Risks of cryptocurrencies

Reviewer: George Michael White

Professor Weaver does not like cryptocurrencies. I don't either. In this all-too-brief paper, he discusses Bitcoin, Litecoin, Dogecoin, Ethereum, and several others, although not the newer attempts by Apple, Facebook, and others. Before browsing the paper, the reader should have at least some knowledge of a few of the technical details of the subject. Otherwise the going is tough. Weaver classifies the risks of cryptocurrencies into four main areas: technical, economic, systemic, and societal. The idea behind the subject comes to us from the early days of computer networks when someone wondered whether an electronic banking system could be created that would work like cash. It should be irreversible; that is, once the payer initiates a transaction, the payee is assured that the money will really arrive. It should also be invisible to central authorities such as agencies of the state. The technical risks arise from the inherent network/computer problems and the fact that such currencies have no intrinsic value. They're worth whatever someone is willing to give you for them. When converted to or from real dollars, the conversion agency must be a stable, trusted entity. The history of such agencies has been quite shoddy. Cryptocurrency security relies on private keys; if these are compromised, the currency can be stolen. Whenever a transaction is made, the distributed ledgers throughout the Net must be updated. This takes computer energy and can, after a time, use up huge amounts of power. The economic risks are largely due to the fact that the intrinsic value of cryptocurrencies is zero. They can be neither eaten, drunk, nor lived in. Thus, they can fluctuate hugely in value from minute to minute, like tulip bulbs in the past, and are quite likely to be used in Ponzi schemes. Systemic risks include worms, exchanges, central authorities, and government intervention. Malicious programmers can write programs that infiltrate one node and then propagate via the transaction mechanism to other nodes, soon flooding the network and stealing all currencies available. The exchanges themselves are vulnerable to exploitation as happened to the Mt. Gox Bitcoin exchange. Central authorities have intervened in conflicts for both Bitcoin and Etherium, and to fix apparent bugs. Government agencies could interfere in attempts to exchange cryptocurrencies back into local currencies. And, finally, the societal risks are not limited to greatly increased global power consumption. Considering just who will benefit from large-scale use of cryptocurrencies, it seems that mainly criminals will be the winners. They are the ones most likely to want complete secrecy from their operations. Weaver writes this paper in a somewhat turgid style, making it difficult for the casual reader to understand. It is necessarily brief. Readers without a good knowledge of the technology involved in the cryptocurrency universe will not appreciate most of it. Even so, the message is loud and clear. As Weaver concludes, quoting WarGames : "The only winning move is not to play."