Cryptocurrencies: Scam or the Real Deal?

Photo by Daniel van den Berg on UnsplashIt could be a bullet in the head, but unless you try, you’ll never know. Some have got burnt through not educating themselves. Is that cryptocurrencies’ fault? Probably not.

UK Scams

If something sounds too good to be true it probably is. In the UK this year there has been close to £30 million lost in bitcoin and crypto asset investments. The surge in popularity of this type of investment in the last few years has made the phenomenon all too common.

Worrying times for those advocates of cryptocurrency and how it will shape our future world.

As the number of scams reported climbed to near on 2,000 in 2018–19, from the 530 from the previous financial year, worries abound to where this is heading. The City of London Police and the Financial Conduct Authority (FCA) have come together to provide a service called Action Fraud, which has provided the gloomy statistics.

‘Cryptocurrency is a scam and governments may move to shut down the currencies [cryptocurrency], because of an inability to control them.’

—Jamie Dimon, CEO JP Morgan

On average, most investors lost a total of £14,600 through foreign investments and cryptocurrency schemes. Of these, according to Mark Steward, the executive director of the FCA’s enforcement and market oversight, ’90 percent are in crypto assets.’

Cryptocurrencies exist as computer code, as a store of value, and are not regulated by the FCA. Supporters of the currency say that’s the whole point. Decentralization and federated use of it will ensure that the currency will remain deregulated and unlike fiat currencies, will not be manipulated via the market.

Fraudster Magnet

A surge in popularity has seen more and more investment in cryptocurrencies like Ethereum and Bitcoin which has naturally attracted the fraudsters.

Scammers often operate outside the jurisdiction of the City regulators where they can operate with impunity in their dishonest schemes. They tend to offer inexperienced investors in cryptocurrencies wildly fantastic promises of great returns on their investment, which invariably, as quoted by Mr Steward “the return is too good to be true.”

Bernie Madoff, King of the Fraudsters. Source: Wikicommons

Many, though, will say cryptocurrencies are as safe as any other form of investment, and getting stung can happen in any area of business.

The only thing required is due diligence.

Bitcoin as a brand is one of the strongest out there. Whether it stays king of the hill in the future is anyone’s guess. As we speak, many companies and serious investors are constructing their protocols and business strategies around Bitcoin trying to procure as many of them as possible.

New Enterprises

Additionally, there are companies springing up in the crypto space which see the potential of cryptocurrencies in the future. One such example is Binance, a Chinese-based global cryptocurrency exchange founded in 2017, which of January 2018 had a market capitalization of $1.3 billion.

Hefty numbers that can only climb with the popularity of Bitcoin and other cryptocurrencies.

Even Binance, however, isn’t immune to becoming a victim of crime — just this month it has claimed hackers had looted 7,000 Bitcoin with a value of $40 million.

Matter of Trust

Whatever view you take, it is important to think about the bigger picture. The crypto landscape is an ecosystem that is gradually building itself up. The process is a slow one, but as more investors and institutions jump onboard, and as they start to feel more confident with how the currency operates, trust will grow. The framework garnered from this experience will establish strategies of reliability, much like we see with the stock markets today of fiat currency. In a word, all Bitcoin and any other cryptocurrencies need, in the words of Michael Bolton, are Time, Love and Tenderness.

How’s my hair? Oh, Michael, you look lovely! Source: Wikicommons

There will only ever be 21 million Bitcoins in existence, and as they become more scarce, the value will go up. Some believe because Bitcoin is the oldest cryptocurrency on the market, it will never disappear. Respect will adhere to it maintaining a presence. The establishment of new cryptocurrencies (as of August 2018 there were 1600 other cryptocurrencies, known as altcoins) in the future will not change this.

‘Bitcoin seems to be a very promising idea. I like the idea of basing security on the assumption that the CPU power of honest participants outweighs that of the attacker. It is a very modern notion that exploits the power of the long tail.’

- Hal Finney

Satoshi’s Dream

The Bitcoin revolution — and Satoshi Nakamoto’s dream — is here, like it or not. And whether we see more scams occurring in the coming months and years (we will, you can count on it), will take nothing away from this innovative technology that will change the way we do business and how we will exchange goods.

One spanner in the works could be how blockchain, the underlying technology that cryptocurrencies operate in, develops in the coming years. Many computer scientists and investors see blockchain security as the most important area for the radical popularization of cryptocurrencies as the cash of tomorrow. As of yet, we do not have the computational power even in the most technologically advanced supercomputers at our disposal to break them.

So what makes blockchains secure?

Nuts & Bolts

Basically, every Bitcoin transaction is stored on an account ledger. These ledgers are then stored multiple times on a computer network in what are called nodes. When there is another transaction, all the nodes on the network check that the transaction is valid. With a subset of these transactions completed, they are added to the blockchain as a block.

The theoretical security of this protocol is in the cryptographic fingerprint that is exclusive to each block on the blockchain, also called a consensus protocol. This is when the nodes on the shared network agree to a unified history of valid transactions within the blockchain.

Source: instockphoto.com

The key to the cryptographic solidity is in the fingerprint, otherwise known as a hash. The hashing function is proof that the operator/miner did the computational brainwork required to earn a Bitcoin. This is a ‘proof-of-work’ protocol which serves as an extra layer of security as trying to change the block would require a new hash. The easiest job by far in the consensus protocol is when all nodes within the blockchain update their copies of the blockchain with the new block.

What makes the blockchain unique in its security is that the hashes are also links to the blockchain. The blueprint of each block contains the hash of the preceding block. Altering this by any means results in you needing to create a new hash for not only the block in question but all blocks before in the chain. To add further difficulty to this operation, you also have to do it more quickly than other nodes can add new blocks to the chain, rendering the operation operationally impossible as there are no computers in existence which can calculate that fast.

Quantum Takeover

There are a number of computer scientists who believe the power of classical computation will never be enough to break the cryptographic fortress of blockchain technology. However, others believe that by going into another direction — that of quantum computers — the technology will be powerful enough to break the hashing functions, meaning blockchains and their protocols will be useless.

Source: Wikicommons

At the moment, though, this kind of advanced ‘out there’ technology is only in its infancy and is not a threat to the current cryptocurrency revolution which we are witness to.

This then, should not scare us from the future of currency and business. Like everything in life, there will always be risks. The way forward is unknown, with numerable forks in the road. And for sure, along with it Bitcoin and other cryptocurrencies that will err into strange lands, step right in the mud, yet like all journeys, there will be a destination.

We just have to get there.

Persistence and determination will be prerequisites.

Cryptocurrencies: Scam or the Real Deal? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.