Like any investment, there is always a risk of loss when choosing to invest in cryptocurrencies. With cryptocurrency, betting on the wrong one is not necessarily the only way for things to go wrong.
From scams and hackers to human error, there are several ways for things to go wrong in the land of cryptocurrency. In this article, however, we will be focusing on something that is often at the forefront of many new investors’ minds: what happens if a cryptocurrency goes to zero?
Can a Cryptocurrency Be Worth Nothing & Go to Zero?
Most price quotes show users the last traded price of a coin or token – if that is true, to display a price, the cryptocurrency would have been bought or sold for a value higher than zero, even if it is just a tiny fraction. On an exchange, other price quotes indicate what people are bidding or offering to buy or sell an asset for (keep in mind this is just what they are asking for – there is no guarantee that they will find a taker and get this price).
Effectively, a cryptocurrency could only really go to zero after it becomes delisted by every exchange where it was available for trade. Even then, however, there would be nothing stopping two people from meeting up on a street corner and trading the cryptocurrency between them.
In short, the price of a cryptocurrency technically cant reach zero, but the trading volume can. For the price of a cryptocurrency to go to zero would mean it passed on to somebody else without receiving any value in return.
Hailed as Unhackable, Blockchains Are Now Getting Hacked
Essentially, the most common reason a cryptocurrency becomes worthless is that nobody wants to buy it anymore. However, the second most common reason a cryptocurrency goes to zero is that the blockchain gets hacked.
A blockchain is a public ledger comprised of every transaction made using a cryptocurrency managed by a cluster of computers. Digital currencies built on blockchains are decentralized, unlike centralized models where one entity is in charge of the entirety of a network’s data.
In layman’s terms, a blockchain is a time-stamped series of digital records. Each block of data is secured and bound to the last using cryptographic security. No centralized version of this information exists for a hacker to corrupt, making it far more secure than traditional means of digital data storage.
However, the technology (otherwise known as blockchain) once hailed as unhackable is not entirely immune to being hacked.
Hacking Blockchains & Double-Spending
In January of 2019, popular cryptocurrency exchange Coinbase noticed something strange going on with Ethereum Classic (ETC) – its blockchain was under attack.
A bad actor had somehow gained control of over half of the ETC networks computing power and used it to rewrite the entire transaction history, making it possible to spend the same crypto more than once – known as a double-spend attack.
Because it is public and immutable, the data stored on the blockchain is available for anyone to see. Anything built on a blockchain is, by nature, open and transparent – in this case, cryptocurrency. Blockchains are particularly attractive to thieves because fraudulent transactions are irreversible, unlike where they often can be reversed in the traditional financial system.
The 51% Rule
“Exchanges will ultimately need to be much more restrictive when selecting which cryptocurrencies to support.”– David Vorick, co-founder of the blockchain-based file storage platform Sia.
Before the ETC exploit became discovered by Coinbase in 2019, attackers began launching 51% attacks on a series of small-trading volume coins such as Verge, Monacoin, and Bitcoin Gold, stealing an estimated 20 million dollars in total. The following fall season, hackers stole another 100 thousand using a series of attacks on Vertcoin. The subsequent hit against ETC netted over $1 million.
Unfortunately, susceptibility to 51% attacks is inherent to most cryptocurrencies. Most cryptocurrencies use proof of work as their protocol for verifying transactions.
In this process, also known as mining, nodes spend vast amounts of computing power to prove themselves trustworthy enough to add information about new transactions to the database. A miner gains control of the majority of a network’s mining power and can thus defraud other users by sending them payments and then creating an alternative version of the blockchain in which the transactions never occurred.
New to Swapfolio?
Are you overwhelmed by multiple tabs and portfolio trackers?
If you are struggling to manage your Uniswap tokens – as always, we have got you covered.
Give Swapfolio a try today – for free!