I’ve noticed that some of my old articles about Bitcoin have been getting a lot of attention lately. I first started writing about Bitcoin back in 2013, when I considered it to be a bubble that would soon burst. When it did burst, I wrote about its flaws and figured that would be the end of the story. I mean after seeing people dramatically lose a lot of money extremely quickly, who else would want to jump in? After seeing a bubble collapse why would anyone want to repeat the process?
Yet as the price of Bitcoin soared to almost $20,000, I got an increasing number of “I told you so” and “Look who’s laughing now” comments. I was just a dumb statist shill who failed to recognise the glory of Bitcoin and missed my chance to get rich as a result of it. In fairness, I was wrong to predict that Bitcoin would fade away, I made the mistake of presuming people would learn from their mistakes and not be swindled by another bubble. As you can imagine, these comments quickly disappeared after the price crashed by three-quarters to $6,000. Funnily enough, my blog still gets shared on Bitcoin forums, however this time it is used to show that dramatic crashes are normal events, if Bitcoin can survive 2013 & 2014, it can survive 2018. There seems to be little consideration of the idea that massive price crashes shouldn’t be a normal feature of a currency or asset and wild volatility should be treated as a bug not a feature.
Since the collapse, the price has risen considerably and currently sits at around $10,000. Most of the discussion now focuses on which direction the price will go, will it rise again or face another crash? Did we just experience a market correction or the beginning of the end?
However, this is missing the point. At the end of the day, Bitcoin is supposed to be a currency, so it should be judged on how well it works as a currency, not if it is a good get-rich-quick scheme. It doesn’t matter how high or low the price goes, if people don’t use Bitcoin to purchase goods or services, then it has failed as a currency.
If you read the comment section of any article on Bitcoin, you will see the same type of comment appearing again and again. There is also people mourning the fact they didn’t buy Bitcoin when it was super cheap several years ago, if only they had, they’d be rich now. If you go to any Bitcoin forum almost all the comments are telling people to hold (or hodl) and not sell their coins. It’s extremely rare to see anyone mentioning ever buying anything with Bitcoin. This is a bizarre thing to say about a currency. What sort of currency discourages people from using it?
There is a lot of debate over whether Bitcoin is backed by anything. It is not backed by any state, but in theory its value should be backed by the Bitcoin economy, the people and businesses that buy and sell with Bitcoin. The problem is that the Bitcoin economy barely exists. A mere handful of businesses accept Bitcoin and those that do report few customers ever use it. As it’s a deflationary currency, people have no incentive to actually spend the coins, in fact they are punished by doing so.
This was bad enough but recently the Bitcoin economy received a mortal blow. Bitcoin advocates traditionally promoted the currency by claiming it was a fast and free service. Supporters claimed/hoped it would replace traditional money transfer and payment methods which they believed charged outrageous transaction fees and had excessive waiting times. There was even wild talk of “Bitcoin for the unbanked” with the aim that Bitcoin should target poor people in 3rd world countries. The idea (which never really made any sense) was that Bitcoin was somehow easier than using a bank for poor people isolated from the global economy.
However, all these dreams were shattered when transaction fees sky-rocketed in December. In Bitcoin, all potential transactions are put in a queue to be confirmed, but you can jump the queue by offering to pay a transaction fee. Recently, massive backlogs formed which forced users to either wait days for transactions to process or pay enormous fees. These fees grew to an astronomical size and were over $10 per transaction for most of December and January and reached a peak of $35 for the median transaction. These fees are far in excess of anything a bank or credit card charges and make it completely impractical to use it as a currency. How are people supposed to use bitcoin in a café if the transaction fee costs more than the coffee and they must wait days before the payment is confirmed? Due to the volatility of bitcoin, by the time the payment has processed, the value of Bitcoin would have changed significantly, leading to large over- or under-paying.
This has caused a major crisis for the Bitcoin economy and discouraged many from using it as a currency. Some of the biggest users of Bitcoin have discontinued their service because it is just too chaotic. Steam (the popular online games vendor) and Stripe (the credit card processor) both stopped accepting Bitcoin due to high transaction fees and the long waiting time. Most embarrassingly of all, even a major Bitcoin conference refused to accept payments in Bitcoin. When even the strongest proponents won’t accept Bitcoin, you know it’s in serious trouble. All of this effectively killed the use of Bitcoin as a currency. Transactions dropped off completely, which eased the pressure until fees finally dropped below $1. Yet this came at the cost of destroying the Bitcoin economy and any hope that it could be used as a currency.
What makes all of this even worse is that Bitcoin was buckling despite the lack of use. As mentioned earlier, there are very few places you can spend Bitcoin and very few people use it as a currency. If the system nearly crashed under such light weight, how could it possibly function under widespread adoption? If merely the population of a small town tried to use Bitcoin on a daily basis, it would overload the system and send fees sky-rocketing again. Bitcoin can only manage a maximum of 7 transactions per second in theory and in reality, it’s more like only 3. How can this replace existing systems like Visa which can handle 60,000 per second.
These flaws are well known in the Bitcoin community but the design of the currency prevents a solution from being found. Bitcoin advocates love to boast about how it is decentralised and no one controls it, but it turns out this means no one can fix any problems that appear. So, despite the fact that most people agree there are flaws that need to be fixed, it has been impossible to repair them. In theory, changes can be made if there is sufficient “consensus” but achieving this has proven impossible. For months the community was torn apart by debate over increasing the block size which would have prevented the fee crisis, but its decentralised nature made it too difficult to reach consensus.
Another major flaw of Bitcoin is the enormous amount of energy required to run the system. It is estimated that Bitcoin uses as much energy as the entire Republic of Ireland (my country). This is especially ridiculous when you consider how little Bitcoin is actually used, the vast majority of people simply buy Bitcoin and hold it. Imagine what the energy consumption would be if large numbers of people started using it on a daily basis?
Some people might agree that Bitcoin is flawed but argue that the blockchain is the real innovation. But to be honest the blockchain is a solution in search of a problem. Here is an excellent discussion of how no one has found any use for it after ten years. Most claims are just scraping the bottom of the barrel or extremely niche uses that the vast majority of people will never need. For example, it is claimed you can use the blockchain to confirm and publicise contracts. But this service is already provided by lawyers, who would still have to check blockchain contracts, so it’s merely adding an extra step to the process. Plus, not many people want their contracts to be public knowledge.
Or tokens could be issued and linked to products to ensure they aren’t stolen or forged. However, the tokens aren’t actually linked to the product, so I could easily steal the product while sending the token on elsewhere. This system doesn’t provide anything that existing stock control measures don’t already do. There are claims it can be used to vote, but no one seems to realise that this completely undermines the secrecy of the ballot which is a cornerstone of democracy. Smart contracts could be established on the blockchain, which for example could automatically pay bills like rent or automatically send money once goods arrive. The problem is, this technology already exists, it’s called direct debit.
When you have a hammer, every problem looks like a nail, and blockchain advocates act as if the blockchain is such a hammer. No one interviewed businesses and then designed the blockchain to solve important problems they face. Instead we have people in IT who presume that there is an IT solution to every problem. The technology to quickly send money and information already exists, the reason it doesn’t happen is because people want to check and confirm the information is correct. For example, if I order a product on Amazon but the dealer doesn’t send the product, I can get a refund from Amazon or my bank. With bitcoin, they can take my money and run.
This is without mentioning the rampant theft and fraud in the Bitcoin community. This is such a widespread problem that I hardly need to elaborate on it. If nothing else, at least it shows why financial regulation exists and how terrible the world would be in a libertarian free-for-all.
Some might say Bitcoin is new so it still needs time to gain widespread adoption and for the infrastructure to be built. But it has been in existence for nine years, which in internet time is an eternity. People didn’t need nine years to be convinced that email was useful (if no one was actually using their email accounts after 9 years, people would have considered it a failure). At what point can advocates stop asking for more time? 2020? 2025? Will people still be writing articles in 5-10 years time comparing Bitcoin to the early days of the internet and claiming it still needs more time before it catches on? People are already moving on and there has been an enormous growth in alternative cryptocurrencies to Bitcoin. I don’t know enough to judge them, but it’s clear there’s a large number of people who believe other currencies work better or offer a better chance of getting rich.
So, that’s why regardless of what the price is, Bitcoin is still deeply flawed. It doesn’t matter how high or low the price soars, if people don’t spend it then it has failed as a currency. That doesn’t mean Bitcoin is worthless, most people use it as an investment and speculative asset, in which case nothing I have said would discourage them. If you bought Bitcoins in the hope of getting rich, good luck but don’t pretend it’s the currency of the future.