Flaws in Bitcoin make a lasting revival unlikely

The latest bubble invites comparisons with past financial manias^[각주:1]

"Be more Brenda," said the ads for CoinCorner, a cryptocurrency exchange. They appeared on London's Underground last summer, featuring a cheery pensioner who had, apparently, bought some Bitcoins in just ten minutes. It was bad advice. Six months earlier a single Bitcoin cost just under $20,000. By the time the ads appeared, its value had fallen to $7,000. These days, it is just $4,025. 

While the price was soaring, big financial institutions such as Barclays and Goldman Sachs flirted with opening cryptocurrency-trading desks. Brokerages sent excited emails to their clients. The Chicago Board Options Exchange (CBOE), one of the world's leading derivative exchanges, launched a Bitcoin futures contract^[각주:2]. Hundreds of copycat cryptocurrencies also soared, some far outperforming Bitcoin itself. Ripple rose by 36,000% during 2017^[각주:3]. 

The bust has been correspondingly brutal. Those who bought near the top were left with one of the world's worst-performing assets. Cryptocurrency start-ups fired employees; banks shelved their products. On March 14th the CBOE said it would soon stop offering Bitcoin futures. Bitmain, a cryptocurrency miner, appears to have pulled a planned IPO. (Miners maintain a cryptocurrency's blockchain - a distributed transaction database - using huge numbers of specialized computers, and are paid in newly minted coins). 

The speed with which the bubble inflated and then popped invites comparisons with past financial manias, such as the Dutch tulip craze in 1636-37 and the rise and collapse of the South Sea Company in London in 1720. Cryptocurrency enthusiasts like to claim a more flattering comparison - with the 1990s dotcom bubble, pointing out that, despite the froth, viable businesses emerged from the episode. But the cryptocurrency fiasco has exposed three deep and related problems: the extent of genuine activity is hugely exaggerated; the technology does not scale well; and fraud may be endemic. 

Consider the overstatement of activity, first. Ten years after their invention, using cryptocurrencies to pay for goods and services remains a niche pastime. Bitcoin is the original cryptocurrency firm, declared that Bitcoin transactions in 2018 totalled $3.3trn, more than six times the volume handled by PayPal. But such figures include an awful lot of double-counting^[각주:4], mostly related to the way Bitcoin's blockchain. Strip that out^[각주:5], and Chainalysis reckons that Bitcoin accounted for around $812bn of genuine transfers of value. 

Of that, Ms Grauer reckons, only a fraction was used to buy things. Around $2.4bn went to merchant-service providers, which handle payments for businesses - a piffling sum compared with the $15trn of transactions on Alipay and WeChat Pay, two Chinese payment apps, in 2017. Darknet markets, which sell stolen credit-card details, recreational drugs, cheap medicines and the like, made up $605m, and gambling sites $857. Most of the rest was related to speculation. 

Even for speculators, business is less brisk than it seems. "Wash trading^[각주:6]", in which traders buy and sell to each other (or themselves) to create the illusion of volume, is widespread. For a presentation on March 20th to the Securities and Exchange Commission, an American financial regulator, Bitwise Asset Management, a cryptocurrency-fund manager, analysed 81 cryptocurrency exchanges. It estimated that 95% of trading volume could be artificial. The justice Department is investigating claims of price manipulation. 

The second problem is that the technology is too clunky to^[각주:7] operate at scale. Cryptocurrencies are unlikely ever to achieve mass adoption, says Nicholas Weaver, a computer scientist at the University of California, Berkeley. Unlike Alipary or WeChat Pay, cryptocurrencies are intended as new financial systems rather than extensions to the current one^[각주:8]. But they have serious design flaws. 

Bitcoin's pseudonymous creator, Satoshi Nakamoto, wanted it to be resistant to control by tyrannical governments and banks. Payment records are therefore not held centrally, but broadcast to all users. A new batch of Bitcoin is issued every ten minutes on average. That limits the network to processing about seven transactions per second (Visa, by contrast, can handle tens of thousands per second). In 2017, as the bubble was inflating, the system became clogged. To ensure transactions went through, users had to pay miners - at one point, as much as $50 per transaction. 

Moreover, Bitcoin is designed such that only 21m Bitcoins will ever be created, making it inherently deflationary. Mining, essentially a self-adjusting lottery in which participants compete to buy tickets, is energy-hungry. At the height of^[각주:9] the boom^[각주:10] it was thought to consume as much electricity as Ireland (these days, it merely consumes as much as Romania). 

The final problem is fraud. Transactions are irreversible - a boon for con-artists. Ponzi schemes are common, as is incompetence. Cryptocurrency exchanges often collapse or are hacked. In February QuadrigaCX, a Canadian exchange, filed for bankruptcy, saying it had lost $165m in deposits when its founder, Gerard Cotton, died, since only he had known the encryption keys protecting QuadrigaCx's deposits. But on March 1st Ernst & Young, which was appointed to handle the bankruptcy, said that the deposit addresses seem to have been empty for at least eight months before the date Mr Cotton is said to have died. 

When Lambos?

Attempts are under way to get round some of these limitations. Some Bitcoin enthusiasts are testing an add-on called the Lightning Network, which tries to speed things up by moving many transactions off the blockchain. Stablecoins, whose value is supposedly pegged to something else, are touted as a way to rein in speculation. Once again, promise often falls short of reality^[각주:11]. On March 14th Tether, the most popular stablecoin, with $2bn-worth in circulation^[각주:12], said that it might not be fully backed with dollars after all. None has achieved even Bitcoin's limited take-up^[각주:13].

Most fans simply want cryptocurrency prices to start rising again. In 2017 John McAfee, a cryptocurrency enthusiast who made his money in antivirus software, said that if Bitcoin was not worth $1m in 2020 he would eat an intimate part of his anatomy on television. On March 20th he tweeted that losing that bet was "not mathematically possible". Last year Jack Dorsey, Twitter's boss, said he thinks Bitcoin will be the world's "single currency" within a decade. Facebook is working on some kind of cryptocurrency project. Market analysts and pundits provide cheery reassurance that the currency will soon soar again. 

Mr Weaver is sceptical, at least in the short term. The very visible boom and bust, and more attention from regulators, have probably cut the number of willing new punters, he says. But boosters are trying their best. They have taken to referring to the post-bust period as a "crypto winter". The intended analogy is with artificial intelligence: the "AI winters" were funding crunches in the 1970s and 1980s after hype outstripped reality. The implication is that, one day, summer will return. 

1. invite ; 3. (일을) 초래하다, 받다, 입다, 가져오다(bring on, induce). ;; 4. 끌다, 호리다, 매혹하다(attract, allure). [본문으로]
2. futures contract ; [명사] (상업) 선물 (거래) 계약. ;; futures ; [NOUN:PLURAL] commodities or other financial products bought or sold at an agreed price for delivery at a specified future date ; 참고 financial futures [본문으로]
3. ripple ; 1. 잔물결(wavelet); 파문; 영향 ; 유의어 wave ;; [NOUN] Ripples are little waves on the surface of water caused by the wind or by something moving in or on the water. [본문으로]
4. double counting ; [명사] 이중계산 [본문으로]
5. strip sth down ; to completely remove things you do not want; to remove everything from a place and leave it empty [본문으로]
6. A wash trade is a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace. First, an investor will place a sell order, then place a buy order to buy from himself, or vice versa. This may be done for a number of reasons: - To artificially increase trading volume, giving the impression that the instrument is more in demand than it actually is. - To generate commission fees to brokers in order to compensate them for something that cannot be openly paid for. This was done by some of the participants in the Libor scandal. Some exchanges now have protections built in, sometimes mandatory for participants, such as STPF (Self-Trade Prevention Functionality) on the Intercontinental Exchange (ICE). Wash trading has been illegal in the United States since the passage of the Commodity Exchange Act (CEA), of 1936 [본문으로]
7. clunky ; [형용사] (비격식, 특히 美) 투박한 ;; [ADJ] If you describe something as clunky, you mean that it is solid, heavy, and rather awkward. [본문으로]
8. extension ; 1. [U, C] ~ (of sth) (세력·영향력·혜택 등의) 확대 [본문으로]
9. at the height of ; …의 절정에, …이 한창일 때에 [본문으로]
10. boom ; 1. ~ (in sth) (사업경제의) 붐, 호황 ; 참조 slump, baby boom [본문으로]
11. fall short of sth ; (예상되는·필요한 기준인) ~에 미치지 못하다 ;; fail to reach the standard that you expected or need [본문으로]
12. in circulation ; 1. (화폐 따위가) 유통되고 있는, 현재 쓰이고 있는 ;; 2. (사람이) 활동하고 있는, 현역의 [본문으로]
13. take-up ; [U, sing.] (제의·서비스 등을) 받는[이용하는] 사람의 비율 ;; [NOUN] Take-up is the rate at which people apply for or buy something which is offered, for example financial help from the government or shares in a company. [본문으로]