Once More Into the Bitcoin…

Last time I talked about Bitcoin, in 2011, I said this:

Prices quickly went from a few dollars to around $30, although they’ve now backed off a bit to around $20/BTC (Bitcoin).

And, you will notice, I was not predicting great things from Bitcoin (although I DID admire the underlying blockchain and proof of work technology).

Seven years later, let me follow up.

First, despite what I said, I did do some bitcoin speculation myself. I ended up losing thousands, not because I didn’t make the right choices in market timing and investment… but because I was part of the MtGox Hack. I lost several thousand dollars, the equivalent of about five bitcoin at the time, which would have been worth $50,000 today.

So that sucked.

Despite that, I got back in a few months ago, using Coinbase, gained back about the amount I lost in MtGox, sold all my bitcoin and bailed. I’m completely out now.

I’m not saying that Bitcoin prices won’t go higher. They might.

But I AM still saying that I don’t believe in its long-term stability. And let me tell you why.

First, Bitcoin’s promises are solid. A currency with no governmental or corporate transaction costs that people can trust. No Mastercard fees, no currency exchange fees. Move money anywhere and keep it safe for free.

And, in general, the technology behind it seems solid enough to fulfill that promise, at least technically.

But there are downsides.

First, most people use exchanges, or third party payment tools, and don’t really run their own bitcoin transactions directly. So you may not pay Visa their 2%, but someone somewhere is probably taking it off the top. Coinbase charges fees of 1.49% PLUS it charges more than market rate for actual coins. The latter may be illegal, except right now Bitcoin isn’t protected by the same consumer protection laws as stocks and commodities.

Second, whether people use shared wallets or host their own, cryptocurrencies are gone forever when wallets are lost, and in some cases they can be outright stolen. The MtGox example was a huge theft through bugs introduced by that specific system. But whatever the security seems to be for Bitcoin, hackers are increasing their efforts to steal them from you. The upsides of Bitcoin security are also a downside… it makes these thefts incredibly difficult to pursue.

Third, the cost of operating the Bitcoin network is insane, consuming, by some estimates, more energy than 159 countries, and a single bitcoin requires as much energy as a US home uses in a week. This is because the “proof of work” requirement actually requires, well, work. The way Bitcoin works is literally to waste computer resources until, by chance, a “successful” hash is found. It’s cryptographically impossible (theoretically) to shortcut this work, so miners have to burn through massive amounts of computations to get them. Plus, its a race, so once ANYONE finds a good hash, everyone else has to start over. The net effect is massive energy costs, so it is VERY environmentally unconscious, and unsustainable without improvements in technology or the core algorithm.

Fourth, and relatedly, Bitcoin is slow. While it was once touted as a replacement for online shopping, there are, at this moment, 94,313 unconfirmed transactions. The network can handle about 2500 transactions per block max and about 2000 on average, which is less than 5 transactions per second. A block currently takes 10 minutes to create (why this is is frequently discussed). Visa operates at about 2000 transactions per second normally and peaks around 4000; it is rumored to be capable of over 50,000 transactions per second.

Fifth, Note that all of this could change. ANYTHING can change if the community agrees on it. This can be good, in the case of improving transaction speed or reducing energy costs (somehow). But the reality has been that Bitcoin doesn’t change much and consensus is difficult to build causing, in many cases, hard forks… duplicates of Bitcoin that are incompatible with it. It’s not even clear what happens in these forks… if someone has a bitcoin wallet on their PC, and there’s a fork, are they savvy enough to copy the wallet and take advantage of both currencies? Because, for every coin stored in a wallet that is NOT participating in the new forked currency, that coin is probably lost forever. So we don’t know how many coins are really in use in Bitcoin Cash for example.

Lost coins aren’t REALLY an issue… it just increases scarcity, but that’s kind of ok in Bitcoin land, but it may point to deeper problems.

Sixth is that there ARE alternatives. Bitcoin is the most popular only due to name recognition (which itself comes from being first to market). See: VHS/Beta or HD/Blu-Ray. The difference here is that there is a fundamental difference in many Bitcoin alternatives. Ethereum is my personal favorite, because it actually implements a programming language on the block chain… it’s not just for moving currency, but for verifying, using blockchain technology, anything you want verified. This is what blockchain tech is really for. Now I’m not saying that Ethereum is the best investment… I just feel that, it will be more successful in actually transacting things. There’s no particular reason for Ether to be expensive since the supply is managed much differently than Bitcoin’s. In many ways the two aren’t comparable, and people complaining that I compare them would be correct. But since there’s ambiguity in the marketplace, it’s worth understanding ALL the different options, to make sure you’re using the appropriate technology.

That’s enough for now. It’s worth noting that many are aware of this and don’t care, or even find many of my points to be positives, or at least believe that the issues will be fixed. Bitcoin, as it is, cannot sustain itself as a currency-free transaction system, or even as a basic value store. I’d love it if the underlying issues were fixed, and it could fulfill it’s original promises safely, quickly, and without major environmental impact. Until then, we’ve got Nobel Prize Winners calling for it to be outlawed, and it’s difficult to argue that they’re entirely wrong.

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