There is an article circulating today that inspired me to write a response. Link at the bottom. These thoughts aren’t a well crafted argument, just a stream of consciousness. They are literally the notes I wrote as I read the article.
If we truly care about first principles, start by recognizing the difference between a currency and an investment. The properties needed for a successful currency do not lend themselves to being a successful investment. Almost nothing else in this article matters if you don’t get that right, but I’ll indulge anyway…
- The creation of a new technology is not an argument in favor of using it as money.
- Money is not a belief, the value of money is a belief. Subtle difference.
- Kings did not invent gold even though they used it to mint coins.
- Gold has outlived every empire that has minted coins with it, so how can you argue its value is derived from the authority of those empires?
- If Bitcoin “killed” (past tense) the king, why was China able to ban it?
- Market cap of a company can not be compared to market cap of a crypto currency. Nobody would buy an entire currency for its market cap, but someone might buy an entire company for its market cap.
- Currencies are NOT shares. Holding a share gives you an ownership stake in a business with the potential to earn revenue and profits from customers. Holding currencies do not. Holding Bitcoin does not.
- We might want the price of a share to “drive up” but we shouldn’t want the price of a currency to “drive up”
- If you acknowledge that Bitcoin likely will not succeed as a means of exchange, then stop calling it money. Storing value over time is not the only property of money.
- Wash trading is an excellent argument in favor of centralized regulation. Curious how that will be addressed without negatively affecting its de-centralized properties.
- Again, if you acknowledge Bitcoin is not a good medium of exchange, why would the US dollar be threatened by it?
- It is absolutely not an advantage for small countries to give up control over their currency. You stated this like fact, when it’s not. Look at Greece in the Euro, constantly in trouble. El Salvador has not so far shown any benefits from the adoption of Bitcoin.
- Eliminating Bitcoin completely (probably) isn’t anyone’s goal, setting that as the bar is a straw man.
- Gold is one of the best conductors and relatively inert. Saying it has few industrial properties is silly. It’s not used more because it’s too expensive, not because it isn’t useful.
- You are confusing value and price. Value comes from utility. Sometimes the market gives a price to something that has no value. You need to first demonstrate value, then second demonstrate it is priced fairly. Two separate arguments.
- Social proof is definitely a strong motivator, not always for good things.
- The original value of Bitcoin came from a desire to use it as a medium of exchange, which you acknowledged it will not become.
- I have less comments to make about the technical parts of the article. I will just note that being technically functional isn’t enough for something to have better properties that make money good, or have better properties that make investments good, or have better properties that make a service good.
- Proof of stake is not “much” of an improvement, but that’s a different argument.
- I agree that crypto has become a pseudo-religion for many.
- Bandwagon effects are great for Ponzi schemes…
- “If” more merchants accept Bitcoin as payment… Will they also price their goods in Bitcoin? Because if not, why use it?
- You should expand upon the likelihood of those negative scale effects.
Bitcoin Killed The King & Now Network Effects Will Determine Its Future
I have come to accept that Bitcoin should not be viewed in economic terms, it should be viewed in political terms. It is a symbol of an anti-establishment movement. People have always been willing to sacrifice their best interests for a cause they believe in.
Martyrdom for a just cause is not something the faithful fear, it is a virtue to celebrate. That’s why nobody cares about the risk of collapse. But as with all well intentioned movements, parasites with ulterior motives attempt to misdirect passions for personal profit.
The choice for outsiders is whether it’s best to encourage the protest, protect the protesters, or join the parasites.
Blockchains can do some exceptional things unheard of just a few years ago, but the solutions they offer today are often just clunky, slow and unnecessarily complex distributed versions of things that already work quite well.
Blockchains are struggling to find relevance because they are based on a historically flawed assumption — the world shouldn’t need trust. At least at this time in our technological evolution, that’s just not true. Trust is good. Economic success is directly correlated with trust. People like having someone they can hold accountable, the infamous “single throat to choke”
A blockchain also doesn’t guarantee data is correct or meaningful, only that it is reproduced faithfully and securely across nodes. Meaning, there is always a need to trust any system with access to insert data, which means trust is always necessary somewhere else in the process anyway.
However, in an increasingly insecure world, it’s always possible the calculus may change. There may come a day when security trumps convenience or performance for many use cases and blockchains come into favor, especially if they develop a track record of security while other networks are compromised all around them.
I am particularly interested in private blockchains as a bridge to wider adoption, because that will eliminate the obvious concern that many will have about storing confidential data on random nodes in random places — even if they are strongly encrypted.
Trust in cryptography
With cryptocurrencies, even if the blockchain is secure, the company that maintains your wallet might not be. Bitcoin thefts have happened routinely and are irreversible — there is no FDIC insurance for bitcoin.
The challenge posed by the ability of quantum computers to break traditional cryptography, including the algorithms used by Bitcoin today, is of course a much larger issue than Bitcoin alone, but it does pose a challenge to the claims of impenetrable security. Modern security protocols rely upon a key pair, one of which is public and the other of which is private. It is possible to derive the public key from the private key, but not the other way around.
That basic premise is broken with quantum computers, because it will soon be possible to derive the private key from the public key. When that occurs, anyone with a copy of the public key can impersonate a node and initiate a rogue “valid” transaction. Roughly 25% of all bitcoin addresses have a publicly exposed public key, which means tens of billions of dollars are at risk of being stolen the day quantum computers with sufficient speeds hit the market.
The rest of the addresses are still vulnerable when a transaction request is initiated, it takes the Bitcoin network about 10 minutes to settle each transaction, during that time the public key is exposed and if the attacker can crack the private key in that timeframe, or if the owner of that address did not transfer the entire contents of the wallet, they will have an opportunity to insert rogue transactions and seize tokens.
This potential vulnerability is of course known to the Bitcoin developers and they will undoubtably be working on quantum-safe cryptographic algorithms, but they will not be able to go back in time and retroactively fix the vulnerabilities of the past already locked in to the blockchain.
This will be a never ending arms race.
Amazon Basics AA 1.5 Volt Performance Alkaline Batteries – Pack of 20
Add to cart
Amazon Basics 36 Pack AAA High-Performance Alkaline Batteries, 10-Year Shelf Life, Easy to Open Value Pack
Add to cart
There was a time we used to pay for text messages and long distance calls, then unlimited data on your phone happened. Remember roaming charges? Now they only occur when crossing a border — that strongly suggests the extra charges are related to regulations and market constraints imposed by the government as opposed to any technical limitation.
Similarly, if one day bitcoin actually becomes a great way to send money across borders, competition from the banks will quickly render it obsolete as fees disappear. Even if there are regulatory hurdles they need to overcome, either the regulations will change or the government will enforce those same constraints on the bitcoin community. Don’t be so naive to believe that isn’t possible.
Also, who wants to store their life savings on a phone? Ultimately, everyone who has a non-trivial amount of bitcoin will need to trust someone somewhere to guard their wealth, re-creating the bank. So much for de-centralization.
Is anonymity desirable?
Bitcoin is not anonymous, but is anonymity even something we want? Laws against child trafficking, drug smuggling, money laundering, tax evasion, and financing terrorism exist for a reason. Do we really want to make those things easier?
Refugees fleeing war zones with coins that need electricity to function being a model use case is a stretch. Even in the often cited Venezuela most bitcoin activity is at a scale that infers ordinary people are not involved in any way.
“Criptolago’s transaction activity suggests the platform may be used primarily by individuals connected to the Maduro regime seeking to launder funds or move them out of Venezuela.” Source
Every transaction is stored on every full node, forever. A public ledger is the dream of every tax collector because once they discover your public key, they can track and trace every transaction you have ever made. So can your neighbor, boss or ex. A public ledger is the opposite of anonymous, it represents the end of freedom. Remember cash? Never forget.
End the Fed
Central banks are easy to hate because anything powerful well-connected people support is immediately suspicious. But, they also exist for a reason. There is much more evidence that fiscal and government policy has been a bigger driver of wealth inequality and crony capitalism than central banking. If anything, the risk of influence by the well-connected affecting outcomes should be an argument for a central bank, not against it.
Bitcoin is an indictment of our education system’s fundamental failure to teach basic economics to engineers and basic engineering to economists.
Is Bitcoin the “Stalin” of financial systems? Trust no one, highly concentrated power and authority, propaganda to bring along the masses, cheat and manipulate as needed to extract maximum selfish benefit, all couched in fake altruistic motivations to advance the common good…
Is Bitcoin modern colonialism? Is it a bunch of people living in countries with well functioning banking systems looking to profit off the destruction of banking systems in less developed countries.
Is Bitcoin neo-white guilt? Is it a bunch of people living in highly developed economies who believe it is their duty to help the poor backwards uneducated helpless underdeveloped peoples of the world to become more like them by lying to everyone about the virtues of being them.
Is Bitcoin yet another in a long parade of “don’t think too hard, just park 1% of your assets here just in case [string of meaningless scary things]” while the salesman gets rich, cons?
A vacuum of rational arguments
Bitcoin inspires highly emotional responses not only because the early adopter community suffers from metastasized arrogance and retail investors are motivated by FOMO, but also because economists who should be defending society against financial snake oil by publicly challenging Bitcoin on its fundamental flaws are so incapable of understanding its opaque technology they would rather avoid any risk of being wrong and neglect their responsibilities by guarding their ego and saying nothing.
Investments should create value. They should fund inventions, creations, discoveries or contribute something meaningful to humanity. Bitcoin is an environmental catastrophe, wasting massive amounts of electricity to enable trading computer bits back and forth producing nothing in the process. Bitcoin exchanges are almost exclusively used to speculate on the price of bitcoin. That’s not investing, that’s gambling. Many people can become skilled at gambling and consistently make money, that doesn’t make it investing.
To the moon!
The biggest mistake Bitcoin advocates have made is measuring success using price. Bitcoin will not succeed by settling for being a better, richer, longer lasting Ponzi scheme.
“Data from New York-based blockchain researcher Chainalysis Inc. show that only 1.3% of economic transactions came from merchants in the first four months of 2019, little changed over the boom and bust cycles of the prior two years.”
If Bitcoin traders want to be taken seriously, why are they cheering tether pumps? When you have corruption in the ranks and don’t act to root it out, because you secretly enjoy its benefits… you are an accessory. The honest Bitcoin advocates need to stop carrying water for criminals. Bitcoin culture needs a reboot around something other than price.
“Tether Ltd. would then buy Bitcoin with the freshly minted Tether and would promote the creation of a fraudulent bullish market, which would attract more investors to buy Bitcoin, contributing this way to increase the bubble (momentum effect).” Source
Bitcoin is a free market
The price is highly manipulated by “whales” who own a disproportionate number of bitcoins and regularly use schemes that would be illegal on a regulated market to trick unsophisticated speculators into throwing away their hard earned cash.
“Bitcoin’s Gini coefficient is estimated at 0.88 & up, making Bitcoinlandia more unequal than any other human society, including North Korea, which enjoys a comparatively liberal Gini coefficient of 0.86”
Prices have a meaning in a free market. They are a signal. People compare bitcoin to gold or other commodities, but when the price of gold goes up people produce more gold. When the price of bitcoin goes up, you may find more miners in the network but the number of bitcoins that are generated is fixed. So the price signal becomes meaningless. Bitcoin is not intrinsically better at $100,000 than it is at $1 if there is sufficient volume.
Yes it’s true, money is just a social contract. Money is whatever we agree should be used to facilitate trade, but there are many things of value we trade all the time: art, sports cards, classic cars, precious metals, jewelry… Yes, bitcoin is easily divisible which makes it a better unit of account than random collectibles, but no better than dollars. The ability to divide something by a billion is not a meaningful advantage, and even if it was, you can’t defeat the incumbent by only being 10% better.
In fact the volatility of Bitcoin’s price makes it a pretty terrible medium of exchange, who will want to receive Bitcoin as payment for goods and services if by the time they pay their bills the value has dropped 10%? The reality is that very few people are using bitcoin to pay taxes, buy burritos or finance their homes.
In the end, it all comes down to being a store of value. Anything is worth whatever someone is willing to pay for it, but history is littered with things that had value one day and none the next. It reminds me of a story Nassim Taleb tells in The Black Swan, a turkey can live its entire life thinking humans are their best friends: taking care of them, keeping them safe from predators, feeding them… then one day, Thanksgiving arrives.
Calling bitcoin money isn’t enough to make it money if it doesn’t meet any of the criteria for something to be money and if it’s not being used as money in the real economy.
Market cap is the solution
It seems all Bitcoin debates ultimately end in a case for increased market cap because the volatility will end with more liquidity. The problem is that we can’t say a higher market cap is justified just because we want it. A higher market cap can only be justified by increased use, usefulness and adoption of the technology. The promise of value comes first, market cap comes second.
Bitcoin’s genius is its ability to convince people that market cap alone is the desired outcome, not value, and price is the only lever to influence market cap — providing a self-serving argument for those pursuing speculative returns to pretend they have altruistic motives; simultaneously arguing for a better new de-centralized world while begging whales for “pumps” and manipulation to drive the price higher.
Ultimately the best way to get more liquidity in the market is to increase volume. The best way to increase volume is to make Bitcoin useful for something other than gambling. Bitcoin mania behaves exactly like we would expect a massive collaboration (conspiracy?) to defraud the public would behave.
If it looks like a duck…
I will be posting a series of blogs describing the reason I believe Bitcoin is more hype than reality.
Rules of engagement
In my attempt to be intellectually honest, I will state the conditions for reversing my views on Bitcoin:
1 – I would like to see a use for Bitcoin beyond price speculation that is (subjectively) 2X better than what it is replacing.
2 – The use it is replacing must be sufficiently significant to justify the amount of investment in Bitcoin (savings, nodes, miners, wallets, apps, exchanges, energy consumption).
In order for this exchange of ideas to be fruitful, we need to set a very important ground rule — no debate can succeed if the participants are incapable of separating what they “wish” from what “is” — meaning, wanting something to “be” isn’t enough evidence that it “is”. We must start from a shared understanding that reality and fantasy are two separate realms. This discussion must be firmly rooted in what the evidence shows is actually happening.
Let’s get started…