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Cryptocurrency: Investment or Scam

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Introduction

Cryptocurrency are digital currency that is created by the use of encryption algorithms

(Hougan and Lawant, 2021). Such encryption algorithms facilitates virtual accounting system

and thus such cryptocurrency can be used to perform financial transaction such as payment of

goods or service. To utilize the cryptocurrency, cryptocurrency wallet is required. The

cryptocurrency wallet is a cloud-based service that is stored on the computer or mobile device.

Also, such cryptocurrency wallet are the tool through which users store their encryption keys that

confirm the identity of the user as well as the link to the cryptocurrency. There are many forms

of cryptocurrency and they include; Bitcoin, Litecoin, Etherium, Dogecoin, Binance, and Ripple

among others.

Cryptocurrency is first run on a distributed public ledger called blockchain. Blockchain

usually shows all the currency holders and the records of transactions which are updated

regularly. Units of cryptocurrency are created through the process called mining (Goertzen,

2021). Mining involves using computer power to solve complicated mathematical problems that

results in the generation of coins.

The system of cryptocurrency is quite difficult to understand and therefore a lot of

research has been undertaken to determine whether cryptocurrency is a legitimate investment or

not. Several research have shown the benefits as well as the risk of investing in cryptocurrency

and therefore, this paper will discuss whether cryptocurrency is real money, whether

cryptocurrency is worth buying/ investing or it is some form of scam, the reason why many

countries have ban cryptocurrency, and the recommendations to ensure that cryptocurrency are

legit and secure.

Is cryptocurrency real money?

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In literal terms, real money is the money that actually exist and is not invented, imagined

or theoretical. There are many people who regard cryptocurrency as real money while others do

not believe that cryptocurrency is real money. Therefore, this creates a debate on whether

cryptocurrency is real money or not.

Proponents who are suggesting that cryptocurrency is real money argued based on the

fact that it can be used as a reliable medium of exchange like the legal tenders and traditional

currencies. For instance, according to Goertzen (2021) who discussed an incident in May 2010

where Laszlo Hanyecz made history by purchasing two large pizzas from Papa John’s for 10000

bitcoins which was valued at around $30 at that time. This implies that Laszlo paid for the pizza

using cryptocurrency as a reliable medium of exchange just like a customer would have paid $30

in legal tender for two large pizzas. Similarly, many people and businesses from all over the

world are paying and receiving cryptocurrencies in exchange for a good or service. Additionally,

even some central of other countries have allowed cryptocurrency to be a medium of exchange.

Additionally, according to Howarth (2022), there are over 2500000 of transactions that uses

cryptocurrency as a reliable medium of exchange. The figure 1 below indicates the number of

bitcoins transaction per day;

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Source: (Howarth, 2022).

Additionally, most people believe that for a currency to be real money then it must be

adopted by a country as a legal tender. Today, most countries are adopting cryptocurrency as a

legal currency. For example, El Salvador in 2021 was the first country to adopt bitcoin as a legal

tender implying that bitcoin is backed by the central bank and the government as a form of

currency for payment and receipts. Similarly, China is also developing its own digital currency

which will be backed by the central bank and the government. Additionally, in the United States

many consumer can buy selective products using cryptocurrency such as bitcoin. Similarly, big

multinational organizations are also developing their own cryptocurrency. For example,

Facebook plans to issue its own cryptocurrency called Diem which will be backed by the United

States dollar thereby giving it a stable value (Prasad, 2021).

Opponents who rejected to recognize cryptocurrency as real money suggest that

cryptocurrency is not regulated by the government and central bank and therefore, they trust the

country’s legal tenders and fiat currency as opposed to cryptocurrency (Rejeb, Rejeb, and Keogh,

2021). When a country’s currency is backed by the central bank and the government, it means
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that it follows all the country’s rules and regulations. Cryptocurrencies are known to be unlawful

and that is why the identity of parties to the transactions are not fully displayed (Voigt and

Rosen, 2022). Similarly, the users of the cryptocurrency are not protected by the government or

central bank if the cryptocurrency platform fails.

Additionally, the opponents who disregard cryptocurrency as real money have argued

that cryptocurrency are easily hacked. Hacking of cryptocurrency platform make users of

cryptocurrency to lose all their money (Bylund, 2022). Similarly, there are some instances where

hackers make the value of cryptocurrency to fall or rise. In case of a fall, many users of

cryptocurrency loose value of their wealth. This risk cannot occur when people use traditional

currencies such as Euro, Japanese Yen, and Great Britain Pounds among others as real money.

Also, another characteristics of currency is that it is a store of value for the currency to be

viable. Legal tenders and traditional currencies are regarded as real money because their value is

not volatile as compared to cryptocurrencies. According to Gorertzen (2021), Bitcon has

increased in value by over 20000% from 2010 to 2021. Figure 2 below indicate the price of

Bitcoin from 2010 to 2022. Similarly, according to Prasad (2021), the price of Dogecoin was 20

cents in late April 2021 but in the next two weeks it tripled and then fell to half that peak ten

days later. Such high volatility make cryptocurrency not to be regarded as real

Money.
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Source: (Edwards, 2022).

All in all, as time goes by, cryptocurrency have been predicted to replace the legal

tenders as real money. As disadvantages of regulations will be sorted out by countries like China,

Japan, and Sweden developing their own cryptocurrency that follows all the central bank policy

as well as the government rules and regulations. However, currently, the traditional currency

which are legal tenders are considered to be real money.

Whether cryptocurrency is worth investing or not

Many people, experts, and even traders regards cryptocurrency as a highly risky

investment. This is true based on the criteria of law, crash and bubble, attacks on the network and

personal accounts, and scams among others. On the contrary other experts have suggested that

despite the high risk investment in cryptocurrency, they have opportunities based on the criteria

of returns, diversification, cost of transaction, and secure technology among others. Therefore in

this part of the paper, the criteria will be discussed when answering whether cryptocurrency is

worth investing or not.

Why cryptocurrency is not worth investing?

1. Law
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Cryptocurrencies are not regulated by any central bank policy or any government rules

and regulation as compared to traditional currencies (Rodger, 2022). The lack of regulations

implies that anyone can have multiple accounts of cryptocurrencies at no cost. Similarly, there

are no centralized vetting procedures and no need of using the real name or real personal

identification data. In such circumstances, cryptocurrency is believed to be vague and may be

used for illegal activities. Similarly, cyber criminals will use cryptocurrency to undertake any

transactions because they are anonymous and they believe if they use such cryptocurrency in

scamming and cheating of innocent people, they will not be caught.

Despite blockchain technology being invented to facilitate ease of transactions, the lack

of regulations makes criminal make easy money with them. Therefore, countries like China and

other governments had banned the application of bitcoin and other digital currencies due to lack

of tracing of the financial transactions that is being undertaken (Fauzi, Paiman, and Othman,

2020). Also, many government have warned its citizens against investing in cryptocurrencies as

they believe that it is for scammers and will automatically result in loss of money.

2. Crash and bubble

Based on financial management, an efficient market is a market where past information is

available and fully reflect the prices of assets today (Hougan and Lawant, 2021).

Cryptocurrencies is believed to be a weak form of commodity because no one can predict its

value in future by relying on past information. For example, Bitcoin when it started it was only

few cents but by 2021 its value had risen to $70000 as shown in Figure 2. Despite the abnormal

rise of crypto such as Bitcoin or any other digital currency, they have not yet reached the bubble

but it is believed that they will reach the bubble in the near future. Similarly, cryptocurrency

have crashed over the past years most recently in 2021.

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3. Attack on the network and personal accounts

The block chain technology has a higher susceptibility to attack on the network

(Antipova, 2021). This will result to manipulation and forgery. Similarly, blockchain technology

is vulnerable to attack at its core operation of mining. It can be either attacked by malicious pool

operator or member or it can be attacked based on the codes that it uses. An attack by pool

members occurs when the pool members combine their resources in the pool and thereby

increasing their computational power in a particular mining pools. This results in destabilization

and heavy reduction in prices of such digital currency.

Attack on personal accounts by hackers is very common by users of cryptocurrencies.

Since users of cryptocurrency requires a log in and password to access their account, hackers can

hack the account and be able to obtain such personal information relating to the account. If this

occurs, a user of such account will be denied access to the account and thus resulting in the loss

of money in the form of crypto that is stored in such crypto wallet (Zhao and Zhang, 2021). This

implies that such cryptos are not worth investing.

4. Scams

Cryptocurrency are always associated with a lot of scams. Such scams result in the loss of

money. According to Federal Trade Commission, as of today over $1 billion have been stolen

by cryptocurrency scammers (Hetter, 2022). Cryptocurrency scammers usually scam people by

telling them to invest with them and they will get a higher return after a short period of time.

There are several ways in which cryptocurrency scammers use to steal from people.

Some the ways include; the use of bitcoin investment schemes, rug pull scams, romance scams,

phising scam, Ponzi schemes, and fake cryptocurrency exchange among others (Hetter, 2022).

For example, a Ponzi schemes used by cryptocurrency scammers, first lures new investors with
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bitcoin and they promise huge profit from the investment with little risk. Once they have gotten

the new investor, they pay the old investors with the proceeds from the new ones and the process

goes on and on. Such scheme is run in circles and before one realizes, the company becomes

shutdown resulting in fraud and loss of money.

Since the introduction of cryptocurrency to date, there are more cryptocurrency scams

than one can count. Some of the biggest cryptocurrency scams include; OneCoin resulted in

approximately $4 billion scammed, Thodex resulted in $2 billion scammed, Save the kids

resulted in $30000 scammed, Evolved Apes resulted in $2.7 million scammed, and FTX among

others. For instance, in OneCoin which was founded by Ruga Ignatova in 2014 sold educational

packets about financial education that allowed owner to mine the OneCoin (Imhof, 2022). Each

packet could cost anywhere from $100 to $100000 with different membership level. It was later

discovered that OneCoin was not mined as it was not a cryptocurrency but a multi-level

marketing scheme. OneCoin was created on SQL programming language which allowed the

code to be altered without any records. Upon the discovery that OneCoin was a scam, OneCoin

had 3 million members. The ultimate results was the arrest of the OneCoin organizers but

Ignatova has not been seen since 2017. This is a similar case to FTX where the CEO lost over 94

percent of his fortune and the organization filed for bankruptcy (Parker, 2022; Gottlich, 2022).

Why cryptocurrency is worth investing?

1. Secure technology

Despite the beliefs that cryptocurrency are easy to be hacked into, hacker will require

sophisticated software, harsh power and many others in order to hack into the technology utilized

by cryptocurrency which is almost impossible to get into (Fauzi, Paiman, and Othman, 2020).

Blockchain used by Bitcoin is believed to be one of the best platforms and the most sophisticated
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technology. This is because it provide efficiency for online transaction in terms of security and

confidentiality. Figure 3 indicates the process of transaction of Bitcoin supported by blockchain

technology. Similarly, because of blockchain technology, once a user has undertaken a

transaction it becomes irreversible. This eliminate the risk of double transaction where one is

able to undertake two transaction by granting the same coin to two different recipient.

Figure 3

Source :(Goertzen, 2021).

2. Cost of transaction

The cost of transaction of cryptocurrency is lower than other currencies. This is because

of the prominent features of cryptocurrency such as deregulated and decentralization (Fauzi,

Paiman, and Othman, 2020). As compared to the current credit and payroll payment system, the

cost of transaction is high for the users who default on their payments. This case is avoided when

using cryptocurrency as trading occurs only when end users agree that is when there will be

remittance of money.

3. Returns

Many traders who have traded in cryptocurrency have gained high returns. This is

because cryptocurrency have increased their value over time than any stock, currency, or

commodity (Antipova, 2021). In terms of risk, cryptocurrency such as bitcoin has a low risk due

to majority of its proportion are in diverse portfolio. Cryptocurrency such as Bitcoin in 2013 was
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worth $112 and the market value was $1.2 billion. By 16th May 2022, one bitcoin is worth

$30000 and the market is valued at $1.3 trillion. This shows the high return associated with

Bitcoin. Not only Bitcoin but also other cryptocurrency like litecoin. One litecoin was worth

$3.38 per coin eight years ago but in 2021, the value increased to $245 per coin and now in 2022

it is worth $60. Despite fall in value in 2022, the holders of litecoin still have made over 1500%

profit by 2022.

4. Diversification

Most of the institutional investors and other investors are looking to diversify their risks

by keeping different investment that have different behaviors under same economic conditions.

Increasing number of investors believe that cryptocurrencies provide positive diversification

especially against rising inflation. Cryptocurrencies such as stablecoins are increasingly being

invested in as their value is linked to the value of fiat currency and assets (Prasad, 2021).

Reasons as to why government are banning the use of cryptocurrency

1. Lack of regulation

Lack of regulation makes cryptocurrency hard to trace. This means that criminal use

cryptocurrency in undertaking financial transaction. Similarly, cryptocurrency has been used for

money laundering activities which is against the rules and regulation of almost all the countries.

Additionally, the high volatility in the value of cryptocurrency is a worry for most governments

due to its lack of regulations (Sulivian, 2022).

2. Climatic impact

The blockchain system used in cryptocurrency consumer a lot of energy. One transaction

of bitcoin requires a number of computers on the bitcoin blockchain network to verify the

transaction. It is estimated that one transaction of bitcoin consumer 1173 kilowatt Hours of
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energy to fully complete (Sulivian, 2022). Such energy is equivalent to six weeks’ worth of

energy consumption in a household in America. Similarly, the process of mining of bitcoin and

undertaking transactions alone utilizes an energy equivalent to the energy being used by an entire

country of Norway.

Such huge use of energy by cryptocurrency has a negative impact on the climate as there

is increased carbon emission (Howson and de Vries, 2022). Similarly, countries like Kosovo

have banned cryptocurrency because of high energy consumption that resulted in blackout in

most of other parts of the country.

3. Increase in criminal activities

Cryptocurrency has been used in criminal activities such as buying drugs online and

because the users are anonymous, the regulators have not been able to apprehend them.

Similarly, most of the ransoms that are paid to kidnappers and cyber terrorist are in form of

cryptocurrency. Russia, Turkey and china have banned cryptocurrency because of such criminal

potential (Sulivian, 2022).

4. Negative economic impacts

Cryptocurrency are volatile and they decline in value and after some time they increase in

value. There are some crashes that have occurred in 2021, 2020, 2018 and 2013 among others

where people have lost all their money from investment and organizations have declared

bankruptcy. Similarly, cryptocurrency are associated with the largest scams that has ever

happened and therefore for this reason many countries including the United States are

considering banning cryptocurrency (Sulivian, 2022).

Recommendations
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One of the key problems of cryptocurrencies is the lack of regulation. Lack of regulation

make it difficult for people to trust and invest in them. One of the recommended solutions that is

already being implemented is that countries like China, Australia, and Sweden among others

have started creating their own cryptocurrency. Such cryptocurrency is backed by the

government and follows the central bank policies and therefore, it is regulated (Prasad, 2021).

Regulated cryptocurrency is more trusted by people since in case of a loss which is rear, the

government can compensate the investors. Such cryptocurrency is worth investing into as

opposed to those that are unregulated.

The problem of volatility in cryptocurrency is a big problem which discourages investors

from investing in them. One of the recommended solution to such problem is the recent

introduction of stableCoin. The stableCoin is a cryptocurrency which is stable and is not easily

subjected to volatility (Prasad, 2021). The number of investors investing in stablecoins has

increased over the recent years because of it is much more stable and thus protect investors from

possible losses. The other methods that is recommended is that there are recently introduced

cryptocurrencies that are pegged to fiat currency (Sulivian, 2022). The reason why the

cryptocurrency are pegged to the fiat currency like the United State dollar is because United

States dollar is a stable asset and is protected by the central bank policies. Similarly, such

cryptocurrencies that are pegged are not volatile and therefore worth investing into as compared

to those that are volatile.

Cryptocurrency such as bitcoins is not sustainable as it power intensive and increases

carbon emission. One of the recommendation to be adopted is similar to that of ethereum where

there is a shift from the energy-intensive proof-of-work (POW) method that is power intensive to

proof-of-stake (POS) method which saves energy by almost 99 percent and thus reduces carbon
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emissions (Ashford, 2022). Also, cryptocurrencies owners can join Crypto Climate Accord

(CCA) which was formed in 2021 aiming at ensuring that the crypto industry is decarbonized

and there is use of sustainable renewable energy.

Conclusion

Cryptocurrencies are digital currencies that is created through encryption algorithm.

There is a huge debate on whether cryptocurrency is real money or not. Some of the proponents

argue that since it is a medium of exchange, it is introduced as legal currency in countries like El

Salvador, and is used by a large number of people then it can be regarded as real money. While

opponents have regarded legal tenders and traditional currency as real money and not

cryptocurrency. This is because of high volatility, prone to attack, regarded as property in

relation to taxation, not used by large amount of people as compared to fiat currency among

others. Cryptocurrency is not worth investing because of lack of regulations, attack on the

network and personal accounts, scams, and crash and bubble. On the other hand, cryptocurrency

is worth to be invested in because of secure technology, high returns, and diversification, and

low cost of transactions.

There are several reasons why countries are banning cryptocurrencies. Some of the

reason include; lack of regulations, negative climate impact, negative economic impact and

criminal potential. Some of the recommendation for cryptocurrency to be worthy of investment

is the regulation by central bank and government, governments creating their own

cryptocurrency, investing in cryptocurrency that is more stable, and utilizing POS method in the

extracting of cryptocurrency which saves power and reduces carbon emissions.

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