Bitcoin breaks $10,000 — but why?
Last month, I was on the hunt for a new VPN service and came across a service that accepted Bitcoin. I’ve been aware of Bitcoin and the other cryptocurrencies for a while now, but I’ve never actually tried to buy something with them.
As an experiment, I did my research on Bitcoin wallets and exchanges. I picked a few providers that were recommended to me or seemed fairly “mainstream”, at least as far as Bitcoin goes. All said and done, I ended up paying more in transaction fees than the actual service I was paying for. Not to mention I had to give my social security number, government ID, and trust several 3rd party services.
I tweeted this after I finished the whole process of getting Bitcoin and then actually using it to purchase something. I don’t use Twitter that much, and only have 160 followers. This Tweet was one of my more popular posts, with 1500 impressions and 7 likes. I think a lot of people agree that it is a problem and needs to be improved before broad acceptance happens.
As I walked through this experience of exchanging USD for Bitcoin and actually trying to purchase something with Bitcoin, it was very clear to me that a lot of the idealistic and lofty intentions behind Bitcoin are not the reality. In theory it should all be great, fees should be low, transactions should be easy, anonymous, and decentralized. But in reality, none of these are actually true.
The BitCoin marketing machine is in full effect. The price relative to the USD is hitting all time highs. Venture Capitalists got on board years ago, and big banks and governments are buying up Bitcoin.
I’ve read about all the promise of Bitcoin — I admire the original libertarian ideals that were behind its foundation. The original ideas set forth by the CyperPunks and Satoshi Nakamoto were idealistic and the technology changed the way we think about money.
Some of the biggest selling points of Bitcoin were:
- Freedom of Payment
- Control and Security
- Decentralization
- Very Low Fees
- Fewer risks to Merchants
I’m going to walk through each one of these and show that while the technology and ideas may support it, the reality of Bitcoin is much different.
Freedom of Payment
No longer do you need to worry about a bank blocking your funds. It is true that Bitcoin somewhat mitigates that risk. But holding a massive amount of Bitcoin becomes a burden. What do you do if you have $1M worth of Bitcoin? You sure as heck don’t want to leave it on an exchange, or even an online wallet, which can be hacked.
The recommended solution is to get a hardware wallet like the Bitcoin Trezor, or simply write down the private keys on paper (yes, paper), and store it in a safe deposit box. But if you do that, aren’t you still relying on the bank?
Control, Security, and Decentralization
The technology behind Bitcoin and the Blockchain is pretty secure*. But it’s not the technology that’s the problem. It’s the users and the ecosystem. Getting Bitcoins used to be kind of a pain. Back in the Silk Road days, it was truly the wild west — and you had to go through hoops to change USD into Bitcoins.
Today — many exchanges have popped up to make it more convenient for people to buy and sell Bitcoin. Coinbase is a popular and user friendly exchange. You can go on Coinbase, fill out some information about yourself, and link your bank account or credit card to the exchange.
But — with this convenience comes a trade off. By using Coinbase to buy Bitcoins you are effectively marginalizing some of the major selling points of using Bitcoin in the first place.
- You now have to trust a 3rd party with your bitcoins
- You are giving up anonymity
- Its no longer decentralized, you are relying on Coinbase
- You have to pay high fees
Now the truth is — and Coinbase would never admit this — but being a middleman is good for business. Is it good for the actual Bitcoin user? Sort of — only in that it helps you buy and sell bitcoins. Every other aspect of the 3rd party exchange is detrimental to everything that Bitcoin stands for.
Coinbase has a vested interested in maintaining the middle man business model. It’s how many things in the current world view work, and it’s profitable. This is something Bitcoin was supposed to change. Rather than change how things are done, it appears we are reverting to the same model that already exists: Big exchanges and Wall Street firms in control of the money supply. Instead of being in Wall Street, they are in Silicon Valley.
I believe that its only a matter of time before the big Wall Street firms get in control of this. How long until Coinbase sells out to J.P. Morgan/Chase or some other big bank?
Very Low Fees
The argument goes something like this: If you want to send a bunch of money to someone in India, you typically have to go through a service like Western Union, which charges very high fees.
Bitcoin has no inherent fees built into the system. Exchanging Bitcoins with someone else is simple, in theory. In your Bitcoin wallet, you simply request a specific amount of Bitcoins, and a public hash code is generated. You send this to the person that is providing payment, and they use this code to send you their Bitcoins. The Blockchain takes care of figuring out if they actually have enough Bitcoin to cover the payment — instead of relying on a central authority.
However, in practice the the process is different. You need to go through a 3rd party service like BitPay. The merchant has to set up an account with them, and guess what? BitPay charges a fee. By the time you get through the whole process, the fees in the ecosystem become prohibitive to using Bitcoin as a currency.
Fewer Risks to Merchants
Bitcoin is like digital cash — when you pay for something, the transaction occurs on the Blockchain, it gets verified, and then it is complete. People always say that Bitcoin poses fewer risks to merchants, because there is no concept of a “chargeback”, like with credit cards. For example, someone buys a product with a credit card, then reports it as fraudulent. Dealing with these chargebacks is a big headache for the merchant.
But what about consumer protection? With Bitcoin, the responsibility is completely on the consumer to protect themselves. If a merchant rips you off, there is no recourse. If someone hacks a Bitcoin exchange that you have money in, its not possible to ever get it back. With a normal US Bank Account for example, the FDIC protects your money up to $100,000. With Bitcoin, no such protection exists.
I get it — Bitcoin was invented partially because there is no government backing, and there is no 3rd party that can steal your money. As I’ve already mentioned, this isn’t true in reality — the trust is just shifted to a different 3rd party.
Bitcoin’s Real Value
The value of Bitcoin relative to the dollar has been skyrocketing lately. There’s probably a few reasons for this, the most notable being that the Nasdaq will allow Bitcoin futures in December. But as far as how to value Bitcoin itself? It’s anyone’s guess. The closest analogy I can think of is the commodity bubble that happened during the 2009 Financial Meltdown. Like Bitcoin, you can’t really value Gold except for that it is a safe haven from the US Dollar. Bitcoin is like that too, except the Dollar is stronger than its even been.
The top comment in this Hacker News posts sums it up pretty well.
It’s amazing to watch the price go up as utility has gone down. In 2012 or so Bitcoin was legitimately useful. Coinbase was around so it was easy to buy. You could move it for reasonable fees / transaction times and it gave you access to Darknet Markets which offered services you couldn’t get anywhere else. We also believed it to be private because law enforcement had not yet developed any block chain analysis software. Bitcoin was the only credible coin, everything else was a joke or lacked critical mass.
Now none of that is true. If you’re interested in privacy you don’t touch BTC with a 10 foot pole. If you want an actually usable currency with speed and low fees you use ETH or any other. And if you’re a financial institution you’re looking at Ripple. Oh and let’s not forget all the BTC forks and exchange hacks.
So — bottom line — Don’t fall for the Bitcoin hype — use Ethereum instead!
