All new revolutionary technologies attract their sceptics. Horse and carriage drivers claimed that the automobile would never catch on. The post office claimed that the telephone would never catch on. Newspapers claimed that TV would never catch on.
There are many sceptics of cryptocurrencies and Bitcoin, and just like in the examples above, the most vocal sceptics are from organisations that are likely to be negatively affected by the new technology.
It’s worth taking some time to deal head-on with some of the most common criticisms made of Bitcoin, as these are the narratives that most frequently find their way into newspaper headlines and TV pundit verdicts.
A Ponzi scheme is an investment product that pays existing investors with funds collected from new investors.
In starting to address this point, we must be clear that Bitcoin is not an organisation or entity. It has no CEO, no headquarters, no office, no employees and no shareholders. It has no mastermind that is trying to engineer a situation to fleece unsuspecting investors.
Bitcoin is simply a network of computers that share consensus over the Bitcoin ledger.
Bitcoin can't be a Ponzi scheme as it does not pay existing investors out of the proceeds from new investors. It is simply an asset, and like all assets its price varies according to the level of demand for it.
Are existing investors being paid with funds collected from new investors? No. When a new investor buys some Bitcoin, the person who already owns the Bitcoin sees no change in their position. They receive no income as a result of the transaction.
Of course, like any product that has a limited supply, increasing demand for that product can see the price of the product increase. In this regard it is comparable to gold, which also has a relatively limited supply. As the demand for gold increases then the price of gold increases.
By definition, Bitcoin cannot be a Ponzi scheme as there is no income.
This narrative goes along the lines that people only use Bitcoin because they want to hide their money, often because they are involved in illegal activities. This argument is absurd on multiple levels.
Firstly every transaction on the Bitcoin network is recorded in a public ledger that is visible to anybody. This ledger records every transaction in Bitcoin that ever took place. This allows companies like Chainalysis to analyse these transactions and check how much Bitcoin was sent from one Bitcoin wallet to another Bitcoin wallet.
Whilst Bitcoin wallets do not have any personal identifying information associated with them, most Bitcoin funds will, at some point, pass through an exchange to convert the funds to or from traditional (fiat) currency. The vast majority of exchanges will require some level of personal identification to use them.
Bitcoin is a terrible choice for criminals as the money is highly traceable. The US Dollar remains the No. 1 currency for criminal activity.
If you were a criminal and you wanted to move money illegally, Bitcoin would be one of the worst choices as anyone could trace where the money went, and probably identify you or one of your associates personally. In fact, you’d be far better off using paper dollars in a suitcase, which are truly anonymous, and that is why cash dollars remain the number one preferred currency for criminals. Nonetheless, those who criticise Bitcoin prefer to use dollars and ignore its widespread criminal use.
The idea postulated here is that Bitcoin can’t be worth anything because it is just code on a computer, so it can’t have any actual real-world value. A comparison might be drawn to gold or silver because they have real-world uses beyond a simple store of value.
To address this criticism we have to think about what gives something value. The simplest way to define value is by the utility provided by the object. Gold has many industrial uses, and it can be argued that the price that the manufacturers are willing to pay for gold is defined by how useful it is. If the price of gold rises too high then manufacturers may start to look at alternative metals.
So utility is a good way to understand the value of something, and it can be applied to items beyond just raw materials. What is the value of an iPhone? It’s not simply the sum of the raw materials and labour required to produce it. Its value lies in its utility and all the amazing things you can do with the phone. How is the fair value arrived at? In a free market, customers are willing to exchange their money for the iPhone because they want the iPhone more than they want the money. In a free market, the price of the iPhone will rise until it is just below the level at which the customer would prefer to keep their money than exchange it for an iPhone. That process determines the fair value of an iPhone.
Bitcoin has value because it has significant utility and has excellent credentials as a form of sound money.
Does Bitcoin have any intrinsic value? To answer this question, we have to ask "does Bitcoin have any utility?". There are strong arguments that it does. In particular, it allows you to store your own money securely and to transfer your money to someone else anywhere in the world very quickly and for a very low fee. Without Bitcoin this is impossible. For the millions of unbanked people in the world it is revolutionary.
Furthermore, Bitcoin’s limited supply must be considered as this is the primary reason that so many people have embraced it. We know that there will never be more than 21,000,000 Bitcoins as this is hard coded into the Bitcoin algorithm. If we compare this to other forms of money, such as fiat currencies or gold, then we can see that these alternatives do not have a limited supply. New gold reserves continue to be discovered, and fiat currencies continue to be printed by governments.
A different way to consider Bitcoin’s value is to look at whether it has the traits of sound money. These traits have been defined by economists and are an agreed-upon set of criteria that help us to understand how well a given item could function as money. As we can see below, Bitcoin offers significantly higher utility as a form of money than gold and fiat currencies.
|Traits of Money||Gold||Fiat Currency||Bitcoin|
|Secure (Can't be counterfeited)||Medium||Medium||High|
|Scarce (Predictable supply)||Medium||Low||High|
|Sovereign (Government issued)||Low||High||Low|
As we can see, the only trait of money that Bitcoin doesn't score highly on is that it is not sovereign. It is arguable not being sovereign is actually an advantage as it means it cannot be manipulated by the sovereign. It is immune to their interference.
It would be remiss not to consider the intrinsic value of fiat currencies when answering the question about the intrinsic value of Bitcoin. So why do fiat currencies such as the dollar have value? After all, they are just pieces of paper.
Many fiat currencies used to be tied to an underlying asset of real value. The US dollar used to be tied to gold, and it was printed on each dollar bill a promise that it could be exchanged for physical gold at any time. In fact, this is how paper money came about, as it is much easier to carry around a few pieces of paper than it is a piece of gold.
This was known as the gold standard, however in 1971 President Nixon ended the standard, and the currency was no longer redeemable for gold. This put the government in a powerful position as they could now create additional money simply by printing it, and they no longer needed to ensure that they had sufficient gold reserves to back up this money. This new type of money that was not backed by gold was called fiat currency.
If fiat currencies are no longer backed by assets such as gold then where does their value come from? Well, people use them because they are commonplace and ultimately because they are forced to. Before Bitcoin came along, what was the alternative? Some scenarios require the use of dollars for payment. For example, you have to pay your taxes with dollars. Also, some types of transaction have to be conducted in dollars, for example oil purchases, which is what is referred to by the petrodollar.
Through this objective analysis we can see that the intrinsic value of fiat currencies is questionable at best, and that the value of Bitcoin, as determined by its utility is very high.
In some ways, Bitcoin is no different to these other currencies. It has value because a very large number of people find it useful and see its advantages over traditional currency. In fact close to 200 million people already have Bitcoin wallets.
Mining Bitcoin uses large amounts of electricity to run the computers that validate each of the transactions. Lots of electricity is used because the algorithm that the computers have to solve is deliberately very complex.
Solving this algorithm is energy-intensive, and cryptocurrencies that are designed this way are said to be based on “proof of work”. Proof of work is an important security feature of Bitcoin, as the energy cost required for a bad actor to deliberately manipulate the network for their own benefit is extremely high.
On the face of it, using all that electricity just to create Bitcoin may seem very wasteful, however Bitcoin energy use is much greener than you might think. It is estimated that well over 50% of Bitcoin mining is powered by renewable energy sources.
The majority of electricity used in Bitcoin mining comes from renewable sources.
Bitcoin mining has some interesting characteristics as it can very quickly be started and stopped, making it ideal for energy sources with peaks and troughs in output. This makes Bitcoin well suited to renewable sources, that can have peaks and troughs in supply, unlike fossil fuels and nuclear energy which tend to run at a steady pace.
Mining businesses also look to maximise their profit by finding locations with the cheapest possible electricity. These tend to be renewable sources in countries with plentiful geothermal or hydroelectric resources.
It is worth drawing a comparison with the energy required to mine gold. Gold mining requires huge amounts of mechanical excavation, and one tonne of excavated rock can yield just 10 grams of gold. The process is highly energy intensive, requiring huge diesel-powered vehicles to mine the ore, and then further highly energy-intensive processes to smelt the gold. This is not to mention the massive physical destruction of the natural environment.
Perhaps the laziest and most tiresome critique of Bitcoin is to compare it to the Tulip Mania of the 1600s in Holland. Around this time, tulip bulbs had become highly desirable in Holland. They were very unique compared to the other flowers already available, and were much more colourful and striking. In a three-year period starting in 1634, tulip bulbs reached absurdly high prices, peaking at several times the average annual salary for a single bulb. Then in 1637, the mania collapsed.
The truth of exactly what happened in this period is not clear as it is such a long time ago that records are not of great quality. However one thing that is clear is that a mania of some form did take place in which the value of tulip bulbs became massively overhyped. A “greater fool” scenario may have been playing out in which those buying at the extraordinary prices were hoping to sell for even higher price to the greater fool.
Tulip mania was a period in Holland in the 1600's when the price of tulips rose to absurd levels. This can't be compared to Bitcoin as unlike Bitcoin, tulips have no utility. They are purely a collectible.
All sorts of manias have played out in history, and humans are susceptible to being caught up in a mania, especially when a singular narrative is repeated at them over and over again.
However, comparing the rise of Bitcoin to tulip mania is absurd. We can understand this by considering again the intrinsic value point. Bitcoin is most likely the purest form of money ever invented according to the standard traits for benchmarking money against. Tulips have very little intrinsic value. They are highly collectable, and have a high prestige value but they offer no other form of utility.
Bitcoin has none of the traits of a collectable as it is not visible and most owners would not choose to disclose their Bitcoin holdings. Some people who don’t understand the powerful fundamental characteristics of Bitcoin do speculate on its price, hoping to turn a quick buck, but the rise in Bitcoin over 13 years and the massive development of a financial ecosystem around it can hardly be attributed to this small minority.
Another favourite anecdote is to draw comparisons between Bitcoin and The South Sea Bubble of the early 1700s. This mania involved speculation in the shares of a public-private partnership business called The South Sea Company. The primary line of business of this partnership was slave trading and it was anticipated that the business was about to boom in selling slaves to the Spanish and Portuguese empires.
High annual yields were offered, and investors piled in hoping to have a share of the massive anticipated profits. However, business did not go as planned, and the Spanish and Portuguese were less willing to trade than anticipated. The result was a massive crash in the share price of up to 80%. Many investors lost very significant sums of money.
The South Sea Bubble is more analogous to the dot com boom than Bitcoin. In the dot com boom, massive profits were anticipated as a result of the advent of the internet. One of the most notorious dot com crashes was pets.com which IPO’d at $11 per share in February 2000, and by November that same year the share price collapsed by 98% to $0.19 and the business was liquidated.
Bitcoin is not a stock. It has no CEO, no shareholders, no business plan and no promise of future income. It is a highly distributed technology, more analogous to the internet itself. The pets.com example is informative as while various tech startups went bust, the internet itself just ticked along, completely unscathed. Owning Bitcoin is a bit like owning part of the internet. It is a unique technology upon which other business can be built.
With Bitcoin no massive yields are offered to entice you in, and no nefarious businessman is trying to figure out a way to pay you income out of another investor’s down payment. Bitcoin just is. It exists, and you can own some of it if you feel that the utility it offers as a form of money is of benefit to you.
The South Sea Bubble was a period in the 1700s when investors were enticed into making investments in a business based on over inflated projected yields. Bitcoin pays no yield and offers no incentive to purchase it other than its excellent credentials as a form of sound money.
Finally, it is interesting to consider how pets.com was built on the back of the internet, and in a similar way, many businesses are being built on the back of Bitcoin. Many of these businesses offer highly innovative and legitimate solutions to the financial services sector, but some businesses are of lower quality than others, and of course, some are outright scams. Just because a poor-quality business is built on top of a technology it does not mean that the underlying technology is any less useful or valuable.
Since the advent of Bitcoin in 2009, the sceptics have relentlessly dismissed Bitcoin as a passing fad and nothing more than a get rich quick ponzi scheme. Several websites document the endless death of Bitcoin articles, such as bitcoinisdead.org, where at the time of writing, Bitcoin has already died 385 times.
Yet despite this relentless assault, Bitcoin has continued to tick along, never once having been hacked or missing a beat.
The narratives used by the critics almost always fall back on one of those outlined in this article, yet as we have seen, these ideas do not stand up to scrutiny.
Many corporations and individuals have benefited significantly from the existing fiat currency arrangement. When the government prints more money, it has been shown through the Cantillon effect that those that receive the newly printed money first benefit the most. This is because they can spend the money before the inflation effect of the new money has occurred. Who gets to receive and spend the new money first? The banks and other financial institutions.
The irony of the overriding get rich quick allegation is that Bitcoin may or may not make you rich, but unless you are in one of the privileged groups above, fiat currencies are mathematically guaranteed to make you poorer.
Bitcoin has excellent credentials as a form of sound money. The same can't be said of fiat currencies, such as the US Dollar, which are open to huge levels of manipulation through money printing.
Meanwhile, those that receive the newly printed money last feel no benefit from it at all, but they do see their everyday costs increasing through inflation. The money printing programmes effectively channel wealth from the poorest members of society to the richest.
The irresistible urge of governments to inflate their currencies through money printing never ends, and history has shown that whenever a government has faced a currency crisis and has been forced to decide between sound money principles or printing money, governments have always chosen to print more money. This inevitability almost guarantees that you would be better off with Bitcoin than fiat currency in the long term.
Political ideology also translates to your likelihood to critique Bitcoin, and the divide is not along traditional left vs right lines. Both branches of politics can have authoritarian tendencies at their extremes. The authoritarians believe in a top-down structure for society in which a large bureaucratic government decides what people can and can’t do. Bitcoin sits at total odds with this ideology as it empowers individuals to take control of their financial situation and be less reliant on the state. People that believe in a big state will often attack Bitcoin for this reason. One of the most common places to find this type of person is in the mainstream media.
Our advice is to not pay too much attention to the mainstream media, particularly if they start rolling out one of the narratives in this article. Instead, do you own research and try to weigh up the benefits and risks of Bitcoin vs fiat currencies. Only you can decide if Bitcoin is right for you.
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