When I was a student at Oxford, my bicycle was my preferred mode of transportation. With bright blue wheels that were, after being abused for four years, far less round than I would have liked, my trusty steed accompanied me every day as I zipped around town. Of course, as in any big town, bicycle theft was rampant, so I used a small combination lock. It wasn't a very sophisticated device (it was easy to "feel" when the 3 digits of protection were lined up), but it got the job done.And, hey, it wasn't the greatest bike in the world.
Fast forward to today. My current bicycle is a thing of beauty, made of carbon fiber, with razor thin wheels that let me tear through the streets of Texas at speeds that feel like Mach 1. The wind whistles past my helmet (a new addition to my garb, now that I appreciate the fragility of life a bit more). And my lock...well, I don't EVER let my bike out of my sight when it's not safely kept indoors. It's a beauty, so the level of protection I use has scaled commensurately. It just makes sense: the more you value something, the more you should be willing to spend to protect it.
Now let's apply that logic to Bitcoin, which I think of more as a "store of value" than an actual currency (though that's a different article). Despite Bitcoin's recent slump from its late 2017 highs, the cryptocurrency has gone up a gazillion percent (okay, okay, a LOT, I'm exaggerating) since 2012. I have to ask, have the protections we put around it scaled proportionately? With danger of tipping my hand to the conclusion, I have to say: heck no.
First, consider this. You lose your Bitcoins, they're gone. Period. According to a November 2017 report by Chainalysis, a VAST number of Bitcoins have simply exited circulation, and some of these are gone for good. It's likely with Bitcoin's meteoric rise that truly lost-forever Bitcoins will happen less, but it's a pretty interesting point to note. If I lose a ten dollar bill on the street, it's someone's lucky day; that money remains in circulation. If I lose my private key or forget how to unlock it (or worse yet, throw the hard drive away; yes, that's happened), they're worthless to me. Not "gone," but inaccessible, forever out of circulation.
Second, there's the problem of theft. We've seen several rather interesting Cryptocurrency heists, and they won't be the last. While transactions are not anonymous (more correctly, they're pseudonymous) you're not going to get those coins back. You might get some fraction of value returned if someone was holding them for you, but that's between you and them. Basically, for the actual value today of Bitcoin, the level of protection we put around them is, bluntly, pitiful, and akin to that three-digit bike chain from the past. I don't leave $10,000 sitting in my desk drawer. You should not, either.
Finally, there's no governing third party here to appeal to when things inevitably go wrong. That's actually considered by many to be the point of Bitcoin, but it's a major shift from the financial instruments most consumers are accustomed to. When I come back from a business trip and find fraudulent transactions on my credit card, for example, I have a recourse. Yes, I pay for that in terms of overall transaction cost, but as a consumer, I'm protected. Those protections are non-existent in the current cryptocurrency ecosystem and will need to be developed. None of this is a complaint about Bitcoin specifically – the problems are pretty generalized across the entire cryptocurrency ecosystem. I could write a similar article, probably, about whatever your favorite coin of choice is, with very similar conclusions.
The point I am driving to is simple and, frankly, should be obvious, but even a cursory look at the facts would tend to indicate otherwise. Despite the unquestionable promise of blockchaining as a basis for multiparty trust, the overall value in any particular application is limited by the systemic risk. Even when the blockchain itself works perfectly, the underlying value is – or should be – capped by the end-to-end strength. The old saw about a chain only being as strong as its weakest link is a cliché for a reason. Market forces will eventually balance risk with utility, but in the interim, if you're a cryptocurrency user or investor you should step carefully to make sure that you're firmly not on the losing side of that rebalancing process.