Despite difficulties, advertising exaggerations and skepticism, interest in cryptocurrencies continues to grow — more people are understanding how they work and how they can participate in this technological process, recognising their value. It is therefore worth reflecting on the main challenges that these valuable digital records will have to face in order to increase their usability.

Challenge 1. Understanding, reputation and advertising

Since the emergence of bitcoin as the first crypto currency, the sector has enjoyed fanatics — with the idea of founding a new financial system — and detractors — who have disqualified any new option outside of the financial system built in the last few decades. However, the combination of the speed of development of this technology and the lack of reliable information available to the general public have confused people and misrepresented the ideas and features of crypto currencies.

For example, the stories of people who lost tokens while trying to make a transaction and who typed their passwords into malware-based or phishing programs that replaced the address of an exchange site with a fraudulent one are well known.

On the other hand, in recent times misleading advertising has appeared that attracts speculative investors, those who want to invest a few hundred dollars and hope to become multimillionaires in a few months. These investor profiles — characterized by lack of planning and the pursuit of short-term gratification — tend to report significant losses, making it difficult for them to recover from the effects of speculation.

It is worrisome to read “expert opinions” that consider the more than 2,000 cryptocurrencies as a homogeneous group. The difference between a security token, utility token, or a currency token often goes unnoticed. They also fail to distinguish that some cryptocurrencies are not applications (application layer), but middleware or software that assists an application to interact or communicate with other applications or operating systems — changing not only the functionality and value of the cryptocurrency, but also its legal nature. These differences will be important for the consumer and market participants, and mainly for regulators.

Finally, the mentioned lack of information, combined with the fear of being left out (FOMO), creates tension in the discussions around cryptocurrencies, difficulty in knowing what is true and what is not, panic sales, confusion for new users and fierce fights for a protocol to become a new standard.

Challenge 2. Technical Complications

The cryptocurrencies have enhanced their popularity — especially in the last months of 2017 - to the extent that there are days in which more than one hundred thousand users were added per day on exchange sites such as Coinbase, Binance, Bittrex, Bitstamp and Kraken. The sites have responded by improving their systems or temporarily closing the possibility of opening new accounts.

Interestingly, a report estimated that last October the Coinbase site reached 13.3 million users, larger than the 10.6 million customers of the brokerage firm Charles Schwab. This milestone not only refutes the idea that there are few users of cryptocurrencies, but also allows us to recognize that the systemic risk of collapse of a site or system has increased due to broadband connection problems, distributed denial of service (DDoS) attacks or the ever-growing size of the Blockchain.

The latter risk has had an important presence in the media, given the controversial energy consumption of the Bitcoin mining process. According to Digiconomist, the electrical requirement of the coin back in February 2018 exceeded 47 TWh per year, almost double Ireland’s electricity consumption.

In addition, its decentralized nature prevents an entity from stabilizing its value in a scenario of hyper-explosion of demand, there is no authority that watches over the cryptocurrencies.

On the other hand, a better way of guaranteeing the governance of cryptocurrencies is required, given that the existence of a new protocol may lead to the appearance of various cryptocurrencies with the same predecessor, or the splitting up of the digital asset with the respective community splits among its users.

Last year we had the Classic, Unlimited, Gold and Cash versions emerged for Bitcoin, as well as the Ethereum Classic and Ethereum versions for the crypto currency of the same name. For now, the only solution has been based on the trust of one community of crypto users in another community, in order to make decisions and manage the currency.

Challenge 3. Scalability with stability

The drops in the prices of the cryptocurrencies between December 2017 and September 2018 have been received with annoyance by the investors who invested at the peak prices, who were at the time driven by FOMO. With this drop, they realized that cryptocurrencies effectively move by supply and demand and that most of them have a fixed supply, so it is the demand that is the agent of fluctuation and volatility by speculation. The demand evaporated and the prices dropped accordingly.

There are initiatives to try to analyze cryptocurrencies with a slightly more traditional financial approach. For example, Weiss Cryptocurrency Ratings rated the risks and potential rewards of 74 crypto currencies. As expected, the methodology and ratings of the evaluated digital goods triggered the anger of investors in the cryptocurrencies, who subjectively hold them in a much higher regard.

If it is aspired that one day crypto currencies will be used as much as cash, they will have to enjoy stability to be a means of trust exchange. The more volatile the currencies, the more ordinary people will move away from them as a means of payment. Fortunately, crypto currencies are pressuring central banks to be more open, more innovative, and to rethink the way they understand and handle money.

A major challenge is to expand the transactional volume capacity of exchanges (or exchange sites) and the same protocols. Exchanges have seen increases in volumes of 10 and up to 20 times at the peak of interest back in December, causing the constant collapse of systems due to saturation. Kraken, Coinbase, and GDAX have had system crashes. Even Kraken announced at the end of 2017 that it would not accept more customers due to lack of capacity to process verifications.

Saturation of protocols is also a serious problem for the industry. Bitcoin registered fees of up to $28 per transaction on Dec. 19, temporarily rendering useless the case for micropayments on its network. As in the early stages of the Internet, the architects of the systems and infrastructure of this industry work day and night to solve these inefficiencies.

Challenge 4. Cybersecurity

Criminals have haunted crypto currencies adjusting their modus operandi to take advantage of these technologies. It skyrocketed from 2013, as bitcoins rapidly increased in value and popularity. Initially, the aim was to steal the passwords of bitcoin users, followed by the attack on crypto currency wallets. Subsequently, the malwares were sophisticated in order to steal cryptocurrencies, attack exchange pages.

Lately, cybercriminals are hijacking computer resources to mine cryptocurrencies and using social engineering methods to convince website hosting providers that they are the real owners of key domains.

Very vivid in the memory of early users are the failures of currencies such as E-Gold, the Sheep Marketplace and Silk Road sites, and the collapse of exchange sites such as Mt Gox — which vanished after recognizing that they had lost hundreds of millions of dollars for unclear reasons.

While the enthusiastic blockchain community is proud of the decentralized and exponentially secure network, the risks associated with these technologies are increasing every day and will continue to increase, as each day they will have more nodes and actors due to hyperconnection.

Challenge 5: Regulations

Regulators have ahead of them an industry that breaks with traditional economic, legal and social paradigms. A natural reaction based on fear of change might be a prohibitive policy, but how can a decentralized network be banned? Legitimate markets such as those exchanges that meet good quality standards and in which 99% of the transactional volume moves today could be closed.

When China announced prohibitive measures in May, October, and December 2017 and in all three cases, the volume of transactions outside exchanges increased between 200% and 300% against a previous week. The result is that the consumer moves to P2P platforms such as “Local Bitcoins”, where regulators have little influence.

In short, banning crypto currencies means banning the internet and mathematics, a task that not only seems impossible, but is also illogical in understanding the broad benefits of this technology.

Finally, we come to the debate linking tokens to the functions of money. Regulators must understand that Bitcoin is just one type of token among several others. According to CoinmarketCap, there are more than 2,000 tokens, many of which are not intended to fulfill the basic functions of money. Utility tokens, for example, simply give access to a service and have the basic function of monetizing a network (Filecoin, for example). Therefore, they are not assets, currency, or debt. It is important that regulators understand this difference in order to establish rules of the game that protect the consumer without damaging innovation.

Conclusions

The challenges described here can be synthesized in two crucial parts. On the one hand, it is imperative to decouple technology and its usefulness from prices. Innovations such as those brought about by the Industrial Revolution, as well as railways, electricity, automobiles, and the Internet, provoked financial readjustments, but finally prevailed to become fundamental technologies for the functioning and development of modern society.

In this sense, liquidity is a vote of confidence of society, which for the first time has broad and barrier-free access to invest in a nascent technology. In order to invest in the automobile, the Internet, or computers, one had to know the entrepreneurs or be a recognized investor.

Secondly, both blockchain entrepreneurs and their investors — large and small — have a greater responsibility than they think, and even than they would like to carry. That is why they are required to assume this duty through the study and understanding of technology, the commitment to innovation and the application of ethics in decision making.