $4 latte? Do I, as the vendor, get shorted? How do I get made whole? You can’t ask other participants on your network to contribute ‘nibbles’ of crypto toward covering that transaction, because it destroys faith in your system: what’s the point of secure transactions if I face the counterparty risk of a completely unknown user shorting a vendor and my coins being used to cover the shortfall? Why would anyone pay for anything using that system? And what would you do with users who shortchange too frequently – kick them off the network? What’s the crypto’s value as a currency if you might face the risk of being unable to use it? Several countries already face similar real-world problems with their currency, and their debt has the sovereign risk premium to prove it.
3. It doesn’t erase – or even mitigate – inequality.
No, I will not espouse wearing shirts that display ‘EAT THE RICH’ in large, sans serif font. This will not be a philosophy of social injustice in brief. Crypto prides itself on being a democratized system of spending, a free and decentralized future of finance that finally and permanently puts everyone on equal footing and empowers us all to be individual monetary nodes in a global network of wealth and prosperity.
Unfortunately, all of that is a lie.
Ignore the carbon footprint argument: the bitcoin network has gone from requiring as much electricity as all of Switzerland in 2019 to needed as much juice as all of Ukraine in 2021. Ignore the fact that in 2018, the energy required to mine a single bitcoin would power the average American home for two years (and would probably power a really eco-conscious home from our European colleagues for a decade). Ignore the fact that the bitcoin network consumes more electricity than 150 countries use in an entire year. Ignore the claims of miners that coin mining is fueled primarily with renewables – a claim which, even if it’s true (and it’s likely not, as most sources that aren’t digital currency advocates peg the use of renewables at less than 30%, rather than the claimed 70%) relies on the use of existing renewables capacity, rather than paying for additional capacity to be built. And certainly ignore the fact that the electricity required to mine bitcoin will continue to increase as more and more bitcoins are mined; by the time the last bitcoin will be mined – somewhere around the year 2140 when I last bothered checking – the juice necessary to process that transaction boggles the mind. Perhaps we should colonize Mars after all: we might need to turn our current world into a planetary-scale hydroelectric power station just to append that last block to the ledger. And, given human nature, it’s unlikely that said transaction will be anything momentous or enlightening – it’ll probably be a six-pack.
But for simplicity’s sake, let’s just pretend, for a moment, that crypto is powered entirely by magic. It simply is.
How has cryptocurrency actually done anything to address the wealth inequality that has been the subject of so much internet ink over the past twenty years? True, crypto is not controlled by a monopoly; instead it’s controlled by an oligarchy – in this case, whales (typically defined as wallets holding over 1,000 bitcoin), which put a staggering amount of crypto-wealth in the hands of very few people. Current estimates claim that 1,000 people own 40% of the bitcoin market, and 1,100 wallets account for the overwhelming majority of the entire currency. Meanwhile, wallets containing less than 0.001 bitcoin number well into the millions. Amongst the thousands of available cryptocurrencies, bitcoin is actually the most democratized: by comparison, 147 wallets control the majority of ether, and 128 wallets control the majority of litecoin.
Crypto markets are no different than any other secondary market: supply and demand drive pricing. But without a centralized authority figure to ensure that everyone plays nicely, you have a situation ripe for market manipulation. The sheer number of bitcoins held by so few wallets mean that large amounts of the currency can be dumped and then repurchased at a much lower valuation. This isn’t hypothetical: a single account at Bitfinex ran bitcoin up to its first high of nearly $20,000, using tether (a stablecoin held in reserve and pegged to the value of the dollar) to assist in the runup. Similarly, on 17 May 2019 a Bitstamp price drop was due to a large sell order placed well below market rate, which triggered automatic liquidation of millions of dollars’ worth of long positions on BitMEX. Short-sellers undoubtedly made a tidy profit; everyone else can enjoy a hearty serving of ‘past performance is no guarantee of future results.’
Market manipulation is aided and abetted by price liquidity – an investor’s ability to move a ‘reasonable’ amount of an asset without triggering a price shift. Liquidity is directly tied to market depth, which for crypto is scattered amongst many large exchanges, and likely hundreds of smaller ones (if they even still exist). When liquidity pools are scattered, they become shallow, and the price discovery infrastructure of an exchange are thin enough that large orders can force meaningful movements in price.
Now that major players – including bulge-bracket banks and perhaps certain world-famous electric vehicle entrepreneurs – are getting into the crypto space at an institutional level, there will likely be governance changes enacted that protect their investments: after all, no one ever became rich by being stupid. The governance changes will likely dissolve any of the so-called ‘advantages’ that cryptocurrency provides; if nothing else, it will force centralized authority over what does and does not constitute market manipulation, which negates the central tenet of DeFi. All you’ll be left with is a global network of computers, running in parallel and inhaling continents worth of electricity, racing to approve transactions in a fake currency with all the speed of an 1850s-vintage cash register.
That’s the 100,000-foot view. What is the view afforded to we lowly mortals, retail investors and speculators alike, as we peer through breaks in the mud? Unsurprisingly, and perhaps rather depressingly, the same view we see now. The whales will trade in dark pools (alternative trading systems; forums where institutional investors can conduct large trades away from the public exchanges and outside the purview of general investors, which allow for the movement of large blocks of securities without causing a market impact) as they have always done. Retail investors will likely remain buying on rumor and selling on hearsay. The chasm between haves and have-nots will neither widen nor shrink: it will simply have moved from Quotrons to Bloomberg terminals to networked GPUs shedding enough heat to melt a glacier.
What problem will this have solved, exactly? Wealth has neither been created nor destroyed, and certainly hasn’t been redistributed – it’s merely been transferred to a new medium, the value of which has always been pegged to a fiat currency anyway. It is not complicated to argue that we can accomplish this same skewed distribution of wealth much faster, and more efficiently, with the real currencies we already have.
4. It’s not actually anonymous.
‘Crypto is only good for criminals!’, the belligerent politicians proclaim. Yes, this is very true: crypto, by its very nature, has certain features that would make it the darling of criminal masterminds everywhere… if only those features actually existed. The simple fact is that pretty much anything can be used for crime – about $1.6 trillion, or 2.7% of global GDP, is estimated to be laundered every year, all without the need for fancy algorithms or ‘anonymous’ blockchains. Criminals seem to be perfectly capable of operating the tried and true way, rather than depending on a wildly-fluctuating artificial currency to fund their operations. And the fact that the big heavyweights of the finance world are investing in crypto and offering crypto portfolios to their clients brings the added scrutiny that makes bitcoin more susceptible to transparency, not less.
The important fact is that bitcoin is not actually anonymous, and none of the other cryptocurrencies are, either. They are pseudonymous, because every user has a public address that can theoretically be traced to an IP address or exchange account, and therefore to a user’s real identity. And if you’re using an exchange that implements KYC protocols, finding out your real identity is almost laughably simple.
But what about using mixers? Certain applications, like Wasabi Wallet and Samourai, allow multiple users to pool their coins together (or use a privacy-specific cryptocurrency like monero as an intermediary) and break transaction tails to make it more difficult to trace the path that specific coins take. And if centralized mixers aren’t to one’s satisfaction, there are Chaumian CoinJoin mixers that make transactions even more difficult to trace and impossible to steal: you’re essentially pooling your coins with a large number of other users, and the pooled user group makes one big transaction to a list of other accounts that are each controlled by an individual user from the group. You’re essentially paying yourself, the mixer doesn’t know where any individual coins are going, and you don’t sign the merged transaction unless you get the exact amount of bitcoin that you paid yourself in the first place. It’s all the hassle of money laundering without any of the sports cars or globetrotting intrigue.
Ignore the fact that, for all their technical wizardry, mixers can be gutted by something as simple (and decidedly technophobic) as lawmakers wielding pens. Already in the US there’s legislation being pushed to force exchanges to verify the real identities of their users, following in the footsteps of a new set of regulations already published by the EU.
And for all the talk of hashing cashes and digital signatures and elliptically-curving algorithm whatsahoozits failing miserably at reinventing the concept of money, it turns out that law enforcement agencies are actually pretty capable of using good old-fashioned policework to peek behind the promises of anonymity offered by the crypto-veil. The Chinese police, at one point in time, owned 1% of all bitcoins in the entire world, all of which came from seizures of criminal assets; the FBI, in addition to shutting down Silk Road, have also disrupted terrorist-funding campaigns and seized bitcoins tied to North Korean hackers. Companies such as Cellebrite offer crypto-tracing software solutions that make hiding behind a wallet address even more difficult. While these solutions being in the hands of every law enforcement officer from the FBI all the way down to mall security will undoubtedly raise the hackles of people concerned with abuse of civil forfeiture, we seem to easily forget that the exact same types of tracing mechanisms are already in place to combat money laundering and terrorist financing.
5. It’s not actually a currency.
I have tried until this point – not very hard, I will admit – to avoid heaping upon cryptocurrencies the ridicule I openly believe they deserve and bring upon themselves. What escapes my notice is valid reasons why people insist that bitcoin, and other detritus like it, are actually currencies at all.
For something to be a currency, it must possess several attributes: it must be transportable, it must be uniquely identifiable, it must have a certain level of rarity, it must have fixed denominations and standards for indicating value, it must be somehow controlled and standardized to limit counterfeiting, etc. No one wants to carry a 40-ft. stone wheel for payment, nor does anyone want to deal with proving that their seashells are somehow more valuable than mine. But above all things, a currency must serve as a means of payment, it must serve as a store of value, and it must be a thing of value in and of itself.
Crypto fails on all three fronts.
Bitcoins are accepted almost nowhere, and in the places where it is accepted it’s more of a novelty than anything else. It has found a home in certain ‘edgy’ establishments typically relegated to the fringes of society. It has found proponents in those who wish to avoid ‘unnecessary and unfair credit card fees’ (though if you don’t like paying x% on a credit transaction, perhaps you can pass along that utterly miniscule fee to your customer… or maybe be grateful that said fee allowed you to make a sale when one might not have occurred otherwise), avoid what they feel is intrusive violations of privacy (although not really because, again, not anonymous), or enjoy some inconsequential and juvenile financial tantrum that allows them to stick it to The Man.
If anything, crypto has probably made it easier to cheat on one’s taxes… although as previously stated, law enforcement tends to be pretty damn good at their job. But even where accepted, bitcoin can hardly be considered ‘money’ when its value can swing wildly from one day to the next. If the money in your (real) bank account fluctuated in value 10% or more in a day, would you ever use it? Sure, you could use a stablecoin (which are accepted in even fewer places) that’s pegged to the dollar or some other fiat currency… which is really no different than just using the fiat currency to begin with. Cryptocurrencies are little more than thinly-veiled attempts to convince the world at large that it should accept Disney Bucks instead of MasterCard.
Bitcoin is worthless as a store of value, not only for the aforementioned volatility but also because its intrinsic value, if it can be said to have any, is basically being underwritten by a fiat currency. There is no location anywhere on earth that will print firm pricing in bitcoin, nor that will accept bitcoin that has not first been converted from its underwriting fiat currency first. There is no nation that will adopt bitcoin as its national currency, because they have then essentially dollarized themselves and given up control of their monetary policy to the US central bank.
Want a soda? That’s ₿3.50 today, tomorrow, and forever. Time to pay taxes? You owe ₿1,740.39. Whether those values mean you can buy a soda for $0.15 or have to pay $1.37 million in taxes depends on volatility that you can neither control nor reasonably predict. I can’t predict the future, because inflation will occur, interest rates will fluctuate, and macroeconomic forces will change the financial fate of millions; on a long enough timeline, everything becomes conjecture – one based on reasonable assumptions and sound first principles (or not…), but conjecture nonetheless; however, I know, with almost complete metaphysical certainty, that I will wake up tomorrow and will be able to buy as many goods and services with one dollar as I was able to today. I am bearing almost zero consumption risk, because I am using a currency that exists eo ipso and which, as a matter of practical application, will not change in value within the time horizon containing the periodic purchases I require as a matter of course.
As mentioned, bitcoin has no intrinsic value. It does not produce consumer goods, it does not power our homes, it does not arm our military, and outside a depressingly large and increasing circle of possibly deluded individuals who fervently believe “but it’s the future!,” it really doesn’t do anything but exist as an intriguing mathematical curiosity. It has value solely because people invest real money in the hopes of selling it later for more money than they originally put into it. This is called the Greater Fool Theory for reasons that, if not immediately obvious, can likely be explained in exhausting detail by those who cashed out their 401(k)s to buy bitcoin in December 2019. Not all crypto is quite so worthless – sweatcoin, for instance, is redeemable for workout gear (as can… you know, fiat currency) – but even these ‘benefits’ are accomplished just as easily with loyalty points or promo codes, neither of which require complex processes to function.
Bitcoin – and cryptocurrencies in particular – are the financial equivalent of an encrypted Nokia brick phone in the world of thousand-dollar disposable pocket computers. If you live in a country where ‘freedom’ is a word that the population can neither pronounce nor spell (and would probably be executed for trying), the idea of a secure, untraceable payment system that doesn’t rely on government stability or a fiat currency that may be politely termed ‘uncertain’ is one that fills the oppressed with hope. But this hope is profoundly naïve, because sooner rather than later that digital coin will need to be converted into a real one; chances are that if one exists in a nation where life is truly that dire, they likely also lack the means to do such conversion safely… not to mention that dollarization has already been used to directly stabilize economies in the past and will likely be used to do so in the future. And for all the DeFi talk of avoiding governmental interference and avoiding [insert whatever we’re hating this week here], crypto’s brief existence has already shown that its weaknesses and susceptibility to manipulation far outweigh whatever benefits their creators’ utopian hallucinations might provide.
What would actually solve a great deal of these problems is regulation and compliance requirements – strict rules of transparency, KYC, and verification that ensure consumer funds are protected and fraudulent activity is prevented or punished.
Strangely enough, we already have a system in place that does these exact things and many more, and it’s managed to do its job quite well without the use of public ledgers and hour-long transaction approvals.
Willie Costa is the President & COO of VUONG Holdings, a holding company, and Vinh Vuong is the Chairman and CEO of VUONG Holdings. www.vuongholdings.com
VUONG Holdings featured in Law360 article:
A sale hearing is scheduled for Tuesday, but Philadelphia-based Vuong Holdings filed for a continuance last week, saying it had not become aware of the auction until Sept. 20 and needed until Oct. 13 to secure proof of funds for its own $150 million bid for the company.
In text messages Monday, Vuong Executive Chairman Vinh Vuong said his company had expressed a willingness to go as high as $200 million.
"We had only 12-18 hours to return a LOI with strategy and info about our firm and we did," he said."