Is Bitcoin really the saviour we think it is?
The following are my thoughts based on a combination of sources I have read from both sides of the argument, paired with my own knowledge of the technology. It is based on the current crypto market as it stands at the time of writing. I am not a financial advisor of any sort. DO YOUR OWN RESEARCH before investing in ANYTHING. Trust no single source, this is the point of the blockchain.
TL;DR
Bitcoin is not the saviour we all think it is, at least not yet. Most people invested don’t understand what they own. The Price is in a bubble, and most think that their utopian ideas of what Bitcoin could/should be are reflected in reality which they are not.
Bitcoin is not really decentralized
Bitcoin refuses to adapt to the changing world and crypto market around it
The amount electricity needed to support Bitcoin is very quickly becoming impossible to sustain
Bitcoin Transactions are far more inconvenient than we are led to believe
Bitcoin has much less acceptance and adoption than we are led to believe
Think and research before you invest. Make sure you really understand the reality of what you are buying.
I would like to start this article by saying that I 100% believe in cryptocurrency, but that I do not believe in Bitcoin in its current state. My personal mindset is that, the price of an asset rising, is not, in itself, enough the qualify that asset as a good investment. In other words just because it is going up today, does not mean it will continue tomorrow. When I ask people why they are invested in Bitcoin, the most common answer is; “because its the future”. The astounding fact is that most people invested in Bitcoin right now, don’t understand where it stands in reality. They have this utopian view of Bitcoin. As if it is this perfect and incorruptible entity, that over time, will just endlessly continue to rise. Eventually when you talk to enough people, you find those who do know a little bit about the blockchain and about crypto currency. They state that the reason they are involved is because of; distrust of the centralized banking system we have now, the ease of transactions without the need for third parties, the constant change that bitcoin will see because it is a software, and of course they state its rapidly rising price. The following is an attempt to look under the hood, just a little bit, to show people who might not otherwise care to look, that Bitcoin might not be the saviour they and their friends think it is.
“An investment in knowledge pays the best interest.”
— Benjamin Franklin
Regarding Price
Before I move on to evaluate Bitcoin as a long term investment. I want to talk about its current price, as I believe that this alone should give pause to those thinking about buying in right now. The digital currency has recently broken $17,000 (Canadian) dollars, which is no small feat. Not to mention the fact that most experts say it will continue to rise to at least the $25,000 mark. To those who are pro-Bitcoin this is proof that the currency is being adopted. To those who are against the currency this is proof of a bubble. Unfortunately, I have to agree with the bubble side. The facts just don’t support this extremely high valuation. Even if you view Bitcoin as the ideal cryptocurrency, there can still be no doubt that it is in a bubble.
The only way that it could reach the level of adoption necessary to justify its current valuation would be if it was widely accepted as a method of payment. Now those in the Bitcoin camp are screaming “but more and more merchants are accepting it!”, “Just look at Dell!” (who does not actually accept the currency anymore). While this may be true it is important to look at how they are accepting it. The overwhelming majority of companies who accept Bitcoin today, do not actually accept the currency as payment, they use services like Bitpay. This allows people to buy in Bitcoin, but allows the merchant to receive their currency of choice. Giving the illusion that bitcoin is becoming widely accepted. In reality, the current price of Bitcoin reflects only people’s belief in it and not its actual value, which is, by definition a speculative bubble.
On Decentralization
The reason Bitcoin was established was because of the realization that our money supply is too centralized. This was the idea that first piqued my interest on the technology. Even just a little understanding of how fiat currency works was enough to make my stomach turn. Bitcoin seemed like an incredible way to safely move away from the centralized and corrupt system which caused the 2008 global financial crises. When you put the power to create money in the hands of a few people, guess where that money tends to stay? In the hands of those with the power to create it (for more read this Hackernoon article). Cryptocurrency should take this power back and give it to the masses!
Bitcoin has now become “re-centralized”, if you will. With 5 entities owning almost 70% of the hashing power on the network. Essentially meaning that these 5 players can control the entire blockchain (only 51% consensus is needed for any decision to go through). They can effectively stop any changes to Bitcoin that don’t fit their agenda and have already demonstrated this ability. What’s more is that because of the mining power they control, most of the newly mined bitcoins will stay with these 5 entities. Although it may seem like a perfect utopian idea, to have a decentralized currency, it is important to understand that if given the chance, people will always seek to gain as much power as possible. Cryptocurrency should never give them this chance. Bitcoin’s “decentralized” network is beginning to look very similar to what we have now, what cryptocurrency is supposed to be moving us away from.
On Adaptation
There are still those with hope; “Bitcoin will adapt, it is a technology, and tech is constantly evolving”. Unfortunately over its lifetime, Bitcoin has gone from a revolutionary solution to a massive problem, to being a part of that problem. Bitcoin is a technology from 2009, which has changed very little since its inception. Could you imagine buying a cellphone thats almost a decade old? Could you imagine paying 24x (using current Ether and Bitcoin prices in CAD) what you would pay for one made in the last 3 years? You would get an iPhone 3GS for almost $5,000, vs. and iPhone 6 for $199.
Currency or not, Bitcoin is a technology and just like any other technology or software it needs to update. Since its creation, Bitcoin has demonstrated an almost religious aversion to change, that has been most recently demonstrated by the cancellation of the Segwit2x update. Another example of Bitcoin’s refusal to adapt; proof-of-stake mining. This technology is something that many newer currencies already employ and others (Ethereum) have plans to implement in the near future, while Bitcoin does not. It is not perfect, but it does address massive scalability issues as the electricity requirements of the Bitcoin network are quickly becoming impossible to sustain with current electricity infrastructure.
“Be fearful when others are greedy and be greedy only when others are fearful.”
— Warren Buffet
As a Store of value
Supporters of Bitcoin claim that it is a good store of value, and so far they have been right. Some have even stated that it is a digital replacement for gold. I disagree with this. Gold has physical properties which intrinsically allow it to be a good store of value and has historically been used very successfully as money. Bitcoin does not have this same physical store of value. Those who support it state that its value is in the network, and the difficulty of the cryptography problems that miners must solve to confirm transactions and bring new Bitcoins into existence. However this gives no value to the holders of Bitcoin. It is impossible to redeem a Bitcoin to use any of this computing power or electricity. So again, as stated above, the price increases that we have seen can almost completely be traced solely to people’s belief in it. The more the price goes up, the more investors feel validated, the more they buy, which makes the price go up, and the cycle continues.
As a Means of exchange
Despite those who think Bitcoin will somehow replace gold as a long term store of value, its main attraction is the idea of transactions free of third parties. Although it is possible to transact using Bitcoin, it is very inconvenient. The currency itself is extremely slow, in December 2017 the average transaction confirmation time was 77 minutes, and this shows no signs of speeding up. Rather the opposite is more likely to happen as the number of transactions continues to go up. Could you imagine going to a store, tapping your card on the reader, and having to wait 77 minutes for the transaction to be confirmed? This stat alone should be enough to convince most that Bitcoin will never reach the mass adoption necessary to validate its current price. On top of this, each transaction uses 250kWh of electricity. Just to put that into perspective, the average home in the United States requires only about 30kWh per day. Meaning a single Bitcoin transaction could power the average US home for almost 9 days!
Should you buy Bitcoin?
Before I recommend anything, I want to address all of the things I didn’t touch on so far, like the fact that Bitcoin can be extremely effective for sending money across borders and that it is probably the most secure system ever made. The reason that I didn’t include these is because they are true of any currency run on the blockchain. Any advantages Bitcoin has in these areas are caused by its maturity relative to the rest of the market, and not by the superiority of the asset or software. I am also not saying Bitcoin is the devil, or that you should not invest. I am however saying that you should know exactly what you’re buying into before you jump on board.
“Price is what you pay. Value is what you get.”
— Warren Buffet
What you should or shouldn’t buy really Isn’t for me to say. It depends on your goals, your beliefs, and of course your own independent research and thought into the matter. These are just some of my thoughts, but in the end it is impossible for anyone to know what will happen. What I can say is that; you should never invest in anything you do not understand. In my opinion, Bitcoin is currently valued at far more than the technology behind it is worth, and its long term value is anything but a sure thing. In our democracy today, the vote of individual citizens counts for essentially nothing. If you don’t have the resources of a large corporation, then the government doesn’t really care about you. This is one space where your voice does matter. Don’t throw your money behind something you don’t fully understand just because you’re friend tells you too and he made a few thousand bucks. Put your money into something you are passionate about and believe will succeed in the long run, that is the way to succeed.
Let me know what you think about Bitcoin/cryptocurrency in the comments below, I am always up for learning and I would love to be proven wrong about anything written above.
