Bitcoin under attack — responding to 7 arguments against cryptocurrency
Economists do not like bitcoin. My favorite university professor is criticizing bitcoin. Bitcoin is not money. Period. My favorite economist (who works for a commercial bank) is even more critical of Bitcoin. It is sinful to call Bitcoin a revolution. Bitcoin is a complete waste of resources.
They miss the big picture. In this text I will examine 7 most commonly used arguments against bitcoin and respond to this criticism.
Bitcoin is a digital currency. But it is much more than that. It is a digital currency that works without the intervention of a central institution. The founder of bitcoin, Sathoshi Nakamoto, came up with a method how two individuals who do not trust each other can make transactions without a trusted third party. Big idea!
Just think about it. We can live without powerful intermediaries! Opportunity to disrupt many industries.
And why would that matter? First, maybe you are not happy that transactions costs are high.You can look at the international remittances market. $600 billion annually are transmitted with average transaction costs being 7%. A lot of money for a relatively simple task. Secondly, even if transactions costs were low, maybe you are not happy that most of the value trickles to one company. Uber is a $70 billion company, while average taxi drivers earn close to a minimum wage. Is that fair? Many people do not like that.
Satoshi Nakamoto demonstrated how we can have a digital currency that works without a central authority. The critics of Bitcoin argue that:
- Bitcoin is very slow and not suitable for payments.
- Bitcoin uses too much energy. It is a waste of resources.
- Transaction costs with Bitcoin are very high. As high as $30.
- It is not a secure method to make payments. Many breaches happened in the past.
- It is not a convenient way to make payments.
- Bitcoin brings benefit to criminals rather than to ordinary people.
- Bitcoin is a bubble and brings value to speculators.
Let‘s discuss each point separately.
By design it takes about 10 minutes to verify a block of 2000 bitcoin transactions. If you make a payment, it will always take around 10 minutes for that transaction to be verified. It is fine if we talk about international payments. We are used to waiting a couple of days for those transactions to be verified. However, if we want to buy a cup of coffee, 10 minutes is too long. For security purposes, the recommendation is to wait for 6 blocks to be verified on top. Which means we need to wait at least 60 minutes. Not good enough. We want instant payments. The beauty of this - we can improve the protocol. There is an army of developers and economists proposing various ideas how the protocol could be modified. Check out lightning network, plasma or proof of stake concepts. Follow the developments. In a couple of years we might have a fast working crypto currency.
2. Energy use
A typical criticism is that Bitcoin uses too much energy. As of today, Bitcoin network uses as much energy per year as all of Bangladesh. To put it differently, one Bitcoin transaction uses the same amount of energy as 27 American households use in one day. This is a big problem. It is related to the above mentioned Bitcoin protocol design. All computers in the Bitcoin network work together to verify a block of 2000 transactions. They actually compete trying to solve a mathematical puzzle by randomly guessing a number. This is called mining. There will be only one winner per 10 minutes. If more computers are added to the network, the difficulty of the puzzle automatically increases, hence more resources are wasted. Not a very efficient system from an economic perspective. The lightning network functionality, or proof of stake verification model could solve the energy use problem. Many other ideas are also on the table. Great topic for academic research: how to fix incentives so that the system is safe, works faster and less resources are used.
Additional philosophical idea: banks have large buildings, expensive IT systems, an army of bank employees and their salaries. Is that a waste of resources or not?
3. Transaction costs
At the end of 2017 the average cost of one Bitcoin transaction reached $35. A complete disaster. Bitcoin was promising us micro-transactions and now we have these huge costs. But that was a temporary spike in costs. Today the average cost per transaction is less than $0.5. Is this still too much? You could also choose to pay nothing. In that case you might have to wait longer (as of today 20 minutes instead of 10). The nodes are prioritizing transactions which pay higher fees. Occasionally high transaction costs is a temporary problem. If we move to a more efficient protocol, we will have instant payments with relatively low costs.
Decentralized Bitcoin ledger is very secure. It is almost impossible to alter transactions in the Bitcoin ledger. So far nobody has done it. The problem is our private keys (passwords). If somebody steals your key, your money will be gone. The best practice is not to store your passwords anywhere online. However, this is not very convenient. If you want a quick and simple way to trade bitcoins you will probably use an exchange, and your passwords will be stored there. If bad guys hack into that exchange, they will steal your private keys, consequently taking all your money away. The critics of Bitcoin cite numerous cases where exchanges were hacked and a lot of money was stolen. They make a wrong conclusion that Bitcoin is not safe. Bitcoin network is very safe. Keeping your Bitcoin passwords in an exchange is a risky strategy. Security and convenience trade-off is a big issue. A lot of companies are working to find a good solution.
Bitcoin critics use a very entertaining example that even at a Bitcoin conference attendants were not able to pay the entrance fee with bitcoins. Yes, this is a problem. We do not have a proper infrastructure in place. It is not easy to buy bitcoins and then to use them for day to day operations. Add regulatory risk to all of this. The companies are not sure what will happen to them if they accept bitcoins: is it legal, how does it affect taxes, what is the proper way to reflect bitcoins in the balance sheets?
There are great videos describing how email worked 30 years ago. It will give you some perspective how much we have progressed with the technology. Long way to go for Bitcoin, but we will get there.
6. Bad guys
Yes, criminals can use Bitcoin. And this is not cool. Criminals can also use cash. Cash is way ahead of cryptocurrencies in popularity among criminals. On the other hand, if you understand Bitcoin, you quickly realize that Bitcoin is kind of a risky form of money for criminals to use. All of the transactions are fully transparent. Anybody can examine all transactions that ever happened in the past, identifying the sender address, the receiver address, and the amounts used. If the police catch a bad guy, they can potentially catch and link all the associates who have ever done business with that particular criminal. If you intend to use Bitcoin for bad purposes, think twice.
7. Bubble and speculators
Big topic. Many economists will argue that there is no intrinsic value of Bitcoin, thus, its price should be zero. It is worse than the tulip mania: people have always bought garbage and we cannot do much about it. Crypto optimists disagree. They argue that Bitcoin can be very valuable in the long run. Might become more valuable than gold or even USD. Great read by Vijay.
I agree with some of the critics that we have too much hype in the crypto market. Even Vitalik Buterin, the creator of Ethereum, has noted that “So total cryptocoin market cap just hit $0.5T today. But have we *earned* it?” We have not created enough utility to justify this valuation. Yes, we have too many speculators in the crypto-ecosystem, whose only goal is to get rich quick. The worst part is that they will use manipulative tactics to inflate the price of some of the coins, and will be proud of it. This harms the credibility of the ecosystem.
However, we are forgetting that Bitcoin was started by technology enthusiasts who are fascinated by the idea that Bitcoin and blockchain can change the world. We can shift the power from large intermediaries to ordinary people. If you happen to meet these guys, and hear their story, you will understand that Bitcoin has a lot of potential.
Bitcoin is like a newly born child. It cannot walk, it cannot talk, it cries during the nights, parents cannot sleep. Complete misunderstanding, waste of time and energy. We need to be patient, let it grow and become stronger. We will see beautiful things coming out of this invention.