Bitcoin, the first cryptocurrency, is completely different from anything that preceded it. Bitcoin is quite real, and it’s likely here to stay.
Bitcoin defies traditional currency and economic models, so it’s ironic that these models are being used to support predictions of its ultimate demise. This makes as much sense as it would have at the turn of the 20th century to use the concept of the horse-drawn carriage to assess the first automobiles. Predictions of bitcoin’s extinction fail to consider the reasons bitcoin was created and the transactional problems it actually solves.
Perhaps less surprising is that predictions of bitcoin’s demise fail to account for technological factors. Bitcoin is, after all, technology, but you don’t have to be a code-writing nerd to understand its purpose and use. What’s more, you do not need a degree from MIT to grasp the concepts underlying blockchain, the open-source technology that serves as the currency’s vehicle, or how bitcoin has evolved since its launch in 2009.
Rather, you just need to understand the impacts of this technology from a practical process standpoint. This perspective is characteristically lacking in high-level business discourse on the subject and nonexistent in popular discourse that’s usually laden with misconceptions.
Moreover, in assessing the validity of various terminal diagnoses for bitcoin, it helps to assess the interests of different parties. One of bitcoin’s more vocal critics is the Bank for International Settlements — the central bank for domestic central banks worldwide.
Bitcoin is a borderless digital currency that eliminates the need for a bank — a common characteristic of different cryptocurrencies that have followed it. Therefore, understanding this concept hinges on conceiving financial transactions without banks.
BIS officials would understandably welcome the continued proliferation of bitcoin transactions with the same warmth that the University of North Carolina Tar Heels show Duke University basketball coach Mike Krzyzewski on their home court.
BIS recently issued a lengthy report on bitcoin that’s nothing less than an indictment of cryptocurrency. Receiving widespread yet uncritical attention from mass-media outlets, the document states various reasons why bitcoin won’t survive. It comes amid a long Google queue of similar prognostications from economists and other critics echoing similar themes, amounting to a collective doomsday book.
Countervailing facts, developments, trends and perspectives aren’t considered in these criticisms and negative predictions about bitcoin.
What critics miss
For example, critics say bitcoin will eventually fail because it just doesn’t work as money. This is the view of Robert J. Shiller, a Yale University economics professor. Shiller says bitcoin will eventually fall into the history’s ash heap of failed, zany experimental currencies, primary because it can never be like money (i.e., currency as we now know it.)
Well, it’s not supposed to be. Unlike money, bitcoin — instead of relying on the central authorities of governments to issue it and on banks to process its transactions — enables decentralized transactions between any parties using this borderless currency, avoiding fees in executing transactions.
Bitcoin is the natural digital result of global cultures that now process most cash transactions digitally and the interconnection of people around the world by the internet. These factors didn’t precede other currency experiments, which relied on banks or some other central authority.
Like BIS, economists are naturally fixated on banks to the point where they cannot imagine transactions without them. This view fails to grasp the commercial disruption that’s upon us from blockchain and bitcoin’s propulsion of it. (And notably, no one is more aware than economists that every industrial revolution has been ushered in by new technology.)
Hastening bitcoin’s demise, Shiller believes, will be its eventual technical transformation beyond recognition. Yet 90 percent of the original core bitcoin code has already been changed and improved upon, and bitcoin’s use is on the rise.
Meanwhile, some say bitcoin can never be a mainstream currency because of power and scalability issues. Bitcoin’s scalability is extremely limited, BIS argues, because mining it — the execution of computer algorithms necessary to legitimize, confirm and enable transactions — uses crippling amounts of electricity. But this actually consumes less electricity than the 3.5 million ATMs in the world. And BIS overlooks the tendency for miners to seek unused power reserves for heavy-duty work. They don’t tend to plug to power supplies stored in high-usage areas such as Manhattan. Instead, think Iceland and Quebec, which have energy surpluses and thus low energy costs.
Scalability and security
More fundamentally, the BIS report, an implicit indictment of all crypto-currencies, fails to mention that energy consumption varies with the consensus algorithms that different crypto-currencies use to validate transactions. While bitcoin uses what’s called “proof of work,” which requires substantial computing power and more electricity, other crypto-currencies use a different process, known as “proof of stake,” which requires far less electricity.
Regarding criticisms of scalability, it’s true that bitcoin’s network has been known to be slow, at times validating fewer than 10,000 transactions per second. But these criticisms fail to recognize that this issue is being resolved. When fully implemented, emerging technologies — including the SegWit protocol upgrade and the Lightning Network — are expected to enable the processing of millions of transactions per second, for a fraction of the fees banking networks charge. By contrast, Visa processes only about 2,000 transactions per second.
Critics say bitcoin will eventually crash the internet. This highly publicized conclusion in the BIS report is based on the use of a flawed estimate of bitcoin’s internet bandwidth consumption. Also, as the new technologies will reduce the volume of data actually recorded on the bitcoin blockchain, reserving it for its most essential function (immutable recording of transactions), this will significantly reduce bandwidth needs.
Is bitcoin really inherently subject to fraud? This widespread misconception makes as much sense as saying that cash is subject to fraud just because frauds may be committed by people trying to obtain it. As an indelible audit trail, the blockchain cannot be hacked. Some exchanges have been hacked because they lacked adequate security. Blaming bitcoin for this is like blaming cash for bank robberies.
Naysayers believe bitcoin has no intrinsic value. Well, neither does traditional currency. Like bitcoin, any currency has worth only because people believe it does.
Critics say that bitcoin involves a user experience that’s far too complicated. Several startup companies are working around the clock to develop apps to enable consumers to buy products and services as easily with bitcoin as they do now with Apple Wallet and PayPal. Some retailers are starting to accept bitcoin for online transactions, and surveys show remarkably broad acceptance of bitcoin among millennials.
These firms see tremendous profit in improving the user experience. They are among a proliferation of well-funded startups developing various blockchain applications; notable among these pioneers are those working on bitcoin tech.
Bitcoin is a completely new kind of currency propelled by technology that’s continuing to advance. Transactions aside, an undeniable problem with bitcoin is its wild value swings — which raises questions about hanging on to bitcoin long-term. Regarding transactions, serious problems may surface down the road. If that happens, there will be commercial opportunity aplenty in developing innovative technical solutions.
The dire criticisms of, and fatal forecasts for, bitcoin currently seeping into popular awareness fail to account for the cryptocurrency’s raison d’etre — its reason for existence — or grasp its basic functionality. If bitcoin is to be convincingly and credibly challenged, arguments need to be based not on what bitcoin isn’t, but on what it is.