On Wednesday (1 August 2018), Juan M. Villaverde, who is a crypto-focused econometrician and mathematician at Weiss Cryptocurrency Ratings, in the latest issue of the “Weiss Crypto Alert” newsletter, addressed the major misconceptions around cryptocurrencies. (Please note that Villaverde’s article is also available via the company’s website.)
Villaverde says that despite the huge amount of work going on in the Distributed Ledger Technology (DLT) and cryptocurrency space, there are still some crypto skeptics (for instance, Nouriel Roubini) who come out every so often to push the same old negative narrative, making comments such as “It’s all worthless” or “It will all disappear in a puff of smoke”. He says that he has found the following are four of the most common misconceptions about cryptocurrencies:
“Cryptocurrencies can’t be used as money because their limited supply makes them deflationairy.” Villaverde says that while this is true of Bitcoin (BTC), the “deflationary money theory”, which says that “people will spend money that’s more readily available and hoard the money that’s scarcer” could just as easily be applied to gold. Furthermore, he argues that Bitcoin is just one cryptocurrency, and that not all cryptocurrencies follow the same model (for example, Ether does not have a maximum supply); cryptocurrencies can be designed to be deflationary or inflationary. He points out that “cryptocurrency can be made to do all the things that traditional fiat can do and much more” with the huge advantage that they are borderless.
“Cryptocurrencies are a bubble because they let companies print their own money out of thin air.” Villaverde says that people using this argument are almost always referring to ICOs (even though it is possible to create an ERC20 token with a non-fixed supply) by startups issuing non-native tokens with the aim of raising funds from their sale. Also, even within the ICO space, he notes that what these startups are doing is “essentially no different from what traditional companies do when they issue shares.” As with traditional companies, almost all cryptocurrency projects that don’t create any value will just disappear.
“Cryptocurrencies are a fad because no one has created any practical use for them.” This one really makes Villaverde angry. He asks: “How about the many millions of the secure, private transactions already confirmed?” He says people who make this type of claim then usually respond by asking what’s wrong with PayPal. He says that saying that cryptocurrencies and DLT are useless because we already have companies like PayPal that can handle payments is analogous to saying that the internet is useless just because we already have fax machines. He observes that blockchain and DLT allow for a wide range of applications (some of which we can’t even imagine yet) that go way beyond simple payments. One example he cites is smart contracts, which allow two parties to create a transaction without needing to know or trust each other; both parties can be sure that the actions specified in the contract will be carried out precisely in accordance with the specifications, and they do not need to worry about “tampering or manipulation by either side, by a central authority, or by corrupt institutions of any kind.”
“Cryptocurrencies will never catch on because the complexity of the financial and legal system is too great to go on the Blockchain.” Villaverde notes that “existing infrastructure is always built for the older technology.” So, for example, the first automobiles had to run on very poor roads that were designed for horses and carriages, and in those days, critics used to say: “These machines will never catch on… They can’t run properly on our roads.” Of course, the second part of what they were saying was true until it was no longer true, i.e. until the road infrastructure caught up with these new vehicles, and asphalt roads and highways were built. He points out that although the current financial and legal systems are too complicated today, some/much of this complexity (e.g. those related to issues of trust) can be removed when these processes are re-engineered to take advantage of DLT.