I initially wrote off cryptocurrencies because of deep
Bitcoin skepticism that largely remains with me to this day. I was also turned
off by the fact that some of the most enthusiastic early Bitcoin enthusiasts
were criminals (because of a healthy aversion to prison) and people who had a
political axe to grind particularly when it came to central banking. Throw in Mt Gox and endless stories of
how the underground economy was leading the way on Bitcoin usage and it was
easy enough to just write it off. In my
defense, I was working on an MBA so I wasn’t paying close attention to much of
anything in this space. It was probably
best that I wasn’t doing much blogging then or I would have beclowned myself
early and often on this topic. I eventually came to a conclusion that while Bitcoin was stupid, blockchain was not. I’ve since decided even that was the wrong approach to take as I’ve come to view Bitcoin as the Wright Flyer of blockchain technology. It shows everyone what is possible and kicks off a revolution in technology that has immense potential even if the original technology starts to look very old, very quickly.
Bitcoin’s problems are legion with one of the biggest being
that it’s simply a wretched currency in its present state. It’s a horrible store of value given how
volatile it is. The fact that it’s rocketed up in value over the past year is
an illustration of how unreliable it is as a store of value rather than an
argument for it. As I write this, it’s
gone up 1,413% since last year, anything that can go up that fast can go down
just as fast and we’ve seen price drops of 15% on some days.
A currency that instable isn’t fit for purpose particularly when
it comes to being something you can trust to store your money. If that’s not enough for you, it’s bat poop
crazy to use it for contracts that are defined in Bitcoin. For example, what possible sense would there
be to enter a contract to purchase real estate in Bitcoin? What buyer in their
right mind would enter into a contract to purchase a house for 10 Bitcoins
worth $145,000 at the time of the contract when in thirty days at the time of
close those bitcoins are now worth $207,350 because the price went up 43.55%
between contract and close?
Throw in the high transactions fees and the slow settlement
time and it’s gotten to the point where even the underground economy is
starting to use alternatives such as Litecoin.
Anyone who has done research on Bitcoin by doing transactions knows how
expensive it gets. It’s certainly some of the most expensive research I’ve ever
done.
I also have concerns about “decentralized” cryptocurrencies
that relentlessly devour so much energy that the infrastructure is concentrated
in a handful of nation-states that can offer up cheap energy to feed the beast.
You can Google to your heart’s content on what makes for a
good currency, but at a minimum a good currency will act as a stable store of
value that doesn’t go wildly up or down. You have to know that if you put money
into that currency that it will remain largely the same value weeks or years
down the road. It also has to be easily transferable (so you
can engage in transactions reasonably quickly and easily) and acceptable
(people will actually recognize it as a valid currency and will transact with
you using it) or it’s just not a viable currency in any meaningful sense.
Ultimately, currency is deeply psychological because it’s
about trust. Once upon a time, currency
was all about obtaining precious metals like silver and gold and then turning
those commodities into actual coined money.
Eventually, we ended up with paper money that was backed by commodities
which is how we ended up with the gold standard. The gold standard was awesome until it wasn’t.
We are now in the fiat-currency era where supply and demand is the primary
determiner of value rather than what the currency issuer has stored in its
vaults somewhere. The trust that the
market has in the issuer of the currency has a large impact in the value of the
currency.
I had a whole section written up for this post that went
into more detail on the history of the commodity-backed currencies and
fiat-currencies, but even my eyes glazed over when I was trying to edit it for
publication so I deleted it. Suffice it
to say that both commodity-backed currencies and fiat-currencies have had
successes and failures. The Great
Depression was the beginning of the end of the gold standard because every
major currency at the time left the gold standard during that time.
Just as the gold standard showed its limitations at various
times in the past century, we’ve seen some spectacular fiat-currency disasters
that have helped fuel interested in cryptocurrencies. The most recent example is the Venezuelan bolívar and the immense amount of human misery
that the mismanagement of that currency has created. I started following the bolívar’s plight even
before I started an executive MBA program at the University of Florida, but I
really started to understand what I was seeing better after getting a great
education in emerging market finance and macroeconomics. The executive summary is falling oil prices
coupled with gross mismanagement of the country resulted in the bolívar
essentially being destroyed over just a few years of time. Like everyone else who is interested in this
topic, I’ve followed the story through the dolartoday website.
We’re at the point where the only question I have about the bolívar is
whether it ends up like the Zimbabwe dollar simply goes away or whether it
remains as a testament to what can happen when a government destroys its
currency and economy.
Even the
Venezuelan government knows the gig is up with the bolívar. Their response?
Wait for it….wait for it….they’re launching a cryptocurrency called the petro which
will be backed with their oil reserves. This will obviously be a wildly
successful cryptocurrency and a terrific store of value given how competent the
Venezuelan government has been at managing their economy and their previous
currency. Wait. I hear it now.
The bolívar
is an excellent use case for a stable cryptocurrency that can’t be mucked with
by a nation-state. Many people saw their
life savings destroyed by the destruction of the bolívar just as many other
people have seen their money disappear in previous fiat-currency
disasters. Even with well managed
currencies like the United States dollar and the European Union euro, we’ve
seen periods of high inflation and trouble such as the Greek currency controls and Cyprus bank account levies.
Nation-state
economic and monetary mismanagement provides a great use case for well-crafted
cryptocurrencies that are truly decentralized and are stable stores of
value. We don’t even need a
cryptocurrency that can be used at the grocery store for this to be a
successful currency. Something that is a stable store of value and can move
money from demand deposit account to demand deposit account relatively quickly
and inexpensively can provide an excellent global hedge against nation-state
related currency disasters.
So why
are you reading this on a cyber crime and digital forensics blog? Because it’s
going to be part of your investigative life whether you like it or not. Being ignorant of blockchain isn’t an option
if you intend to be an effective cyber crime investigator or digital forensics
examiner. Anyone who is working on cyber
crime cases will have to deal with bad guys moving money around through blockchains.
Anyone doing digital forensics exams will be asked by the people doing the
cyber crime investigations to provide them evidence that the devices were used
to move money via blockchains and to help them determine the classic
investigation questions of who, what, why, where, and when.
