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Central bankers say cryptocurrencies could face ‘complete loss of value’

The value of cryptocurrencies could easily go to zero, a recent report by an umbrella organization of major central banks said.
The value of cryptocurrencies could easily go to zero, a recent report by an umbrella organization of major central banks said. AP Photo / Rick Bowmer

It’s been a tough few days for cryptocurrency enthusiasts. After research by the University of Texas last week suggested the Bitcoin craze of 2017 may have been the product of market manipulation, a new report published on Sunday argues that “a cryptocurrency can simply stop functioning, resulting in a complete loss of value.”

READ MORE: Remember how Bitcoin’s value soared in 2017? Most of it was market manipulation: study

The paper comes from the Bank for International Settlements (BIS), an umbrella group of the world’s central bank, which offered a scathing takedown of the idea that digital tokens could, one day, replace fiat currency.

READ MORE: Bitcoin price falls below $6,000; half its value lost in 2018

The BIS has a number of concerns about digital money like Bitcoin. Here are just a few of them:

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‘Complete loss of value’

Cryptocurrencies have value only insofar as their users believe they have value. Should that belief fail, the value of digital tokens would go to zero, the BIS noted.

Admittedly, that holds for traditional money as well. One just needs to think of hyperinflation in Venezuela or Germany’s Weimar Republic for examples of how banknotes can go from being stores of value to meaningless pieces of paper.

READ MORE: Who owns crashing Bitcoin? Mostly young men

But the BIS thinks the collective trust enjoyed by digital money is far more fragile than what underpins most modern currencies.

“Trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded,” the BIS wrote. “Not only does this call into question the finality of individual payments, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value.”

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All it takes to shake that trust, according to the BIS, is disagreement or lack of co-ordination about how to record digital transactions or around other protocols that govern cryptocurrencies.

Volatility

Even setting aside a scenario in which users completely lose trust in cryptocurrencies, there’s the issue that cryptocurrencies are typically subject to sharp swings in value.

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According to the BIS, this happens, in part, because there is no central bank or other central authority ready to adjust the supply of digital tokens in circulation in order to keep their value stable.

“Whenever demand for the cryptocurrency decreases, so does its price,” reads the report.

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It could bring down the internet

The more people adopt blockchain-based digital money like Bitcoin, the clunkier it gets to manage them, according to the report. That’s because, in order to prevent duplicate payments, cryptocurrencies rely on users to maintain and constantly update a ledger with details of all the transactions ever made. This system of transaction-processing takes up an enormous amount of data and often gets backed up.

If there are too many incoming transactions, “the system congests and many transactions go into a queue,” the report noted, adding that payment processing can take up to several hours.

If people started using cryptocurrencies for everyday payments, “only supercomputers could keep up with verification of the incoming transactions,” the report reads. “The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte.”

READ MORE: Bitcoin is crashing – and selling it is not easy

‘Environmental disaster’

The BIS report also slammed digital currencies as “an environmental disaster.”

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Many cryptocurrencies like Bitcoin rely on so-called miners, who use enormous computing capacity to solve complex mathematical problems and earn the right to record transactions on the ledger, for which they are rewarded with a fee or issuance of new currency.

But that system comes with enormous energy consumption.

“At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland,” the BIS wrote. “Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster.”