BItcoin, Ethereum, Litecoin and other cryptocurrencies, more of which continue to pop up every day, have been gaining widespread popularity and value in recent years. While the earliest of these were created as part of efforts to create financial and monetary systems that would be free from the interference of governments and authorities, this dream is steadily fading and taking a backseat as more traditional investors and traders begin to stake their claims of the pie. These people bring with them the same practices that have in the past inadvertently toppled whole markets and economies. In addition, the same authorities and regulators whom these currencies are supposed to circumvent have begun to display an unwanted amount of interest in the technology.
They are a poor means of storing value
All forms of money have three primary functions: storing, exchanging and communicating value. Cryptocurrencies have for the most part been failing at the first of these functions. In fact, this particular shortcoming has been a major driving force in popularizing these currencies – most of the people who are accumulating crypto stocks are doing so while banking on their inability to maintain anything close to steady values. This means that those wild upticks (and the eventual subsequent downticks) in value which brought these currencies into the public eye in the first place also make it a highly volatile and often poor means of storing value.
They are not safe from regulatory whims
Even governments which are already failing to manage and maintain the values of their own national currencies tend not to take kindly to competing currencies which are outside their control. All around the world, governments are using both pre-existing and new laws to police these cryptocurrencies. In countries which have chosen to completely ban these, the concern most often stated is the risk of money laundering. Cryptocurrency transactions are untraceable and anonymous which makes them very attractive not only for people who want to conduct shady electronic transactions but also those who want to ease the movement of their ill-gotten funds. These concerns are not completely unfounded; an online marketplace, Silk Road, which allowed users to trade everything from firearms to hard drugs, was able to thrive for several years in full view of helpless authorities
While some countries do not completely ban the currencies, they can introduce rules and regulations which can complicate the use and trade of these currencies to the extent of completely negating most of their allure. Any shift in the regulatory policies of wealthier countries tends to have a significant effect on the global valuation of these currencies. Bans and other restrictive measures can cause nosedives in value while those which ease the restrictions and appear to officially recognize these currencies as legitimate assets generally cause appreciation. An example of the latter is the instance when cryptocurrency units confiscated from criminals are auctioned off. Even the mere anticipation of new regulations can affect these markets. A case in point is the initial 12% loss of value that cryptocurrencies suffered in early 2018 that was triggered by rumours of an impending ban of their use in South Korea.
Uncertainty will fuel speculation for the foreseeable future
Rather than being used as a means of storing value, a significant number of cryptocurrency transactions are conducted by speculative traders. As you may well know, volatile assets chase away investors and attract speculators instead. Unfortunately, these speculators are not merely market observers; they are also major influencers of the value of these cryptocurrencies. Even in the absence of external factors, these people can contribute to the creation of bubbles and their eventual bursting.
With only a limited number of countries having a clear and solid legal framework regarding cryptocurrencies, any legal case concerning these is a groundbreaker. In most countries, the legal status of these currencies continues to remain uncertain. As long as the regulations surrounding these currencies are in flux, they will continue to be the subject of speculation which in turn causes instability.
The decentralised control is only an illusion
A few years back, the best known of these currencies, Bitcoin was split into two (known as forking) because of disagreements among developers and the various other major stakeholders. A standoff ensued after there was disagreement over how the system that powers the currency should be upgraded. This means that despite all the talk of decentralization and liberalization there are still groups which will always have more control and power over the direction of these currencies.
In recent years there are organisations which have been issuing cryptocurrencies as a means of skirting the legalities of issuing actual shares. These so-called ICOs (initial coin offerings) have been used as an alternative means of raising startup capital. Even bigger organisations have been eyeing opportunities in cryptocurrency with Facebook very recently suffering backlash after trying to launch its own cryptocurrency called Libra.
At the end of the day like their fiat counterparts, cryptocurrencies do not have intrinsic value – this means that their values are still ultimately determined by the laws of supply and demand.