[Cryptocurrencies] Bitcoin, Ethereum etc. – From a alternative currency to a speculative bubble

Even if it is a bit out of scope of topics I usually write about, I want to share my thoughts about the rise of the Bitcoin and the related blockchain technology. I also want to explain why I think, that its a bubble and what other technologies seem to be more appropriate for a distributed currency.

Blockchain

Back in 2011 I first heard about Bitcoins. I was studying and I watched some videos about how the block chain works and after some reading I downloaded a GPU mining tool and started mining on my GeForce GTX 260, just for fun and for studying. In this time Bitcoin was worth nothing compared to today and after some research I decided to stop mining because energy was more expensive then the reward (haha). I remember the idea of bitcoin was to make a currency independent from government. But in reality the use for bitcoins where in the darknet and for online gambling.

After the first crash in 2013, the bitcoin started to grow and more and more companies accepted bitcoins. I decided to spend a bit of money in 2014. Until 2017 it was a stable growth and it seemed like bitcoin had a chance to be a real currency. I do not exactly know, why in 2017 the craziness began, but the hype is still here. Now the only reason to have Bitcoins is the value increase. Besides that fancy new cryptocurrencies are created every day. (Dentacoin, Aeron). So why is there so much hype around the blockchain?

Value

Before looking into some technical details let’s think about the value behind all these coins. I definitely agree, that block chain technology has some value and there will be applications for it. But is this true for for the current existing solutions?

Bitcoin transactions are so expensive at the moment, that paying things with it is just expensive and makes no sense. Besides that, it is also not accepted very often, even in Zug (Swiss crypto valley) only few people are using it. And even if bitcoin transactions would be cheaper and if the price would be more stable, the technology cannot even handle the amount of transactions necessary for a real currency.

Ethereum has some more value, because it is a platform to build applications on, but in the end, there is no need to give Ethereum coins itself so much value. It’s not even meant as a currency. One thing I can think about is to use crypto coins as an immediate currency (Ripple) for exchanging, but Ripple is pre-mined and still mostly owned by the company itself.

Scalability

Bitcoins and Ether and the most other blokchains are not scalable. Developers and researchers are trying to increase the transaction throughput with lightning networks, bigger block sizes and a lot of great ideas, but it seems like you cannot have a secure and high performance blockchain. Even if they reach 100 Tx/sec, compared to a payment system like VISA (they say they can do 56 000 Tx/sec) it’s nothing. There is a great wiki post about theory behind that. IOTA and Ripple seem to be more scalable, but is it still secure enough?

Bugs

Have you heard about Spectre and Meltdown? A major CPU security bug, which exploits speculative execution to read data directly from caches, without security violation checks. It was exploitable since 1995(!), over 20 years. What happens with a cryptocurrency after such a bug is found in it? It probably will be completely worthless.

In smart contracts it is even more problematic. Ethereum is a decentralized system and if you write a smart contract, you cannot change it after submitting the code, a bug inside will ruin your whole application. Does this sound like a good idea for the most cases? If you think about the smart contracts, at the moment the most smart contracts are just new coins for specific (weird) applications. In fact Ethereum smart contracts are very limited in functionality.

Security

While the cryptography behind the block chain seems secure (at least until quantum computers solve the prime factorization problem), the architecture is obviously vulnerable. If criminals manage to get 51% (1/3 of the nodes) of the bitcoin computation power, the bitcoin is broken and this is true for other coins, too. And there are even more possible attacks. There were successful attacks in the past and there may be in the future.

Energy

Bitcoin with its PoW energy intense algorithm is a massive waste of resources. Bitcoin is consuming more energy then small countries. Other cryptocurrencies are better, but still far away from efficient.

Future developments

What happens if Google, Facebook or some other big tech company is introducing a coin? What about if the hashgraph consensus algorithm is really working like proposed (scalability, proofed consensus, more security)? What about political regulations?

tldr;

I am not an expert in cryptocurrencies, but obviously it is a big hype at the moment and I would be very careful with investing money into this. Moreover I am sure there will be other (better) technologies and after all instant, independent and secure payment without huge fees, will be available at some point.

 

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