Legendary investor warns of blockchain ‘crisis’

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Legendary investor warns of blockchain 'crisis'

Legendary investor Mark Mobius explained why he believes blockchain technology is inherently risky.

Could blockchain instigate a financial crisis? Mark Mobius, a founding partner of Mobius Capital Partner, believes it very well could.

A noted financial expert, Mobius believes that blockchain technology is highly vulnerable to hackers.

“A lot of people say, ‘blockchain can’t be broken into.’ No, it can be. Anything that’s created by man can be broken into. And it could create a big crisis,” he recently told CNBC’s Squawk Box.

Security risks remain

Mobius’ remarks are perhaps far more likely than most crypto fans would like to admit. For instance, opportunities to defraud investors of smaller cryptocurrencies have surged in the past year.

This is due to the fact that miners, who verify crypto transactions by exercising extensive computing power, have consolidated as an industry.

As such, they have much more leeway in taking over a cryptocurrency (as it’s currently a fairly inexpensive proposition).

If successful, the bad-faith miner could create an alternative version of a cryptocurrency and spend the same cryptocurrency twice.

Investors who use software clients to trade cryptocurrencies or run a node may also precipitate a crisis.

Last September, developers of Bitcoin Core, Bitcoin’s main software client, hurriedly fixed a bug that would have potentially allowed attackers to mint more bitcoins that the system is supposed to allow.

The risks of faith-driven currencies

And yet, as Mark Mobius notes, investors continue to have faith in cryptocurrencies.

“There’s a whole generation of people who have faith in the internet. They have faith in these cryptocurrencies,” he said.

“That’s all it takes. People believe in the U.S. dollar because they have faith that with dollars in their hands they can buy something.”

Indeed, cryptocurrency valuation is merely based on a combination of public sentiment and supply and demand.

And while many crypto enthusiasts would like to use cryptocurrencies in daily life, they’re still primarily viewed as an investment vehicle.

As such, they remain highly volatile and leave investors at risk-taking large losses.

Although public faith in cryptocurrencies remains unabated, Mobius believes that “people are going to begin to realize that these are very, very risky situations.”

“And by the way, I believe blockchain is a very high-risk situation,” he added.

Creation of risk-averse cryptocurrencies

Interestingly, Mobius believes creating a gold-backed cryptocurrency might be a worthwhile alternative.

“If there is a cryptocurrency that is really backed by gold and there is a meaningful agreement and some kind of modern thing of this connection, then this could be quite interesting.”

By backing a cryptocurrency with gold, a cryptocurrency investment would be less susceptible to taking a catastrophic plunge (particularly as gold rises when catastrophic events occur).

However, risk-averse cryptocurrency investors currently have the option of investing in stablecoins, which act as a hedge against cryptocurrency volatility.

Stablecoins are typically pegged to the US dollar, a combination of fiat currencies, or the consumer price index.

Thus, merchants who receive cryptocurrency payments are incentivized to immediately trade it in for a stablecoin (as a means to protect themselves from loss).

Mark Mobius’ belief that blockchain technology remains a risky venture is certainly not without merit.

However, it’s also true that the industry is gradually mitigating this risk on a variety of fronts.