Bank Of England Unveils The Seven Deadly Paradoxes Of Cryptocurrency

Authored by John Lewis via The Bank of England 'BankUnderground' blog,

Will people in 2030 buy goodsget mortgages or hold their pension pots in bitcoin, ethereum or ripple rather than central bank issued currencies?

I doubt it.

Existing private cryptocurrencies do not seriously threaten traditional monies because they are afflicted by multiple internal contradictions. They are hard to scale, are expensive to store, cumbersome to maintain, tricky for holders to liquidate, almost worthless in theory, and boxed in by their anonymity. And if newer cryptocurrencies ever emerge to solve these problems, that’s additional downside news for the value of existing ones.

The congestion paradox

For a conventional medium of exchange, the more people who use it, the better. Like in telecoms or social media networks, network externalities mean that the more users one has, the more attractive it is for others to sign up. Additionally, most conventional platforms benefit from economies of scale: because their costs are largely fixed, spreading them over more transactions lowers average costs. But cryptocurrency platforms are different. Their costs are largely variable, their capacity is largely fixed. Like the London Underground in rush hour, crypto platforms are vulnerable to congestion: more patrons makes them *less* attractive. Some (but not all) have very limited capacity: Bitcoin has an estimated maximum of 7 transactions per second vs 24,000 for visa. More transactions competing to get processed creates logjams  and delays. Transaction fees have to rise in order to eliminate the excess demand. So Bitcoin’s high transaction cost problem gets worse, not better, as transaction demand expands.

The storage paradox

Ironically, virtual cryptocurrencies relying on a distributed ledger may be vulnerable to a crippling diseconomy of scale through system-wide digital storage costs. Each user has to maintain their own copy of the entire transactions history, so an N-fold increase in users and transactions, means an N-squared fold increase in aggregate storage needs. The BIS have crunched the numbers for a hypothetical distributed ledger of all US retail transactions, and reckon that storage demands would grow to over 100 gigabytes per user within two and half years.

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