For the last two years, I have been following the rocky road of Bitcoin, as it soared on the promise of revolutionary change and collapsed in a fog of fraud and bad economics. After losing almost 85% of its value in the last twelve months, plunging from $1,200 to $200, has bitcoin finally reached the end of the road? Does it have any chance of recovering or is it destined to simply fade away?
Now some people claim that the price of bitcoin doesn’t really matter. These people either have no clue what they are talking about or are trying to downplay the damage. The price is extremely important. The reason is simple, bitcoin has no internal economy. For example, I am not directly affected by the exchange rate of the Euro because I receive my wage in Euro and pay my rent, electricity, food etc in Euro. So if the Euro drops 10% against the Dollar, this doesn’t directly affect me as I have no need for Dollars (it has a small indirect effect on me through its affect on trade and the wider economy, but let’s leave that to one side). In comparison, almost no is paid in bitcoin or can pay their rent, electricity etc in bitcoin. Therefore each time they wish to trade they must exchange fiat currency for bitcoin. So every time the price drops, you have to pay more for electricity, rent etc.
Bitcoiners love to point to Bitcoin Obituaries as if to point out Bitcoins resilience. “Look, at all the people who claimed bitcoin is dead, how wrong were they!” However, if you actually look at the website, it’s clear that few articles actually claim bitcoin is dead, rather they say it is dying (which it is) or that it will never take off and be a widely used currency (which it hasn’t). Far better would be to look at a compilation of outrageous claims of $1,000+ bitcoins and the hyperinflationary collapse of fiat currencies.
Bitcoiners like to point to the number of retailers who use bitcoin and claim that the infrastructure is strong (or unwittingly quote politicians during the Financial Crash by claiming that “the fundamentals are sound”). There are frequent posting of businesses beginning to accept Bitcoin in forums. However, even on pro-Bitcoin sites, there are few reports of people actually using Bitcoin to buy things. While records are kept of how many places begin to accept Bitcoin, few are kept of how many keep accepting it or how many of the customers actually use Bitcoin. In fact, the majority of retailers automatically convert the Bitcoin they receive into fiat, making the Bitcoin part of the transaction completely pointless. Accepting Bitcoin is more of a cheap, one-off publicity stunt than a proper element of the business.
Bitcoiners love to compare bitcoin to the internet, however there are several problems with this. First of all, you are comparing apples and oranges, by mixing a technology with merely one applicant of it. Bitcoin has more in common with one internet company rather than the whole technology. Bitcoiners seem to forget (or are too young to remember) that during the 90s there was a massive IT bubble full of wild promises of completely changing how we live that ended up crashing into nothing (I’ll let you draw your own Bitcoin parallels.) Just because the internet was a revolutionary new technology, didn’t stop many IT companies from collapsing.
The biggest difference between bitcoin and the internet is that the internet offered a major advantage that no one else had. You could freely send and receive information instantly all over the world. The advantages of e-mail over regular post were obvious and enormous. Whereas its not clear what the main advantage of bitcoin is. If I want to purchase something online, I can already do this with debit/credit cards or Pay Pal. If I want to send money, I can do this with a bank transfer. The technology already exists, all bitcoin claims to do is replace paying fees to banks with paying fees to exchanges.
Bitcoiners are getting desperate in their defences of the currency. Some like to point out that despite massive collapse, the price is still higher than it was two years ago. Of course it is, two years ago, hardly anyone had heard of the currency and it was still spreading. All start ups register enormous proportional growth in the beginning (after all, they are starting from nothing), its only impressive if they can maintain it with absolute gains too. If I set up my own currency and convinced one friend to use, that would be 100% growth, which is only impressive on paper. After all, over six years Bitcoin up +∞%. This reminds me of politicians who claimed that the 2008 crash wasn’t so bad as the economy only fell to 2003 levels .
One of the main claimed advantages of bitcoin is that it is free. This is not true. In reality, bitcoin is heavily subsidised. You see, bitcoin transactions only occur when they are confirmed by miners. These miners don’t do this out of the kindness of their heart, but because they receive bitcoins in return. This system holds so long as the price of bitcoin is high. However, if it drops too low, then the mining costs outweigh the rewards and miners will either have to start adding transaction charges to every transaction, thereby forcing bitcoiners to pay the full cost of the transaction, or else shut down. Either way involves higher costs and a slower service.
Bitcoin mining is a major problem source. In order to create/mine Bitcoins you need advance computers with high processing power. Due to economies of scale, these computers (or mining rigs) are concentrated in a few hands which every so often threaten to seize control of the whole system. Without getting too complicated, if 51% of the bitcoin mining is in the hands of one group, they can effectively destroy bitcoin (by double spending bitcoins). There is also the problem that mining involves serious costs not only in equipment but also electricity. If the price of bitcoin falls below the cost of mining, then it is uneconomic to continue mining. If they halt mining, then transactions will not be processed. The falling price of Bitcoin could lead to a death spiral if miners halt processing transactions because the price is too low. This will push people away from Bitcoin and push the price even lower and so on.
One of the most ridiculous and unexplainably popular ideas in the bitcoin community, is that bitcoin will be used by billions of people in third world countries who do not have access to banks. The idea that desperately poor people with limited access to basic necessities will have the technology and the expertise (or need) to use bitcoin is laughable. It is delusional to believe that Bitcoin will be saved by people without access to running water. The people of the Third World have bigger concerns than a decentralised peer-to-peer electronic currency.
Many bitcoiners have the odd notion that Bitcoin somehow challenges the banking system. Perhaps they are not familiar with how banks work, because even if everyone used bitcoins, we would still need to borrow and save. International transactions are a tiny part of a banks’ operations and even if they did lose this business, they would not go bankrupt. The Financial Crisis of 2008 would have been as bad or worse if Bitcoin was the global currency instead of the Dollar. Housing bubbles would still occur, banks would still be greedy and bailouts would still happen. Sure the banking system needs reform, but Bitcoin is not going to do it.
One of the signs that Bitcoin is dying is that hardly anyone actually uses the currency. Records show that only an insignificant number of Bitcoins are used on a daily or weekly basis. A mere 10% are used in a month and a massive 70% of Bitcoins have not been used in at least six months. A currency that people don’t actually use to buy things is a failure. Looking at its history, it never met the basic criteria of a currency and was instead merely a speculative investment (aka “Get Rich Quick”).
Some claim that Bitcoin doesn’t really matter, what really matters is the blockchain. Apparently this is a new ledger system that will change the world. Maybe accountants might get excited about that prospect, but the rest of us don’t care. Why any company would want its entire trading record to be public knowledge is byond me. Claiming the blockchain is revolutionary smacks of desperation and is like watching a drowning man clutching at straws. Bitcoin is a sinking ship and the blockchain is not going to save it.
Another common Bitcoin argument is that it is protection against inflation or more usually phrased as protection from evil Central Bankers stealing your money with inflation through the printing press. This is a common libertarian and Austrian economics argument, and was particularly common when Bitcoin was created in 2009 and Quantitative Easing was beginning in the US. However, since then the argument has lost most of its credibility. The tsunami of hyperinflation that was supposed to destroy the Dollar never happened. Instead inflation has remained as low as its always been for the last 30 years leaving the doomsayers looking foolish. Bitcoin is essentially a massive bet that fiat currencies (especially the Dollar) will suffer high inflation, if not hyperinflation. As an economic experiment its certainly interesting, but the verdict is clear, it failed.
The lack of control over the supply of Bitcoin has turned into a major weakness, not a strength. Throughout 2014, as demand for Bitcoin fell, it would have been sensible to stablise or freeze the supply of Bitcoins. Instead, the supply increased from 12 to 13.5 million. Increasing supply in a market where demand is falling, makes the problem much worse. In the irony of ironies, Bitcoin, a currency designed by people who despise Central Banks ability to create money and are convinced that excessive creation will destroy fiat currencies, is being destroyed excessive expansion of the money supply. At least it is providing a lesson in showing the value of leaving money supply to the discretion of Central Banks, it allows them to adjuste it to suit the needs of the economy.
All of which is to say nothing of the rampant fraud and theft in the Bitcoin community. Be your own bank has gone from being a slogan to a warning against theft, unless you want to get robbed, you need to provide the security of a bank. Many bitcoiners have gone to the level of spending as much on security as their Bitcoins are worth or storing them in paper wallets, which essentially means taking them off computers and away from the internet. Bitcoin, revolutionary internet money that it isn’t safe to keep anywhere near the internet.
You could fill a book with the flaws of Bitcoin and why it will never take off. Its had its 15 minutes of fame and now everyone has moved on. The community is shrinking and growing more desperate in its attempts to pretend everything is fine. Currencies rely heavily on network effects to survive, if no one else uses one then there’s no sense in you using it. The Bitcoin network is fading away and the price is destined to continue its downward march. This is likely to be the last year people take Bitcoin seriously (if last year wasn’t already). Whether Bitcoin disappears with a bang or a whimper, the end is coming.