There are many proponents of cryptocurrencies. If you spend any time on the internet, you've likely heard them proclaim how great these new products are and how they will revolutionize finance. It is no surprise then that the crypto economy grew from nothing 10 years ago to about $3 trillion at the peak of the bull market in 2021.
Today, with the price of Bitcoin down more than 50% from all-time highs, the market cap of all cryptocurrencies has fallen to about $1 trillion. However, many owners of these securities remain optimistic.
But the downsides of cryptocurrencies are there and have never been clearer to those who look at them through an objective lens. Here's why investors need to have major reservations before buying any crypto for their portfolios.
Rampant fraud
If you exchange your dollars -- or any other fiat currency -- for crypto, there is a chance of it being stolen. With almost no rules and tons of technical complications, it is easy for computer science savants around the world to hack or swindle away people's savings when they buy crypto tokens.
It is unclear exactly how much in crypto is stolen from people each year, but analysts estimate it is in the billions of dollars. With government regulations, such as Federal Deposit Insurance Corp. (FDIC) and Securities Investor Protection Corporation (SIPC) insurance, this does not happen with normal stock market investments or consumer bank deposits.
With the criminal trial of Sam Bankman-Fried and the alleged scam he ran at the cryptocurrency exchange FTX and his hedge fund Alameda Research, crypto fraud has been in the spotlight. Bankman-Fried is accused of stealing $8 billion of customer deposits and using them for lavish real estate purchases, political donations, and wild venture capital investments. People who deposited money with FTX will not likely be getting their funds back.
And this is just one example. Theft and fraud have been a feature of crypto since its inception, not a bug. There's no reason it can't happen to you.
CRYPTO: BTC
Key Data Points
Financing nefarious purposes (of the worst kind)
There's more, and possibly worse, going on in the crypto world. Through the first half of 2023, North Korea stole an estimated $200 million worth of cryptocurrencies, which has gone to finance its nuclear missile program. Since the inception of its hacking program, it has stolen an estimated $3.8 billion to fund these investments. I don't think the citizens of South Korea would extol the virtues of crypto if they found out about this crypto-to-nuclear-missile pipeline.
To be fair, these criminal organizations sometimes just use the "benefits" of cryptocurrencies to finance their operations. It has been reported that the terrorist group Hamas -- among others -- uses crypto to accept payments from financiers such as Iran to fund its operations. Cryptocurrencies allow them to easily evade the traditional finance system they are generally sanctioned from accessing. Groups such as these are responsible for the deaths of thousands of innocent people around the world. That they use crypto for financing is a major red flag for the industry.
So, what exactly are the upsides?
The arguments for crypto are centered around it being decentralized, removing third parties such as governments, and streamlining international remittances. But once you try to analyze these arguments, it is clear that they make little sense.
The crypto industry is far from decentralized, with the fraud at the centralized exchange FTX a prime example. The absence of regulation is the key reason criminals thrive in the crypto economy, so it's unclear why this is a benefit. Streamlining international remittances seems great, but when you look at the actual data, traditional methods are cheaper.
It is not hard to make the argument that if you own cryptocurrencies, you are inadvertently supporting criminal and terrorist organizations. It is hard to find any reason to buy them besides the possibility that speculators will bid the price above what you paid. This isn't a sound investing thesis. You also have a non-zero chance of getting your own hard-earned money stolen.
To be sure, the traditional finance system is used for nefarious activities all the time. It just seems like crypto makes it all so much easier. From my seat, all of the above make the downsides of cryptocurrencies significantly worse than any upside they may have as an investment or any benefits they may provide to the world at large.
