Bitcoin certainly flames the passions. Usually reserved academics start to sound like fiery pastors preaching against the evil one when topic of Bitcoin is brought up. Central bankers call it intrinsically worthless (THAT should be one of the definitions of irony in the Webster’s). Bitcoin is expensive. Bitcoin wastes electricity. Bad guys use it. Etc. Etc.
Most of the arguments against Bitcoin are wildly off the mark.
It is hard to know where to begin. Maybe we can start with this question. What does intrinsic worth really mean? In the history of human civilization sea shells, cigarettes, rocks (including huge rocks that could not be moved anywhere) were used as money. Does a large rock seem useful to you? Maybe if it’s on top of a mountain and you are defending that mountain in the absence of firearms. Intrinsic worth is a very vague and relative concept. It seems to me like something that came out of Marxist economics, where a product’s worth is related to the amount of labor put into it. Except in the case of money’s worth, it is not the labor put into it, but the non-monetary utility derived from it is what people appear to mean by intrinsic worth. Nobody brings up the fact that utility is relative. Cigarettes may have intrinsic worth to some, but are worse than worthless to others. And same economists don’t ask any questions about intrinsic worth of a $100 bill that costs about 20 cents to produce. I would rather not debate such a ephemeral subject. I believe money is a purely social construct. It is whatever society agrees it is and can be devalued and/or replaced very quickly (think of Weimar Germany, today’s Venezuela or 1990’s post-Soviet republics). But people keep repeating this idea of intrinsic worth of money.
No less an authority than Paul Krugman makes this nonsensical argument about intrinsic worthlessness of Bitcoin. This is from a guy who said in 1998 (time of widespread adoption of email and Netscape Navigator) that by 2005
”…Internet’s impact on the economy will have been no greater than fax machine’s”.
By the way, Krugman’s defense of this mind-boggling prediction was even funnier. He said literally this: “But the main point is that I don’t claim any special expertise in technology — I almost never make technological forecasts, and the only reason there was stuff like that in the 98 piece was because the assignment required that I do that sort of thing. ”
Ehhh, what? An economist (Nobel prize winning nonetheless) admits he doesn’t understand technology and is forced to make predictions about something he doesn’t understand because of an assignment? How can one even begin to think about economy in the 21st century without thorough understanding of technology? And if one doesn’t really understand technology, maybe it is a good idea to stick to some other subject?
Bitcoin is expensive to use
Nouriel Roubini, who harbors particular disdain for Bitcoin, said: “Paying $55 dollars of transaction costs to buy a $2 coffee cup is obviously never going to lead Bitcoin to become a transaction currency.” First off, the $55 figure is a complete fabrication, because in Bitcoin network the sender can actually adjust the fees to make the transaction go through faster. During the speculative mania (we will get to that) point, someone did pay that fee to ensure that a transaction went through quickly, despite the congestion on the network. Fees were never really that high and today they are on the order of 10 or 12 cents. That is to receive money within 30-60 minutes, irrespective of the amount.
What are the alternatives to Bitcoin? Let’s consider bank transfers and credit card payments. Bank transfer such as ACH could take 2-3 days, just to move money between two bank accounts. Unless you want to pay a wire fee (typically $25 or more), you have wait for DAYS to receive your money. So no, Bitcoin is not expensive compared to bank transfers. For some reason critics of Bitcoin always want to stick with examples of small daily payments, but forget to talk about bank transfers, which are completely broken and can immediately be fixed by cryptocurrency.
But Bitcoin opponents keeps using coffee as an example? Maybe they watched too much of Airplane?
But actually, let’s talk about coffee too. Admittedly, credit card payments for something like coffee and most online purchases work far better than crypto at the moment. It is mostly a matter of wide acceptance, as well as chargebacks. Consumers are used to credit card protections using possible reversal of charges if the shopping experience failed them for some reason. However, that is only the status quo today. Remember, the internet in the 1990’s was thought to be too slow to stream video or audio, and certainly too slow to pass results of massive calculations.
Today we constantly stream video (let’s get back to that in a minute) and many calculation intensive applications live in the cloud (like pretty much everything we build here at Larkspur-RiXtrema). So is with cryptocurrency. The fees on crypto are already much lower than credit card fees for most purchases. I guess that cup of coffee now costs about $5 or more. Credit cards frequently charge up to 2%, which is comparable to the current Bitcoin fees and far higher than fees on other blockchains such as Litecoin. The fact that vendor pays the fee is irrelevant, ultimately it is still passed on to the consumer. And who could forget the real expense of credit cards, the various annual/late/interest charges which add up to billions annually. So, the question of paying for coffee with crypto is simply matter of convenience and of reduced costs to consumers and producers. As crypto payment mechanisms spread, it will be quite easy to do. And chargebacks are not insurmountable. Just like with credit cards, we could see companies who will be willing to take the risk of a chargeback and act as a payment intermediary for crypto purchases. Crypto today is like internet in 1990’s. Sure, some think it will remain slow and inefficient (altough as we saw, it is already more efficient and faster than current bank transfer methods), but history of innovation speaks against it.
Bitcoin Wastes Electricity
This one definitely has some merit. The mining algorithm is wasteful by design, no accident it is called Proof-of-Work. Bitcoin was estimated to consume about 26 terawatt hours in the fall of 2017. It probably dropped since the crash of 2018 due to washing out of miners and more efficient mining machines.
Still, Bitcoin does consume a great deal of energy. If you read the criticisms, it does seem quite gratuitous and unnecessary. That is until you consider what Bitcoin mining actually does. It ensures that hundreds of thousands of transactions per day run without centralized server farms. Yes, it does consume as much electricity, as some countries such as Denmark, Iceland, Nigeria, Ecuador (not combined). But that electricity spend protects our only way to transact without relying on or trusting a centralized entity. It is the first time in history that humans are able to create a trustworthy ledger of events that is strongly protected against malicious alteration, without an appointed (usually self-appointed) guardian of that ledger. Surely, that must count for something in the grand scheme of things. But traditional payment channels can consume as much or more electricity. As this insightful article shows (https://hackernoon.com/the-bitcoin-vs-visa-electricity-consumption-fallacy-8cf194987a50 ), the banking system consumes at least 3X electricity of Bitcoin (probably much more today). But banking is not a fair comparison. After all, some of the most important functions around keeping trust and ledgers are done by human bankers, while Bitcoin does it all with a proof-of-work algorithm. Let’s consider some other massive uses of electricity.
All those people raging about Bitcoin’s method of keeping social consensus should think about social networks. Facebook has 2 billion active users (though according to one recent study, about 50% of them are fake, see here: https://www.ccn.com/facebook-billion-fake-account-zuckerberg-con-man/ ) exchanging images and texts. Can you consider how much electricity Facebook uses? Only Facebook as a corporation itself uses 2.5 terawatt hours of electricity. But that does not count the 2 billion active users that it claims. Every gigabyte of data downloaded eats about 2 kilowatt hours of electricity. So, a billion users will consume 2 terawatt of electricity for every gigabyte of data!!! The numbers are mind boggling and Bitcoin is like a Dust in the Wind.
Watching a movie on a mobile device can power a lightbulb for 100 hours. Well, at least it is not like everyone around us is constantly streaming video all day long. Oh, wait…
Another amusing example are click farms trying to inflate Facebook, Google etc. views:
That is why I believe that much of the outrage about Bitcoin’s electricity is fake, brought by people who do not consider the facts or those that are looking to knock Bitcoin for other reasons.
But the bad guys use it!
Before discussing this use of bitcoin in money laundering, please consider some very recent headlines.
- ING paid 775 million euros ($884 million) to close a money laundering probe
- Danske Bankcould be fined $8 billion after its huge money laundering scandal
- JPMorgan Chase Fines Exceed $2 Billion Bank Failed to Report Suspicious Activity Linked to Madoff
And yet all of these (and many more) banks continue to be highly profitable institutions. These fines are simply a cost of doing business. In other words, bad guys will find a way to use monetary institutions with or without cryptocurrency. Outlawing a convenient instrument, because that instrument is also convenient for bad guys doesn’t really add up. While we add it, let’s ban cars, bad guys use it for getaways all the time and not just in movies, see here:
But didn’t the title of the story promised to explain the real problem of crypto? Yes, certainly. Now that we dispensed with fake or overstated criticisms, let’s get right to it. The real problem of cryptocurency is the way attention of participant was hijacked by price fluctuations, as opposed to building useful products. I can only hope that crypto fanatics will take the medicine of the 2018 crash and focus on building useful things.
Cryptocurrency as a new technology is inherently volatile. However, it was made unnecessarily volatile by the irrational exuberance mentality. Unfortunately, many smart people in the crypto community allowed themselves to be carried away with “to the moon” mentality and absurd price gains. Additional volatility made it more difficult to use Bitcoin and crypto for payments. But all is not lost. I think lessons will be learned. In addition, there is possibility for other cryptocurrencies that have algorithmic adjustments to the emission schedule. Bitcoin has limited supply that is set to stop growing forever. This scarcity creates incredible upward price pressure in the bull market. So-called stable coins increase supply during increased activity on the blockchain to attenuate price swings. Currencies are inherently volatile. But crypto has been made unnecessarily volatile thus far.
In part 2 of this post, I will outline some use cases for cryptocurrency and blockchain that could change the economy as much or more than internet itself did (and yes, that would be much more than a fax machine). And if cryptocurrency startups do not start building really useful stuff, they will go the way of the fax machine. And that is a hard way to go, as this video shows: