by 
All money depends on trust. When we accept dollars in exchange for our labor, property, or services, we surrender something of immediate value in return for tokens—or electronic account entries—that we expect others will accept later. Money is, in that sense, a social promise.
But not all monetary promises are equally well supported.
A dollar has little intrinsic value as paper, and a bank balance is only an electronic record. Yet the dollar is embedded in a large and accountable economic system. Employers pay wages in dollars. Merchants state prices in dollars. Taxes must be paid in dollars. Banks clear dollar payments, courts enforce dollar-denominated contracts, and government institutions act to preserve the payment system. Deposit insurance, banking regulation, fraud laws, and established procedures provide at least some recourse when things go wrong.
Cryptocurrency attempts to create monetary confidence without that institutional foundation.
Its supporters often say that cryptocurrency does not require trust because transactions are controlled by mathematics and recorded on a distributed blockchain. That is only partly true. The technology may allow participants to verify that tokens have been transferred according to the software’s rules. It does not establish what those tokens are worth. Nor does it guarantee that anyone will accept them tomorrow.
The value of most cryptocurrencies is almost entirely a market phenomenon. A token is valuable because people are willing to exchange ordinary money, goods, or services for it. Its price depends on scarcity combined with demand.
Scarcity alone, however, does not create value. Many things are scarce and valueless because nobody wants them. Moreover, although the supply of one cryptocurrency may be limited, there is no practical limit on the number of new cryptocurrencies that can be created. Promoters can introduce another coin, give it an impressive name, describe it as technologically revolutionary, and attempt to manufacture demand.
Unlike commodities, most cryptocurrencies have little or no intrinsic utility. Wheat can be eaten. Oil can produce energy. Gold has industrial and decorative uses. Land can support housing or agriculture. A share of stock represents an interest in a business that may own assets and earn profits. A bond represents a legally enforceable promise of repayment.
A cryptocurrency token ordinarily represents none of these things. It may permit access to a payment network or some other digital service, but ownership usually provides no claim on productive assets, earnings, interest, or physical property.
The purchaser is therefore making a wager: that future buyers will place as much or more value on the token than the current buyer does.
There may be situations in which cryptocurrency provides a practical advantage. It can transfer value across borders, operate outside ordinary banking channels, or permit transactions when governments or financial institutions are unreliable or restrictive. In such cases, a user may be purchasing access to a useful transfer mechanism.
But for someone who has no practical reason to bypass the banking system, buying cryptocurrency is primarily speculation on its future price. The buyer is not purchasing a productive asset. The buyer is betting on continued confidence.
That confidence is especially fragile because the network is amorphous. The software and transaction records may be distributed among thousands of computers, but there is no central institution responsible for maintaining the token’s value. No board of directors owes a fiduciary duty to holders. No central bank stands ready to support the market. No insurer guarantees that the assets will be restored after theft. No customer-service department can reverse a mistaken payment.
The technology offers a narrow promise: if the network continues functioning, it will maintain a record of transactions according to its rules.
That is not a promise that the currency will remain valuable.
Cryptocurrency also depends heavily on the conventional economy it is sometimes said to replace. Exchanges need bank accounts. Computers require electricity and internet service. Miners and software developers generally pay their expenses in national currencies. Owners usually measure their gains and losses in dollars. Most buyers enter and leave the cryptocurrency market through commercial exchanges connected to regulated financial institutions.
Thus, cryptocurrency borrows stability from the very legal, banking, communications, and energy systems it claims to bypass.
The exchange mechanism itself can fail in several ways. A cryptocurrency exchange may collapse through theft, fraud, insolvency, or mismanagement. Customers may discover that the exchange did not possess the assets it claimed to hold. A token may continue to exist on its blockchain but disappear from major markets, leaving holders unable to sell it at any meaningful price. Software defects may permit theft or permanently lock up funds. Governments may restrict the gateways through which cryptocurrency is converted to ordinary money.
A technically functioning blockchain can therefore record ownership of economically worthless tokens.
Cryptocurrency markets are also vulnerable to manipulation. In a pump-and-dump scheme, organizers acquire a little-known coin, promote it aggressively, and create the appearance of rising public interest. Social-media posts, fabricated news, celebrity endorsements, or claims of secret information attract new buyers. As the price rises, the organizers sell their holdings. The collapse comes after they have taken their profits, leaving later buyers with the losses.
The lack of recourse compounds the danger. Cryptocurrency transactions are generally irreversible. A person persuaded to send funds to a scammer cannot call a bank and stop payment. Although public blockchain transactions can often be traced from one digital address to another, tracing an address is not the same as identifying its owner or recovering the money.
Cryptocurrency may prove durable as a specialized transfer technology, a speculative collectible, or a niche financial instrument. But those possibilities should not be confused with a dependable currency or a prudent store of household savings.
All money is based on confidence. The important question is what supports that confidence. National currencies rest on broad systems of law, taxation, commerce, banking, and public accountability. Cryptocurrency rests largely on software, market liquidity, and the expectation that other people will continue to want the tokens.
A person buying cryptocurrency should therefore understand exactly what is being purchased. Unless the buyer needs its particular transactional capabilities, the purchase is not an investment in productive value. It is a bet that confidence will persist, the network and exchanges will remain accessible, and someone else will later pay as much or more for the token.
That bet may succeed. It may also fail without warning—and without anyone being responsible for making the holder whole.