Bitcoin for skeptics — Part I
(this article is a transcript from my original post on Improve-in’s Blog)
As with any disruptive technology in its early moments, there are some skeptics (myself included) whose first reaction is to question the value proposition. And if we also consider that such technology expects to change money, the skeptics will quickly grow in numbers. Luckily, that is beneficial and if you are a Bitcoin skeptic reading this article, welcome!
I’m going to start by saying that it is OK to not believe in promises, no matter how impressive they are, and to try to use critical judgement to draw personal conclusions. In the same way that it is important to keep an open mind in order to be permeable to new information and questionings, and analyze them properly later.
My intention with this piece is to cover the most common critiques that I’ve found about Bitcoin and try to provide answers that can address existing questions. In those cases in which, by lack of space, I cannot expand over a long and boring answer I intend to at least motivate you to question those assumptions that sometimes we take for granted. If that leads you to look at Bitcoin with different eyes and appreciate it as the new and improved alternative to money as I do, excellent, and if not it’s fine too!
I will try to tackle each critique independently, so feel free to jump directly to those that you think match your skepticism.
What is Bitcoin backed by?
This is the question I have most often heard when I talk about Bitcoin. In many cases alluding to the obvious comparison with other currencies such as the US dollar.
The first thing we can clarify, because sometimes this confusion exists, is that there is no sovereign or state currency today that follows the gold standard and is backed by this or another precious metal. To put it in simple terms we can say that currencies such as USD, GBP, EUR and others have their backing in the trust that the society places in the authorities or governments that issue them, in addition to the coercive factor that force people to use these currencies. Some cases in which the currency of a state is “backed” by the currency of another state like the USD, the trust or obligation in that case will be partly transitive.
That being said, it’s worth asking: if the currency were backed by gold, how is gold backed? What is special about gold, how useful is a piece of gold to me? Is it necessary for a currency to be backed by something else?
Money is a social tool of economic coordination, it is a symbolic representation of the value we confer to things. In other words, it is a social construction and it’s greatest “backing” (if we use that word) is the trust in that the other members of society will use the same money as me. The evolution of this social construction made us use different mechanisms at certain moments in human history. The fact that we were born in an era in which the predominant form of money is the fiat “paper money” (represented mostly in digital form) issued and controlled by states, is only a historical circumstance. But it is not at all a unique and essential representation of what money is or should be.
The best we can do is to know more about the history of money (a topic that could take us hours and hours of debate) to break down some preconceptions, and once we do we will be able to decide if we believe that money should or should not be issued by a government or to be backed by something, and if we believe that an alternative is now possible.
It is only useful for illegal or criminal operations because it is anonymous
Let’s start by clarifying that Bitcoin is not anonymous, instead it is pseudonymous. This means that Bitcoin does not guarantee anonymity in a fundamental way. There are methods to increase privacy, but nowadays they require a certain knowledge and proactive attitude.
In the event that it were anonymous, would that be a problem? why? Implementing controls and traceability on money flows, really solves some real problem in the world? Cash money, for example, is a means of exchange that has a high degree of anonymity, as was the exchange of metals in other times. We didn’t decide that it was a valid reason to ban them.
Anonymity and privacy are related but different concepts, and they are also important to consider. In the same way it is important to understand that automatically associating anonymity or privacy with criminality is a simplistic and, I believe, mistaken view. For example, the fact that we operate with cash money, or that we are not willing to publish our personal finances in our social media profiles, does not mean that we are criminals or want to commit any criminal act.
Any technology has the ability to empower the human being, both in what we believe is good and in what we believe is bad. This is a sensitive topic that usually generates debate, that’s why I think it’s important to learn a lot about it, understand all points of view and draw your own conclusions. You can start by asking “why.”
It doesn’t have intrinsic value
When we talk about something intrinsic, we talk about something that is of the essence of the object that we are evaluating. The problem with this statement is that to talk about “intrinsic value” is an oxymoron: value is something completely subjective, it is not an attribute of the valued object. Following this reasoning we could say that there is nothing that actually possesses intrinsic value.
Value is a preference that each one of us assigns to something. A glass of water might be worth something to us right now, but it would be worth something very different if we were in the desert for hours. And surely it would be worth something completely different for us if, as a specie, we did not need water to survive. The value is not something attached to water, but to our perspective (which, of course, is influenced by many factors such as access to such resource in a given context).
On the other hand, the price of a resource expressed in a certain currency is the way in which we communicate our preferences in order to coordinate with other individuals in a commercial activity. And that price is represented as amounts using some form of money as a unit of account. If we believe that there are certain resources that have an intrinsic value (or price) it is probably because we are not looking very closely, or perhaps we don’t know the mechanisms by which these values are discovered. These mechanisms may imply greater or lesser market freedom, but in neither case does the determination of a price or the assignment of a value come intrinsically from the resource itself.
In this way, Bitcoin has no intrinsic value and neither does the fiduciary currency that we use every day, nor does have it a gold ingot or a piece of bread.
It is pure speculation, a bubble
Financial bubbles exist, and speculation exists as well. There is no good that can be exempt from them, because it is within the freedom of each individual to speculate with a certain good.
Is Bitcoin a bubble then? No, but Bitcoin did suffer (and will suffer?) from speculative bubbles. Just a look at the variation of the USD valuation charts is enough to see the highs and lows of a bubble. However, claiming that Bitcoin itself is a bubble can make us believe that Bitcoin’s reason for existence is speculation, and it is not.
Bitcoin is money, and it is not exempt from several people resorting to it in order to make profit by speculating on its price variation. The same can happen (and it happens) with other currencies and goods in the world. The difference is that Bitcoin is younger, with a smaller market, and therefore fluctuations are more pronounced due to its lack of price stability. But Bitcoin has proven to be useful beyond its use as a speculative instrument, and the fact that it exists as a medium of exchange or for sending remittances in situations where resistance to censorship is important is proof of this.
It is a pyramidal/ponzi scam
For something to be a scam, there should be a scammer to take advantage of it. I mention this because there are some very important points about Bitcoin that should not be overlooked:
- Bitcoin is not a company, and has no owner
- Bitcoin does not advertise or promise dividends or future profits
Bitcoin is a decentralized system. What we surely can have are people or companies that promise profits using Bitcoin, just as we could have people or companies that promised profits by investing in the “internet business” in the 90’s. However, if those cases are or were scams, it was not because Bitcoin or the Internet are designed as scams but because of the use that scammers make of it.
In addition to the aforementioned, it should be noted that Bitcoin has real utility, far from only existing as a means to generate profits. Bitcoin has characteristics that make it unique and different from other existing forms of money, and there are many people who have already found a use in commerce or in sending remittances around the world.
I want to clarify again, because it is important, that Bitcoin has no owner. There is no government, no company and no founder that controls it and that is earning big gains thanks to it. Bitcoin has in this fact one of its most important differential points, which of course opens a lot to talk about … in another article.
The price varies a lot, it does not work for commerce
What we call the price in this case, is the parity between USD and Bitcoin. In other words, we take the US dollar as a stable reference point and we measure how much a bitcoin is worth.
It is true that the valuation of a bitcoin in terms of price is fluctuating, and it is quite true that this fluctuation makes it difficult to operate commercially. It is not impossible to do it, of course, if one is willing to use another currency as a unit of measurement and then make the corresponding conversions. However, we can agree that it is more practical to trade directly with that other currency.
The fact that Bitcoin has fluctuations in price today does not mean it will be like this forever. In my opinion, to more adoption more stability in price. In the future we may stop measuring bitcoins in dollars, and we will measure everything in bitcoins.
Of the three main functions of money “Medium of exchange”, “Unit of account” and “Store of value”, Bitcoin could evolve first in some and then in others. These processes could take decades or more.
It’s too complicated to use for a regular person
It is true that there are many people who find Bitcoin difficult to use, and I believe that this is due to these reasons:
- The decentralized nature of Bitcoin gives much more control and sovereignty to the individual over their money, but it comes with more responsibility and a paradigm shift in the way we think about our interaction with money.
- The custom and habits with which we operate in the current systems we know make it difficult to adapt to big changes in the way things are done. This is a reality that many of us have surely lived through the years with any important technological advance. Eventually we adapt.
- The current state of a technology does not imply that this will also be its future state. Evolution is part of the process and Bitcoin has a lot to improve in regards to the user experience.
All these appreciations could easily be applied, for example, to the Internet of the 1980s, where sending an email surely was not a trivial task for the average human being.
It is worth mentioning the case of companies that offer services that greatly simplify the operation with Bitcoin or other cryptocurrencies, where the user does not even have to take the trouble of managing his “private keys”. However, in these situations it is important to remember that when we incorporate intermediaries, those characteristics that make Bitcoin unique are being removed from the stage, and therefore it is not being used completely or in its true form.
In summary, although the difficulty for some people is a nowadays reality, in no way does this imply that it will be like this forever. Technology is constantly evolving, and new generations will surely find all these processes much more natural and part of their daily lives.
Let’s question and keep an open mind
It is difficult for us to change our mind about an issue unless we can open ourselves to new data and be able to question the preconceptions we bring with us. My objective with this article was not to convince you that Bitcoin is a better form of money, but to get you to questions the criticisms you could have about it, to get you to ask “why” about each statement that your mind proposes, and to keep you thinking about it honestly. If after this your final opinion is the same, at least you will have considered more points of view.
In the past, milestones in the evolution of money generated resistance such as the passage of metal money to paper money, or the appearance of “plastics” (cards). Likewise, Internet in its early days was difficult to use, mostly useless for the average user, and with very defined limits that later the evolution was responsible of breaking. The fact that the history of technology shows us this pattern again and again does not mean that Bitcoin will follow without doubt, no one can say that. However, it does tell us that we must keep an open mind and accept that it can be a possibility.
Perhaps Bitcoin is not for you today and now, and there is no point in forcing it to be so. But Bitcoin will be, from my point of view, the global form of money in the near future and we live in a time where we can see it born and evolve. It will be up to each one of us to choose what to do about it.