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What are the disadvantages of cryptocurrencies?
Much time has been spent lauding blockchain and cryptocurrencies in this series. However, cryptocurrencies suffer from several drawbacks that have led many (such as famed investor Warrant Buffet) to refer to them as a the next “bubble”. As such, it is important to identify and to understand the drawbacks and obstacles that may refrain mainstream adoption of these technologies.
Drawback #1: Scalability
Probably the biggest concerns with cryptocurrencies are the problems with scaling that are posed. While the number of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that payment giant, VISA, processes each day. Additionally, the speed of a transaction is another important metric that cryptocurrencies cannot compete with on the same level as players like VISA and Mastercard until the infrastructure delivering these technologies is massively scaled. Such an evolution is complex and difficult to do seamlessly. However, some have already proposed several solutions, including lightning networks, sharding, and staking as options to overcome the scalability issue.
Drawback #2: Cybersecurity issues
As a digital technology, cryptocurrencies will be subject to cybersecurity breaches, and may fall into the hands of hackers. We have already seen evidence of this, with multiple ICOs getting breached and costing investors hundreds of millions of dollars this summer alone (one of these attacks by itself resulted in the loss of $473 million). Mitigating this will require continuous upkeep of security infrastructure, but we are already seeing many players dealing with this directly, and using enhanced cybersecurity measures that go beyond those used in the traditional banking industries.
Drawback #3: Price volatility and lack of inherent value
Price volatility, tied to a lack in inherent value, is a major problem, and one of the specifics that Buffet referred to specifically a few weeks ago when he characterized the cryptocurrency ecosystem as a bubble. It is an important concern, but one which can be overcome by linking the cryptocurrency value directly to tangible and intangible assets (as we have seen some new players do with diamonds or energy derivatives). Increased adoption should also increase consumer confidence and decrease this volatility.
Drawback #4: Regulations
Buffet also touched on this problem in his recent talk:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
Even if we perfect the technology and get rid of all the problems listed above, until the technology is adopted by federal governments and regulated, there will be increased risk in investing in this technology.
Other concerns with the technology are mostly logistical in nature. For example, changing protocols, which becomes necessary when the tech is being improved, can take quite a long time and interrupt the normal flow of operations.
With all the potential barriers to mass adoption, it is logical that experienced investors like Warren Buffet choose to err on the safe side of this technology. And yet, we know that cryptocurrencies (and the blockchain technology) will be here to stay. They offer too many of the advantages that consumers seek in a currency today; decentralization, transparency, and flexibility being chief among these. Expanding the discussion to everything that blockchain can accomplish across numerous industries doubly reinforces this point.
Sofiane is one of PreScouter's Project Architects. He leads the financial and professional services and high-tech verticals at PreScouter. Sofiane earned his B.S. in Materials Science and Engineering from The University of Illinois at Urbana-Champaign, and his Ph.D. in Materials Science and Engineering from the Georgia Institute of Technology. His research focus was in nanotechnology and energy storage. After graduating from Georgia Tech, he worked as an emerging technology and business strategy consultant at several firms and for his own clients before joining PreScouter.
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