CryptoCurrency

3rd May '17 by Daniel Rudd

9 comments 3188 reads

I know this is a little off topic but does anyone have any advice or opinions on CryptoCurrency? They seem to have regained popularity over the past few months.

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About the Author

Daniel Rudd

Premium Member

Professional poker player & CISI associate

9 comments

Nick Ray

4th May '17

The idea behind cryptocurrencies is to provide a way to exchange value between two people without using a central authority to maintain the database of transactions. This then gives a more cash-like behaviour and no-one can deny anyone an account, etc.

However because there is no central database, in effect everyone maintains a copy of the database and the system is designed so that although you can add transactions if you own the private key for an "address" (=account) neither you nor anyone else can ever delete or reverse them. The consequence is that all transactions are final and irreversible. In some contexts this could be useful but it does mean that if you make a mistake with who you are paying that money is gone for good.

However the real problem with this is more subtle. All code contains bugs. And the code for these currencies is constantly being modified by their developers. If they ever introduce a bug which corrupts the blockchain, or results in some kind of error in the way any of its fields which prevent double spending are computed the consequences are terminal for everyone's bitcoins (or whatever coins). One single bad-enough bug will result in the corruption of the system.

With a central database this does not happen. If the software contains a bug which corrupts one or more transactions we can reverse them out of the database. But in the cryptocurrency design a bad-enough bug destroys the integrity of the data. Although it won't invalidate older transactions, it would lose huge numbers of transactions in progress or performed since after the bug was introduced. This would destroy confidence in the system, and if no-one trusts the data any more then any old bitcoins you hold will become unspendable. Add in the fact that many of the developers are mavericks with slightly sloppy development habits and it is a recipe for trouble.

So for me that invalidates any further interest. There is a sword of Damocles hanging over the whole system. They've had a few close calls already. (At least three I can think of.) They only need to fail to catch one and that will be curtains.

timarr

5th May '17

That's describing a distributed ledger system, aka "Blockchain", the technology underpinning Bitcoin. The genius of the system design is that it allows participants who don't trust each other to trust the data on the ledger (the database of transactions). Although everyone treats the Bitcoin ledger as immutable (i.e you can trust it) that's only true if an attacker can't control over 50% of the network. And as over 50% of Bitcoin mining is now done in China that is not necessarily true.

There are other crypto-currencies and there are other protocols but as the software problems with Ether have shown these lead to a tricky problem - you either let the money be stolen or rewrite (aka fork) the database to rewrite history.

The other problem with cryptocurrencies is that they're not backed by anything other than belief - and as the Mt. Gov debacle shows, if your money gets stolen there is no redress.

Oh, and regulation around anti-money laundering is coming soon, so that will either force disclosure of ownership or push even more transactions into the criminal sector. I mean, do you really want to be lumped in with drug dealers, child pornographers and terrorists? :-/

timarr

shauniekent

5th May '17

Theres a lot to say on the matter - my brief thoughts:
- crypto currencies have been steadily gaining popularity over the last 8 years since BitCoin was created. Look at transaction volumes and you'll see steady continuous increase over time
- bitcoin is the most widespread, largest by capitalisation
- crypto currencies are an attempt to 'do' money better than previous efforts. A bit like voice over IP (ie skype) is a better way of doing voice communication over distance (telephone calls). When you research and start to understand how it does things better than traditional money it will open your mind to the possibilities and potential scale. Just think about the ability to make many micro payments which are currently infeasible due to transaction costs or the idea that you can send money around the worl in a click without significant exchange or transaction costs.
- they 'are' real money. Google the properties of money and ask yourself how it squares up - unit of exchange, store of value etc etc

I am hugely excited by BitCoin. I think as with most things in this era the biggest and most popular takes all and once entrenched will be impossible to assail. Adoption is growing but yet is still only used by a tiny % of the world. If adoption continues i can't see how the price doesnt continue much higher.

I personally view a position in bitcoin as risking the possibility of a 100% loss against the possibility of a 50x gain. 100% loss due to something unforeseen and unpredictable - or being leap frogged by another crypto currency. 50x gain in the next 10 to 20 years plus if it simply continues to grow as it has been over the past 7 years.

Sounds ramptastic i know but i genuinely believe we could be in the early stages of a new 'paradigm' in the technology of money and how we humans use it. We'll look back one day and say "Oh wasn't it obvious".

cig

5th May '17

The main takeaway for investment purposes is probably to be short listed exchanges and similar businesses. Distributed ledgers, with block approval based on a rotation of authorised participants (as opposed to anonymous miners playing a proof-of-work lottery) are a very good replacement for centralised exchanges. Maintaining the master list of participants is still a central job, but can be done by a couple of employees of the relevant sector regulator.

timarr

5th May '17

Visanet can do 40,000 to 50,000 transactions per second,, Bitcoin 40,000 to 50,000 transactions per week and it's hampered from changing this by its own lack of governance. Cryptocurrencies may become successful, but Bitcoin is a deadend niche.

timarr

5th May '17

Hi cig - agreed. A permissioned ledger with authorised consensus participants is probably the most likely short term approach. I'd say that any business that relies on inefficiencies in inter-networking is a likely target as well - so money remittance services, for instance, are a sitting duck for disintermediation by distributed ledger technology.

timarr

cig

5th May '17

For legal trade it´s vastly inferior to the existing payment system. It's slow. You can´t reverse transactions so can´t get money back from fraudsters like you can with a credit card chargeback, or following the audit trail of bank transfers. It´s also fiendishly tricky to use for non-geeks (and there are many geeks who´ve lost some coins to operator error) unless you use a credit-card like service provider, which brings you back to the old way of doing things (you have to trust a bank-like entity with your funds). If you look at retail adoption you see this clearly: it´s going nowhere.

It´s great to trade illegal stuff and regulatory evasion though, so will keep some niche value because of that, with the speculative interest providing a fig leaf to avoid making any interaction with Bitcoin a straightforward criminal offence.

I wouldn´t go so far as saying that´s a "dead end" unless people start to stop wanting to evade tax or buy non-mainstream stuff.

shauniekent

5th May '17

Cig - i disagree on most of what you've written but i don't think we want to have a full out debate on the detail here.

It's vastly superior to the current system in many ways. Not every way but plenty. You're also viewing/writing about it from a transaction and processing point of view - thats they 'way' money is transacted. Lets not forget about the fact that as 'money' itself, bitcoin is superior in many ways to 'traditional' money.

I'm reminded of those in the 80's asking what is the point of the internet, its for geeks and wont go anywhere.

timarr

5th May '17

In what way is it superior? Money has three basic functions - it's a store of value, a medium of exchange and a unit of account. I can't see that Bitcoin offers any advantage in any of those categories. In fact its main advantage seems to be that it's hard to track and easier to move around than cash, so it's a favoured tool of criminals.

But again, and I repeat, this is simply the issue with Bitcoin. Cryptocurrencies can and will be developed that don't suffer from the governance and design flaws of Bitcoin. But they'll be regulated and auditable. The key phrase here is "translucent accountability" - the transactions themselves will be confidential but it'll be possible to automate the analysis of them for regulatory purposes.

timarr

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Daniel Rudd

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