I am stuck at an airport and therefore bored, so this might just be the right time to note down a few issues I have with bitcoin and large parts of the crypto community at this point. Note that I am a bitcoin, cryptocurrency and blockchain enthusiast. I love my exposure to this space and I share a lot of its ideals.
However, there are two major points of disagreement I have with what I see proclaimed in large parts of the community, though not all.
Issue #1: bitcoin will never be able to replace fiat currencies
Yes – I know. Saying this in the middle of the bubble of all bubbles is crazy, right?
But consider this for a moment: a fiat currency is plainly a medium of exchange. It is not (!) a store of value. We use fiat currencies to be able to easily exchange whatever we manage to contribute to society with what other people contribute. I will not get into fairness arguments and whether nurses should be paid more than bankers as that is not my point. The point is for anything to function as a medium of exchange in an economy that enables growth and opportunity, it needs to be (amongst other things):
- able to keep value over the short to medium term (note: not store it long term or expand that value)
- losing value over the medium to long term (ie be an INflationary currency; over time there needs to be more of it)
- embedded in a system able to scale so it can service the world‘s transaction needs
- universally accepted
The second point might be counterintuitive. Why would anyone want their „value“ to erode over time? Well, quite simply because without all the attributes above, our medium of exchange cannot function the way it should. If the US Dollar (just picking one) were a deflationary currency (like bitcoin, rising in value every day), people would fight to not spend any of their Dollars. If I can buy two TVs for my bitcoin tomorrow, why would I ever buy one today using bitcoin?
This has quite serious consequences for society, none of which are intended by most people. Not only would this kind of a currency discourage spending on goods and services, but much more importantly it stifles innovation and progress. Consider a world were bitcoin is the new US Dollar. The supply is fixed and people who have bitcoin can basically be assured that these will never lose value and that no one who does not have bitcoin can ever surpass them in wealth. On the one hand nobody would lend anybody bitcoin at an interest rate that can be recouped through innovation and on the other hand if it is more profitable to simply trade bitcoin every day then why would you ever continue that research on cancer or working long nights on your start-up idea, investing precious bitcoin on highly uncertain returns.
Next, while a lot of people seem to have branded the Fed and other central banks as evil actors that enslave everyone with their evil debt, debt is actually the fairest method we humans have devised (in a capitalist world that is) to enable people without capital to gain capital. If you have a good business idea, you can borrow US Dollar at a reasonable interest rate and gain more US Dollar than you owe, enabling you to pay back your creditor as well. This only works if the currency is sufficiently stable and loses value over longer term periods so both sides are correctly incentivized. Therefore the optimal medium of exchange is actually slightly inflationary – hence most central banks inflation target of 1–2%…
Those who say „fair point, but what about accumulating evermore debt and just punishing future generations?“ have a point, but the current world solution, namely a currency reform where debt is forgiven every 50–100 years or simply printing the money to make up this debt slowly is currently by far the better (ie more humane though certainly not ideal) system than having a currency that has an immutable fixed supply, gets distributed once and then effectively divides the world into the haves and have nots just like the current one only with hardly any chance to ever switch sides later as a built in feature rather than a lamentable outcome among many.
I know this isn‘t a popular thought in cryptosphere and believe me – I enjoy rising bitcoin prices as much as anyone, but a deflationary currency is not the solution for humanity that we need. Ask Japan if you don‘t believe me.
Next, let‘s look at the third point. A world currency system obviously needs to be able to scale. I am not very technical, but I understand the basic premises (and brilliant ideas) behind Lightning and Segwit well enough. However, to truly replace fiat, it won‘t be enough to simply reduce most entries on the Bitcoin blockchain by 80 or even 90%. The sheer size of the ledger would still very quickly outdo these efforts. (Oh and isn‘t an overuse of lightning between one main counterparty and many smaller ones kind of similar to centralization?). So further innovation is necessary (which is unlikely to happen once bitcoin just rises by 10k USD every day – why work then?). I am half way optimistic this is possible medium term, but it certainly won‘t be ready as quickly as necessary if the current mania persists. Just look at the cryptokittie app basically clogging the entire Ethereum blockchain. There is not one iota of a doubt this would happen to bitcoin too if the same kind of craze were to break out (or if it were to replace fiat transactions). The blockchain would also need to be able to provide instantaneous transactions, something that currently is far from the truth.
Finally, consider that the energy use of the current system is simply horrendous. I have long held the belief (and still do) that just looking at Bitcoin energy usage without subtracting the energy used by banks and clearing houses first (ie the services it replaces) is unfair. Yet I believe this currently still would imply a totally unsustainable amount of energy if fiat were to move to the current blockchain. Swift processes 28.5 m transactions per day, currently Bitcoin could processes about 350k at current block size at 1 block every 10 minutes and current average transactions per block. So Bitcoin would have to scale 78 times from here. The same proportion applies to value – Bitcoin currently processes about 1/70th of the daily Swift volume. Even if the blocksize is increased and the blockchain reduced in size dramatically, given the current energy usage of the Bitcoin blockchain, this would still mean an enormous increase of energy usage versus the current infrastructure.
So yes, maybe my headline above where I use the word ‘never‘ is too negative, but hey – I wanted you to read all this text so I have to challenge you a bit. I do agree though that bitcoin is a great way to replace gold as purely a store of value by the way.
Issue #2: Bitcoin can be made irrelevant by governments
The other thing that bothers me about the crypto community is a strongly held belief that no central government can ever harm bitcoin. That is just blatantly false and if you truly believe this you are delusional.
Ever since ‘China banned bitcoin – again‘, the cryptosphere seems to believe they are invincible.
Below are the ways in which governments can ensure that bitcoin or any other decentralized currency that they do not approve of will not gain mass market traction. Note that this assumes they really want to achieve this. Ie this means they want to ban it completely and not benefit from the potential innovation. I do not therefore think any of the below are likely. They certainly are possible though:
- Start with the miners: in a system where mining consumes massive amounts of energy all governments have to do is outlaw mining operations and lead raids against mining rigs. I do not mean the kind of lacklustre bans we have seen by the way. I mean a complete and full crackdown on miners. Extremely easy to find when you have a map of power consumption in your country. I do know there is a satellite in space now, but we all know the US government could take that down as well if they wanted. So the blockchain method of proof would need to change in order to make this (easiest) point of failure immutable from governments.
- Next, you go with the law abiding citizen (or company doing business): whatever the mindset of many crypto enthusiasts might be, the majority of the population are law abiding citizen. If you outlaw possession of bitcoin at the threat of prison and maybe even throw some high profile bitcoin holders in jail, I guarantee the majority of people in a democratic and rich society (ie all of the West) or living in a regime that has autocratic elements (Russia, China, USA) will follow this rule. Of course it won‘t stop the rise in countries that are in complete chaos, but that is not exactly the mass use case either. This is the side of government actions that would be a strong deterrent also from using decentralized exchanges (next to the US ultimately being able to simply shut down most of the internet by cutting underwater cables or simply switching off Amazon Cloud services…).
Granted, for the above to truly work in a connected world, governments like the US, the EU, Japan, China and Russia would all need to work together. That might be the biggest reason why the above may never happen, but when a system threatens their entire control of the economy, it is certainly not unthinkable. Also I know this would never entirely prevent some people from using bitcoin, but it would kill mass market adoption
Okay, my plane is ready to leave. I want to stress again that I am pro bitcoin and pro blockchain technology, but I do think the above deserves more consideration among enthusiasts. Note that it is purely personal opinion. I would love to hear your opinions as well. Not the ones that simply say „Bah humbug“ (ie FUD), but those that are well founded. I also realize I am no coding expert at all and my understanding of any concepts might be flawed; happy to learn.
Thanks for reading and check out my other articles on the cryptobubble, price analysis and crypto market cap issues.