Passing on Bitcoin

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For my first essay, I’ll pick something that has been all over the news recently. The cryptocurrency Bitcoin has seen its value shoot up tremendously in 2017. Some say it’s a bubble, but others insist it is the dawn of a new age, the age of cryptocurrency.

Though I wouldn’t call myself an expert in much of anything, I do know a thing or two about how Bitcoin works, and I’m firmly in the “bubble” camp. My skepticism is based on a few aspects of Bitcoin that seem to present to me insurmountable limits to its usefulness. If crytpocurrency is the future (and I think there are a few significant hurdles to cross before that happens), I don’t see Bitcoin being “the one”.

During the dot com boom of the late 1990s, I worked as an independent contractor, and did some work with some funny-sounding companies whose names ended with “.com”. Even then, I refrained from investing in these companies* because it was hard to see what the underlying value was to most of them. It was a surreal experience, because everyone was talking about Internet stocks and there was no counterbalancing voice saying “Yes, but…”. Eventually, the .dom boom busted, and most of these companies fell back to earth. From my perspective, we’re seeing much the same thing with Bitcoin.

I should probably create a “top ten list” of problems with Bitcoin, and count backward, but instead I’ll just jump to the biggest issue I see: a Bitcoin does not represent anything in the real world. It is not backed up by anything at all except people’s belief in its value. True, the dollar is no longer backed up by real gold, but in the case of the dollar you have a government promise to pay the face value of the bill. As long as the government exists, the money will be worth something. The prospect of a failing government is a disaster for the value of its currency, and indeed restoring faith in that value is often a top priority for a government in distress (or, failing that, the succeeding government).

Bitcoin dispenses with all of that. There is nobody in the Bitcoin universe vouching for the value of the Bitcoin. It has no objective value at all.

Worse, it actually costs real money to create a Bitcoin, and that cost is increasing every minute. In the beginning, the electrical cost to “mine” a Bitcoin was fairly low, so low that could do it in your computer’s idle time. Today, you need dedicated server farms (preferably hosted in a country with low electrical costs) churning 24/7 to do the same job. Before long, the cost to mine a Bitcoin will exceed its value, and the monetary base (as it were) will halt. I will not even go into the cost in computing cycles and electricity of verifying a transaction, but it is not trivial.

There are alternative cryptocurrencies to Bitcoin, and they all promote lower costs, both to mine coins and to process transactions. As I write this, Mark Zuckerberg is announcing that he is looking into how to use cryptocurrency on Facebook (perhaps to shake a perception that Facebook is Big Brother?), but doesn’t mention Bitcoin by name. When a new leader emerges, do you expect that you will be able to move your Bitcoins to the new currency? Perhaps you can, the same way you could move your MySpace followers to Facebook (which is to say, clumsily).

Before I close, I would like to draw a distinction between Bitcoin and the blockchain, which is one of the enabling technologies. There would be no Bitcoin without blockchain, but it is not correct to say that there would be no blockchain without Bitcoin. So, when you see big tech companies touting their blockchain capabilities (itself ironic because the whole point of blockchain is its decentralized nature), do not take that as necessarily an endorsement of Bitcoin. They are not the same.

I could be wrong about all of this, of course. Although I have a certain background in Internet technologies, commerce, and cryptography, I do not hold myself up as an expert in cryptocurrency. That said, I am old enough to have lived through several bubbles, and I can’t help but thinking that I know one when I see one.

For my money, I’m going to buy a Beanie Baby. At least when that market crashed, investors got to keep some cute stuffed animals.

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Here’s my background on the subject of this essay, so you can decide how much credence you want to put into the opinions I present.

I do not work in the cryptocurrency industry, nor I am not an investor in Bitcoin or any other cryptocurrency. I do understand the underlying technologies and have lived through the boom and bust years, and have a certain sense of déjà vu.



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