Over 2.3 billion people worldwide have access to the International Network (commonly called Internet) and this figure is expected to grow to 5 billion by 2020. In a study undertaken by Miniwatts Marketing Group(MMG, 2016) to determine the top twenty (20) countries with the highest patronage of online investments ranked Nigeria on the tenth (10th) position, with about 44.6 million internet users while China came first (1st ) with about 420 million internet user.
In spite of that, only a few people know how cryptocurrencies emerged as an alternative medium of exchange for products and services. Mr. Satoshi Nakamoto invented the electronic currency in late 2008. While announcing the invention of Bitcoin, Satoshi said he has developed “A Peer-to-Peer Electronic Cash System”.
The electronic medium of exchange popularly called Cryptocurrency or referred to as digital assets involves trading through buying, selling or holding of cryptocurrencies such a Bitcoin (XBT), Ethereum (ETH), Litecoin (LTC) amongst others, with the aim of generating a profit through short, medium or long-term fluctuations in their respective prices.
Also, the cryptocurrency market sphere seems to be growing by the day in both popularity and patronage. There seems to be an influx of people into the market. The average daily trading volume of the market is usually in trillions of dollars. The total transaction ceiling of the entire market stands at more than half a trillion dollar which is a surprising accomplishment considering the age of the market is just slightly above a decade.
Notwithstanding, despite these large number of patronage, experts have it that, there are numerous problems that plague the market. To use these numbers solely as an appraisal index of the state of the market would present a false narrative. As such, there are structural and functional issues that militate against the market. The identified problems stem from a variety of reasons such as the nascent nature of the market, lack of understanding of the cryptocurrency space, and some peculiar economics of cryptocurrencies, just to mention a few.
Against the foregoing development, few identified problems associated with digital asset/cryptocurrency are discussed below:
Price Manipulation
One of the outspoken issues in the cryptocurrency market is its excessive volatility. The prices of cryptocurrencies on exchange platforms rise and fall dramatically over a short period of time. When a tradable asset in the market sphere can drop by as much as 49 or more percent in less than 24 hours, then the volatility of that market is high. One key cause of volatility in this climax is the activities of “whales”.
Whales are individuals that have large cryptocurrency holdings. They are able to swing the market by manipulating the price of a cryptocurrency. They do this by means of “buy and sell walls.” A buy wall is simply when a “buy position” worth a lot of money (probably running into millions of dollars) is opened on a crypto trading platform. Regular investors who trade in small amounts will notice this big buy position that has been opened and interpret it to mean an imminent price increase. Once this happens, the price of the cryptocurrency will inevitably go up.
Additionally, the problem with this regularly occurring scenario is that the whales can drive up the price without actually investing in the market. The actual trades that have boosted the price of the cryptocurrencies have come from the smaller traders. When the price is at a level that favors the “whales’, they can adjust their buy and sell walls, cash in on the price spike and once they do so, the price of the cryptocurrency falls dramatically. This process gets repeated over and over for the benefit of the whales.
Pump and Dump of Initial Coin Offerings (ICOs) Schemes
ICOs have emerged in recent time to become an integral part and parcel of the cryptocurrency market. Many tokens are introduced to the market via ICOs with investors buying these tokens in exchange for fiat money. Pump and dump ICO schemes continue to be a problem for the market due to the lack of regulation. During the ICO, the entrepreneurs behind the token speculate massively on the virtual currency (coin), driving the prices up and getting investors attracted. Once this is done, the ICOs pull out, leaving the investors with worthless coins that have little or no monetary value.
The Activities of Cybercriminals
In the same vein, the virtual currency market has since from its inception been overwhelmed by the activities of hackers and cybercriminals. There have been a number of high-profile cryptocurrency hacks and heists that have resulted in millions of dollars being stolen. Traders and investors have lost funds and some platforms have ceased to operate. In the aftermath of these hacks, the price of particular cryptocurrencies has dropped, drastically.
Price Fluctuation
Stability in price chart is an essential part of asset/commodity trading. It is often necessary to develop price charts in order to carry out investment analysis and develop trading strategies. The problem here is the price of a cryptocurrency can vary considerably on the different exchange platforms. With such extreme price differences for the same cryptocurrency, price charting becomes a difficult endeavor. In addition to this, the absolute level of volatility in the market, as well as the problem, becomes even more intensified.
Transaction Delays
Related to the above, the cryptocurrency market is overwhelmed with a series of delays across almost every type of transaction. From opening a trading account to verifying your identity and being able to make deposits and withdrawals, the system seems to be quite slow. The market is volatile and as such, delays can be costly. Traders end up missing out on favorable positions because the transaction didn’t get posted on time.
Conclusion
To recap the debate on reliability or otherwise of cryptocurrency trading, it is worthy to note that, there are some nagging issues in the cryptocurrency market that threaten to affect the quality of the transaction. It is pertinent that key stakeholders in the market continue to work on efforts to combat these issues. As the market grows and evolves, it is hoped that some of these issues will be resolved and all encumbrances will be things of the past.
Most importantly, in the Nigerian context, on 17th January, 2017the central bank of Nigeria (CBN) issued a statement banning Bitcoin, Peercoin, Litecoin, Dogecoin, Ripple and many others declaring that they are not legal tenders in Nigeria. The apex bank went further to draw attention of banks and other reporting financial institutions to the risk associated with such transactions.
