January 28, 2018
Opinion on Bitcoin
Tags:
Finance,
Technical
I have being hearing people talking about
Bitcoin recently, and as the
designated ‘techie’ some people ask me what it is (the subtext being
“should I buy some?”). I am always hesitant to say much in such
situations (no one has ever made money listening to my financial
advice!). For the interested, there are many good descriptions of the
fundamental technology online (most of my knowledge comes from this
Coursera Cryptocurrency
course). I also mined
some cryptocurrencies (results detailed in this blog
post), but stopped very quickly
after calculating the profit vs cost. I have never owned any Bitcoin,
and have no immediate plans to change that.
Basically, I probably know enough to be dangerous, but falling victim to
the Dunning-Kruger
effect
seems appropriate for
Dunning-Krugerrands.
Take everything written here with that in mind.
Firstly, most conversations on the utility or value of Bitcoin need to
separate the cryptocurrency (Bitcoin) from the underlying technology
(Blockchain). Blockchain
seems like a very clever solution to the problem of distributed trust
(i.e. a system where you do not need to trust anyone involved in the
system but are still able to trust the system itself), produced by
assuming that no one can control over 50% of the system. Bitcoin is the
proof-of-concept application of Blockchain, with the added benefit that
the value of the cryptocurrency encourages people to join the trust
system (by mining) and thus decreases the likelihood of anyone
controlling over 50% (also clever!).
As just a technology, the value of Blockchain depends on where it has
been applied. Sometimes it will be useful, and sometimes not. At the
moment it is the hot new technology and everyone seems to be using
wherever they can. As I’ve seen with previously hot technologies, I
suspect it will greatly overused in areas it is not applicable - beware!
Still I can easily imagine places it would be helpful - it would be
great for tracking ownerships of items/land in corrupt countries
(although I suspect those are the last places that would adopt such a
system for the same reason!).
Right now, there are five main reasons I don’t like Bitcoin. However,
each of those reasons is surmountable with time and the advancement of
technology. So while I think the Bitcoin is currently flawed and not
worth the hype, I can believe that it has future potential (or more
likely a successor cryptocurrency does). I’m sure all of these problems
are being worked upon actively (and know of a few such efforts). A
cryptocurrency that solves them all will probably be worthwhile.
The problems:
- There is no use for the mining calculation, it just burns
electricity (and a lot of it!). To be part of the Bitcoin system by
mining means performing a useless computation just to act as
“proof-of-work” and randomise who proposes the next block. It would
be great if this calculation had inherent value (like for instance
drug discovery). However, it is hard to find a useful calculation
that has the required mathematical properties.
- Bitcoin has no intrinsic value, and therefore no floor price.
Cryptocurrencies have no backing (other than perhaps
Tether). There is nothing to say the price
should not be 0 or millions. This makes it hard to act as a store of
value - holding it is currently speculation. If it was widely used
for purchases then that would be something, or if the mining
calculation had value. For comparison, commodities (like gold) have
value in the industrial uses of that commodity; national currencies
have the backing of their government, and even if you don’t trust
them, you can still pay your taxes in that currency.
- Bitcoin is deflationary due to a fixed total size. While the total
amount of Bitcoin in circulation is currently growing, at a certain
point in the future this will stop. The Bitcoin system has a maximum
amount of coin built into it, and when reached no more will be
added. A currency that doesn’t grow makes the economy based on that
currency hard to grow. It encourages people not to spend it as it
will likely be worth more in the future (thus deflationary).
- Slow transaction speed and thus high fees. Bitcoin can handle a
maximum of 7 transactions per second - worldwide! Only 7 people can
use Bitcoin in the same second! This is several orders of magnitude
less than any serious online payment system or credit card. The low
number of transactions means people have to pay fees to have miners
to include their transactions at the front of the queue. Everyone
else waits. As the demand for Bitcoin increases, so will the number
of transactions and the size of the fees.
- Few to no legal protections. One of the touted benefits of Bitcoin
is that is not controlled by anyone, and thus safe from government
interference or devaluation. However, this also means it is not
protected. Scams and thefts of Bitcoin or other cryptocurrencies are
common with victims seeming to have little recourse. I don’t think
the level of corruption in the countries I reside is a serious
problem for their currencies (yet) and their central banks generally
do more good than harm - so I am happy to provisionally trust my
wealth to government currencies. I would struggle to say the same
for any cryptocurrency.