Cryptocurrency is a scam.
All of it, full stop — not just the latest pump-and-dump “shitcoin” schemes, in which fraudsters hype a little-known cryptocurrency before dumping it in unison, or “rug pulls,” in which a new cryptocurrency’s developers abandon the project and run off with investor funds. All cryptocurrency and the industry as a whole are built atop market manipulation without which they could not exist at scale.
This should surprise no one who understands how cryptocurrency works. Blockchains are, at their core, simply append-only spreadsheets maintained across decentralized “peer-to-peer” networks, not unlike those used for torrenting pirated files. Just as torrents allow users to share files directly, cryptocurrency blockchains allow users to maintain a shared ledger of financial transactions without the need of a central server or managing authority. Users are thus able to make direct online transactions with one another as if they were trading cash.
This, we are told, is revolutionary. But making unmediated online transactions securely in a trustless environment in this way is not without costs. Cryptocurrency blockchains generally don’t allow previously verified transactions to be deleted or altered. The data is immutable. Updates are added by chaining a new “block” of transaction data to the chain of existing blocks.
But to ensure the integrity of the blockchain, the network needs a way to trust that new blocks are accurate. Popular cryptocurrencies like Bitcoin, Ethereum, and Dogecoin all employ a “proof of work” consensus method for verifying updates to the blockchain. Without getting overly technical, this mechanism allows blockchain users — known as “miners” in this context — to compete for the right to verify and add the next block by being the first to solve an incredibly complex math puzzle.
The point of this process is to make adding new blocks so difficult that meddling with the blockchain is prohibitively expensive. Though the correct answer to these puzzles can be easily verified by anyone on the network, actually being the first to find the answer requires an enormous amount of processing power — and thus electricity — and outcompeting the rest of the network is impractical.
For their troubles, miners collect a reward for being the first to verify the next block. The Bitcoin blockchain adds a new block every ten minutes, and the block reward is currently 6.25 newly minted bitcoins, worth nearly a half million dollars at Bitcoin’s last all-time high. Competition for block rewards has led to a computing power arms race as prices have risen. Mining bitcoins on a personal computer is no longer feasible. The majority of cryptocurrency mining is now conducted in commercial mining farms, essentially huge warehouses running thousands of high-powered computer processors day and night. The electricity expended mining Bitcoin and other cryptocurrencies is rapidly approaching 1 percent of global usage, which is famously greater than the total electricity consumption of many smaller developed nations.
Given that cryptocurrencies don’t produce anything of material value, this enormous waste of resources renders the whole enterprise a negative-sum game. Investors can only cash out by selling their coins to other investors — but only after the miners and various cryptocurrency service providers take the house’s rake. In other words, investors cannot — in the aggregate — cash out for even what they put in, as cryptocurrencies are inefficient by design.
This makes them a poor and costly form of currency and absolutely ludicrous as a long-term investment. We could dismiss them as a doomed experiment in the “greater fool” theory of investing, in which investors attempt to profit on overvalued or even worthless assets by selling them on to the next “greater fool” — think of it as gambling on a high-stakes game of musical chairs — if the rising price of Bitcoin and other cryptocurrencies were simply a function of demand.
This isn’t the case. Price manipulation plays as much or more of a role than demand in driving prices higher.
more at
Cryptocurrency Is a Giant Ponzi Scheme (jacobinmag.com)
All of it, full stop — not just the latest pump-and-dump “shitcoin” schemes, in which fraudsters hype a little-known cryptocurrency before dumping it in unison, or “rug pulls,” in which a new cryptocurrency’s developers abandon the project and run off with investor funds. All cryptocurrency and the industry as a whole are built atop market manipulation without which they could not exist at scale.
This should surprise no one who understands how cryptocurrency works. Blockchains are, at their core, simply append-only spreadsheets maintained across decentralized “peer-to-peer” networks, not unlike those used for torrenting pirated files. Just as torrents allow users to share files directly, cryptocurrency blockchains allow users to maintain a shared ledger of financial transactions without the need of a central server or managing authority. Users are thus able to make direct online transactions with one another as if they were trading cash.
This, we are told, is revolutionary. But making unmediated online transactions securely in a trustless environment in this way is not without costs. Cryptocurrency blockchains generally don’t allow previously verified transactions to be deleted or altered. The data is immutable. Updates are added by chaining a new “block” of transaction data to the chain of existing blocks.
But to ensure the integrity of the blockchain, the network needs a way to trust that new blocks are accurate. Popular cryptocurrencies like Bitcoin, Ethereum, and Dogecoin all employ a “proof of work” consensus method for verifying updates to the blockchain. Without getting overly technical, this mechanism allows blockchain users — known as “miners” in this context — to compete for the right to verify and add the next block by being the first to solve an incredibly complex math puzzle.
The point of this process is to make adding new blocks so difficult that meddling with the blockchain is prohibitively expensive. Though the correct answer to these puzzles can be easily verified by anyone on the network, actually being the first to find the answer requires an enormous amount of processing power — and thus electricity — and outcompeting the rest of the network is impractical.
For their troubles, miners collect a reward for being the first to verify the next block. The Bitcoin blockchain adds a new block every ten minutes, and the block reward is currently 6.25 newly minted bitcoins, worth nearly a half million dollars at Bitcoin’s last all-time high. Competition for block rewards has led to a computing power arms race as prices have risen. Mining bitcoins on a personal computer is no longer feasible. The majority of cryptocurrency mining is now conducted in commercial mining farms, essentially huge warehouses running thousands of high-powered computer processors day and night. The electricity expended mining Bitcoin and other cryptocurrencies is rapidly approaching 1 percent of global usage, which is famously greater than the total electricity consumption of many smaller developed nations.
Given that cryptocurrencies don’t produce anything of material value, this enormous waste of resources renders the whole enterprise a negative-sum game. Investors can only cash out by selling their coins to other investors — but only after the miners and various cryptocurrency service providers take the house’s rake. In other words, investors cannot — in the aggregate — cash out for even what they put in, as cryptocurrencies are inefficient by design.
This makes them a poor and costly form of currency and absolutely ludicrous as a long-term investment. We could dismiss them as a doomed experiment in the “greater fool” theory of investing, in which investors attempt to profit on overvalued or even worthless assets by selling them on to the next “greater fool” — think of it as gambling on a high-stakes game of musical chairs — if the rising price of Bitcoin and other cryptocurrencies were simply a function of demand.
This isn’t the case. Price manipulation plays as much or more of a role than demand in driving prices higher.
more at
Cryptocurrency Is a Giant Ponzi Scheme (jacobinmag.com)
