If you’ve been paying attention to “Crypto News”, I’m sure you’ve seen the doom and gloom Headlines. Bitcoin is down about 70% since it’s most recent high, Ethereum has lost about 75%, and the rest of the Crypto Market looks around the same. These crashes had led to reported layoffs at exchanges like Gemini, BlockFi, and Crypto.com. Even worse, you have other exchanges and lenders, like Celsius and Vauld, who have suspended withdrawals and there is fears they may soon declare bankruptcy. These are some scary times… So, what could be causing this?

1) Lack of Utility as Currency

This is one of the biggest, most straight forward issues with Cryptocurrencies today. It’s not a very good currency. What do we mean by that? Well, simply put, Currency is a medium used in order to exchange goods and services. Instead of having to trade 3 Sheep for someone to build you a house or finding something else that person wants, you both agree a certain token is worth a certain value that can be traded. Generally, these tokens have been created and backed by governments but cryptocurrency is different. Cryptocurrency is protected through cryptography and a distributed ledger protected over a decentralized network. Basically, everyone in the “Crypto Economy” agrees that One Bitcoin is worth $20,000, so it is.

One problem is, the value of tokens changes drastically and constantly. Except for Stable Coins which are generally pegged at a dollar, most Cryptocurrency has very volatile price changes which make it hard to purchase things. Imagine a car costing one Bitcoin while Bitcoin is worth a $20,000. You want to buy the car the next day, but when you go to the dealership, one Bitcoin is now worth $30,000. That car isn’t worth that price to you and you can’t afford it. Or worse, you buy the car for one Bitcoin at $20,000 and the next day, one Bitcoin and your car are only worth $10,000. If you have to resell your car, you’ve just lost $10,000 in only one day! Even the Stable Coins have shown lack of stability, such as Terra Luna which dropped from the value of a dollar to almost zero.

The other problem is a lack of ability to pay for services and items in cryptocurrency. Can you remember the last time you were able to buy your lunch in Ethereum? I know I don’t. Due to the extreme energy costs and sheer computing power required by most cryptocurrencies, it’s still very hard to make everyday purchases in cryptocurrency. Now, different cryptos do have plenty of other use cases that provide value and solutions to many different problems. For example, Ethereum has been used effectively for smart contracts and with the generation of NFTs (Non-Fungible Tokens). Yet, until the ability to pay for things in crypto becomes readily available for daily use, the utility of cryptocurrency as a currency is significantly lacking.

2) Crypto Exchange Solvency Issues

A Crypto Exchange, is essentially like a stock exchange but for cryptocurrencies. These are businesses that allow you to buy, sell, and trade different cryptocurrencies with other users on their platform. The problem we’re seeing today is many of these businesses are starting to have issues maintaining enough cash on hand to cover the costs to run their platforms or pay off different debts. This effects us as users because, if a crypto exchange files for bankruptcy, there is no protection offered for your money. If the Exchange goes under, any coins you have on the exchange are lost to you. Traditional Banks are different. Because of what happened during the Great Depression, Banks are now required to be covered by the Federal Deposit Insurance Corporation (FDIC) so that if something happens to the bank and they run out of money to reimburse you, the Government will protect up to $250,000 at that bank. Crypto Exchanges don’t have these protections. If they lose money, you’ll lose your money on the exchange.

3) Crypto Lenders Over Promising and Over Lending

Crypto Lenders are similar to Crypto Exchanges in the way that many allow you to buy, sell, and trade coins, but they also allow you to lend your coins. Essentially, you can allow the Crypto Lender to borrow your coins, in a method generally referred to as staking, and then the lenders will invest or loan those coins to others for a fee, giving you interest on their loans. For example, let’s say you have 5 Ethereum (ETH) on a fictional lender called Crypto Lendo;

You Stake 5 ETH for 8% Interest

Crypto Lendo Loans your 5 ETH with a 10% Interest Rate

Crypto Lendo Pays you 8% and Keeps 2% for Themselves

Sounds simple enough, but two things can happen;

1) Crypto Lenders can Over Leverage

The Crypto Lender takes your 5 ETH from our previous example and lends it to another lender, we’ll call “Lender B”. Well, “Lender B” then lends those Crypto to “Lender C” at 12%. Then “Lender C” loans to “Lender D” for 14% and so on and so on. Then, if in this chain the last Crypto Lender can’t afford their payments, all the lenders can’t make their payments. That’s what over leverage is.

2) Crypto Lenders make Poor Investments

Even though the common example we think of is the lender providing loans with your staked coins, they can also invest the coins elsewhere. For example, say the lender takes your 5 ETH and reinvests it into Dogecoin as Doge starts to grow faster than ETH. Well, if the Lender buys Doge at the peak and it only falls from then on out, they may not be able to make your interest payments and start to lose liquidity.

This may seem hard to believe, but with the market crashing as it has been lately, this problem has been happening with more and more lenders. The most notable right now is Celsius who originally offered up to 30% interest on some staked coins. As of June 12th, Celsius has suspended all withdrawals due to “extreme market conditions”. If you would have been holding your life savings on Celsius, that money would just be gone to you now and there would be nothing you could do about it.

4) Hacking and Money Laundering!

Although we talk about it less today, hacking and money laundering have been a huge problem within the Crypto space. With headlines like the ones you can see here, it’s clear to tell that hackers have been able to take significant funds from people. Not only that, due to the decentralized nature of Crypto, it’s almost impossible to find that money after it’s been stolen. Due to this, Crypto is also an ideal way for criminals to launder money gained by illicit and hurtful means. With anonymous exchanges that allow anyone to buy, sell, and trade cryptocurrency without ever revealing themselves, it is hard to “follow the money” to find criminals and prevent further criminal activity. Along with that, with lack of protections on exchanges, once your money is gone, it’s gone. There is nothing you can do to get your money back.

5) Lack of Ability to Regulate

One of the purposes behind cryptocurrency was to create Decentralized Finance (DeFi) which is a financial system free of control from governments, financial institutions, and payment processors. This can be crucial in countries with exceptionally high inflation and corrupt regulatory agencies. It can allow individuals the ability to transfer funds quickly and internationally without excessive fees or complications. It can also protect individuals from excessive taxation or government suppression. Although these are very noble goals, it also allows all the issues to exist which were mentioned above. Without regulations, there are no protections to prevent Crypto Exchanges and Lenders from conducting “Bad Business Practices”. There is no protection for regular investors if these exchanges go under and can result in the individuals losing all their money. This decentralization also creates significant means to enable money laundering and funding of illegal activity.

It can also result in Crypto Scams such as a “Rug Pull” or “Pump and Dump”. In these schemes, creators of a coin aggressively advertise and market their crypto project to possible investor to try to “pump up” the value. Then once they’ve gained enough funds, the run off with the capital gained without ever creating the real project. That leaves the investors with worthless tokens they can’t use. Commonly referred to as being “left holding the bag”. In Centralized Finance, there are options that can be taken thanks to regulation to both prevent these scams and seek recourse if you become victim to such a scam. In DeFi however, there is no regulation to protect you. The problem is; how do you regulate a global, decentralized, anonymous network?

Should You Still Invest in Crypto?

After reading everything mentioned above, it may be hard to believe this but I personally think there is still in investing in Crypto. Beyond the problems above, cryptocurrencies still hold value in solving many problems utilizing distributed ledgers, Smart Contracts, Non-Fungible Tokens, and more. Although I don’t see cryptocurrency as a viable currency today, there is plenty of potential for a functional cryptocurrency in the future. I won’t pretend I have any clue which project or company will be successful in creating that coin, I personally still choose to invest in Crypto on Coinbase (which you can sign up for here). If you also choose to invest, here are some tips to follow;

• Do Your Research! Make sure you know what the project is behind the crypto you choose to invest in. Do your best to ensure it isn’t a scam through research and due diligence. You want to trust both the exchange and the coin before you invest.

• Don’t Invest More than you’re Prepared to Lose! I think it goes without saying, but crypto is a volatile, unregulated, decentralized market. As Gary Gensler, SEC Chairperson once labeled crypto the “Wild West” of investing. Make sure you are prepared to lose all of your investments. The general consensus from experts is no more than 2% of your total net worth.

• Diversify Across Different Exchanges/Lenders. Since Exchanges and Lenders aren’t regulated, it would be smart to invest coins on different exchanges. That way, if one goes under, you won’t lose all your investments.

• Take your Tokens off the Exchange. As is commonly said in the Crypto Economy, “Not your Keys, Not your Coins”. If you leave your tokens on an exchange, you’re at risk to many of the issues we mentioned above. Instead, you can take your coins off the exchange and save them in a Cold Storage Device which is a digital wallet not connected to the internet to protect your coins from being stolen.

Of course, I must reiterate that this is NOT Financial Advice nor should it be misconstrued as anything more than information. Everyone’s financial situation is different and if you’re unsure whether you should invest in crypto or any investment, I recommend speaking to a certified Financial Advisor. Beyond that, the next best thing is to keep educating yourself. Financial Literacy is the Number 1 Key to Financial Success so keep learning.

Links

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*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.

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