Bitcoin is bullshit

I’m going to say something up front here — I don’t know much about Bitcoin. I don’t own any, and at this point, I don’t want to own any. I’m not up on all the subtleties of the technology. If you’re inclined to write me off as an ignorant naysayer, you can start right now.

That said… Bitcoin is bullshit.

Bitcoin is universally described as a “cryptocurrency” — a new form of money, a new medium of exchange. As crypto, it’s fascinating and important — the first real-world use for the blockchain concept. But as currency, it is a failure, and will almost certainly continue to be a failure forever.

Currency is a financial instrument, the same as stocks and bonds, real estate… and Bitcoin. All financial instruments are subject to a financial triangle — risk, liquidity, and return. Increasing the value of one of the corners means compromising the value of one or both of the others.

The nature of currency is to be (ideally) very low risk, and very high liquidity, with a slight (and deliberate) negative rate of return.

Inflation, deflation, and bubbles

All modern government-backed reserve currencies are deliberately inflationary. They lose a small amount of value every year, in the 1–4% range. This encourages investment. Investors must put their capital in businesses, or they will slowly lose it.

For currencies, deflation is death, to be prevented at all costs. If a currency deflates, it increases in value over time. Why should capital owners bother to invest in new businesses, when they could just stuff cash in a mattress and be better off in the future?

At the time of this writing, the value of Bitcoin has increased well over 1000% in the past year. It broke $10,000 last night. That’s incredible.

As a currency, that is about as bad is it could possibly be. Not only is it deflating, it is deflating at a rate that far outstrips even the most aggressive investments (such as venture capital). It would be irrational to invest Bitcoin in anything, unless getting out while the getting’s good.

It’s not a currency. It’s barely even an investment. At the moment, Bitcoin is simply a speculative bubble. It’s valuable only because it’s valuable. It is useless for its intended purpose — as a medium of exchange for goods and services.

In other words, the only sane thing to spend bitcoin on is mining more bitcoin.

Bitcoin mining is the new coal mining

A bitcoin mine in Wyoming

According to some reports, bitcoin mining has become a large enough business to be a noticeable contributor to global energy consumption — and therefore, a noticeable contributor to global warming.

Bitcoin proponents argue that the efficiency of mining scales with demand, so when the value of bitcoin stops increasing at its current “I swear this isn’t a bubble!” rate, the mining operations will scale back as well. But, in fact, it isn’t the case right now. When the value of bitcoin is increasing at rates far outstripping any other investment, people will do all they can to mine it.

Digiconomist explored the energy consumption of a single major bitcoin mining operation in Inner Mongolia (China). This one bitcoin mine, which is responsible for about 3.5% of all mining worldwide, is producing 24–40 tons of CO2 per hour — or 2 to 3kg of CO2 per transaction. Now, this is about on par with the carbon footprint of a single fully loaded 747, so it’s not completely outrageous. All the bitcoin mining in the world is maybe a hundred 747s worth of carbon? I could be wrong. Nonetheless, it’s not the end of the world that some critics claim, but neither is it negligible, the way proponents claim.

One thing for sure, though… the transaction volume is tiny, relative to traditional credit cards or cash. We cannot afford to drop a couple of kilos of CO2 with every transaction, for transaction frequencies on par with the frequencies of a proper currency. Even if consumption goes down when the bubble bursts, volume will go up — way up — if bitcoin is ever to be anything but a nerd novelty. It will impact the global carbon footprint in a meaningful way.

So… bullshit?

You can buy this as a sticker, but not with bitcoin

To be clear, I’m not arguing that bitcoin is bad, or should be outlawed, or something like that. I’m just saying that it has become something entirely at odds with its stated intent — a speculative “investment”, not a currency. And I don’t see any way back from that brink.

It’s not hard to find bitcoin proponents who worry that evil governments will suppress the use of a means of exchange that they can’t control. This is almost certainly true. But that’s not the problem right now, and won’t be anytime soon, if ever. The problem isn’t that governments won’t allow it. It’s that no rational person would use it for legal financial transactions other than hipster cred. You wouldn’t buy a car with it, or a house, or even a bagel. Back to our financial instrument triangle — a currency should be low risk, zero (or sub-zero) return, and as liquid as possible. Right now, bitcoin is extremely high risk, with absurd returns, and only minimal liquidity. It can’t be used as currency. And liquidity can’t be properly addressed (in terms of global business use and bank acceptance) until the risk and returns have stabilized. Then there are concerns like security, and inaccessibility in case of death of a bitcoin holder — real world problems we’ve only begun to think about.

Yeah, bullshit.