Bitcoin Criticism Answered

Bitcoin Criticism Answered

Many powerful people and institutions have come out against Bitcoin; we discuss this. Some of the detractors are the current Fed Chairman, The Bank for International Settlements, and the Washington Post. I cover why I, as a US citizen have decided to own Bitcoin.

Fed Chairman Powell on Bitcoin

Jerome Powell told members of Congress that “relatively unsophisticated investors see the asset go up in price, and they think: ‘This is great; I’ll buy this.’ In fact, there is no promise of that.

First thing, there is no promise that any investment will go up. Relatively unsophisticated investors will make many mistakes, as will the sophisticated ones. The only real differences between sophisticated and unsophisticated investors are the ability to strategize and quantify risk (and their net worth if you’re using the textbook definition).

But, instead of just saying “Bitcoin is risky,” which would have been true and a fair warning; Mr. Powell seems to blame investors for taking an interest in Bitcoin, which has in fact gone up quite a lot over the years (although the price is very volatile). See below:

Year High Price
2010 $0.37
2011 $32
2012 $13
2013 $1,009
2014 $867
2015 $459
2016 $998
2017 $19,290

Mr. Powell goes on to say:

The Fed chairman also said cryptocurrencies are not real currencies because they have no intrinsic value.

This attack doesn’t make much sense. What is intrinsic value after all?

Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis.

Bitcoin may not be a company, but neither is the US Dollar. A publication from the St. Louis Fed’s own website puts it plainly.

Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.

While the US Dollar is backed by the ability of the government to enforce tax collection domestically and the ability of the armed forces to police it overseas; Bitcoin is an open source project that has proven robust because it has no single point of failure. Unlike the US dollar, which inflates away over time, Bitcoin has a limited supply and a growing user base, which causes it to increase in value over time. Bitcoin is backed by game theory, an active open source community and strong encryption. There is no way for someone to spend your Bitcoins unless they get your private key.

Sure Bitcoin is an experiment, but so far it appears to be working.

Bitcoin is too volatile to be a currency

In a recent article in the Washington Post, Matt O’Brien said “Bitcoin is Still a Total Disaster.” The only point that he seemed to raise in this article was that Bitcoin’s price is volatile.

It’s almost as if people think that there’s a Bitcoin head office somewhere. Every day the team of hundreds of hyped-up nerds all gather for the solitary purpose of making Bitcoin’s price “stable.” Each day they head into their cubicles and do their best after a pep talk and some Monster energy drinks. But, at the end of they day they hang their heads in shame, concede defeat and say to each other “We may have failed today, but we’ll nail it tomorrow for sure!”.

I’ve covered this in the past, by showing with data that Bitcoin is actually becoming more stable over time on its own. But, today I’d like to plug an author named Nic Carter who dealt with this in a different way.

Claim: Currencies are meant to be stable

“There’s one thing a currency is supposed to do that Bitcoin never has. That’s maintain a stable value.”

This assumes that Bitcoin is a currency, and that the definition of currency is normative (“x should do y”) as opposed to descriptive (“things of type x have the qualities y and z”). I’d classify Bitcoin the protocol as a complete monetary system, and Bitcoin the unit of value as a commodity money, which has the potential to become a gold-like reserve currency. Commodities fluctuate — that’s what they do.

Bank of International Settlements on Bitcoin

First, cryptocurrencies simply do not scale like sovereign moneys. At the most basic level, to live up to their promise of decentralized* trust cryptocurrencies require each and every user to download and verify the history of all transactions ever made, including amount paid, payer, payee and other details. With every transaction adding a few hundred bytes, the ledger grows substantially over time. For example, at the time of writing, the Bitcoin blockchain was growing at around 50 GB per year and stood at roughly 170 GB. Thus, to keep the ledger’s size and the time needed to verify all transactions (which increases with block size) manageable, cryptocurrencies have hard limits on the throughput of transactions (Graph V.4, centre panel).

It’s a shame that this was even published, because it goes to show that the Bank of International Settlements does not understand Bitcoin scaling. We simply cannot take the power being used by miners, or the size of the blockchain and multiply that by X to know how big it would be in the future. Why? Because Bitcoin is scaling with the Lightning Network, and that’s simply not how it operates.

Transactions that occur on the Lightning Network are not written to the blockchain. They happen between state channels on a second layer. The Lightning Network will handle millions of transactions per second, and the only transactions that the base layer will know about (the blockchain), are when people add funds or remove funds from the Lightning Network (opening and closing their channels). These transactions will not require more miners, and therefore will have a minimal impact on the increase of electricity demands as well.

This video is from ten months ago, before the Lightning Network actually launched, but I think it does a great job of covering the bases in five minutes. Watching this would have helped the BIS save face.

Why would a US Citizen want to own Bitcoin?

Many people have said, “look, I live in the USA and our money works fine. What do I need Bitcoin for?”.

This is a valid argument. In fact, I agree that Bitcoin is not for everyone, especially at this stage. Bitcoin is very volatile, experimental, and is still in its early stages of development.

The best I can do here is to tell you why I own Bitcoin as a US citizen.

  1. I used to be a software engineer and from a technical standpoint, I think Bitcoin is cool. Maybe some people will think I’m a nerd, but I’m really curious about where it might lead and what amazing things could be and are being built on top of it.
  2. I started buying Bitcoin back in 2015, when it was around $250 for a single Bitcoin. As you might imagine, those purchases from the early days turned out to be quite rewarding, even at today’s price. So, I’ve seen how powerful and effective Bitcoin can be first hand.
  3. After doing a lot of research, I think I can say honestly that I actually understand Bitcoin. I know how to spot a bubble, how to tell if Bitcoin is growing or dying, when to get in and get out, and I know why it’s an important project. This skill set has been very rewarding for me and my investors (and it could be for you too).
  4. The idea of a cross national currency with no central point of failure is just awesome. There are people suffering, really suffering out there because of failing national currencies. Bitcoin has even saved people’s lives in Venezuela (and possibly Zimbabwe too).
  5. I used to be a bit of a gold bug, and I am interested in Austrian Economics. Bitcoin resonates with me because I like the idea of having a limited currency supply. Some people will say that it’s no way to run an economy, but the way I see it, is that we’ll have many options in the future. People will be able to use inflationary and deflationary currencies as they wish based on their preference or needs. Keep in mind that private banks and states used to issue their own currencies in the United States, so we have had other monetary systems in the past. Those banks and states each had their own way of doing things, some were more restrictive than others but somehow we still had commerce. I see a future like that, but all digital and happening at lightning (pardon the pun) speed.
  6. Looking at the raw data from the Bitcoin network, I don’t know how anyone could not be amazed. I mean we’ve got nine years of exponential growth (look at the number of transactions, the computational power of the network, the growth of the Lightning Network, all growing at log scale), it’s uncanny. This type of growth has happened before with other information networks, but this time the information is money. Money as a data type, what?!

Why invest in Bitcoin now?

I’m sure many of you are familiar with the diffusion of innovations. This is the idea that certain segments of the population will adopt a new product or technology before other segments.

Some people will get in early (the innovators and early adopters) and they will bear the most risk and reap the most reward. People who get in later (the late majority and laggards) will have less risk but also less reward.

diffusion of ideas

Bitcoin is somewhere on the left side of this chart, maybe just entering the “early adopter” phase. If you’re thinking about getting into Bitcoin for the long term, there’s no time like the present.

One word of caution however, we are coming out of a bear market still. The price of Bitcoin will likely go lower from here before it stabilized and starts to recover. Never invest more than you’re willing to lose and remember that timing the exact bottom may not be possible.

Conclusion

We need to push back against the trends in our society towards low information and sensationalism. These are exacerbated by Bitcoin, which is new and I’ll admit does have a steep learning curve (I’m still trying to wrap my brain around elliptic curve multiplication).

There are many things you could say about Bitcoin; actual points of concern. It troubles me that the things we see in the headlines are often based on misinformation.

Bitcoin can be used for bad purposes, but then again so can anything. Terrorists have used planes, cars and US dollars to carry out their attacks, but I think very few people would believe that we need to ban those things. Bitcoin is volatile, it’s experimental, and it just might change the world.

Leave a Reply

Your email address will not be published. Required fields are marked *