Bitcoin is useless
While the recent surge in bitcoin price is good news for many bitcoin investors, it should be seen as a death sentence for the functional value of bitcoin. As the price continues to reach new record levels, it becomes obvious that bitcoin is useless for anything else than speculation.
Looking back at Satoshi Nakamoto’s original White Paper, Bitcoin is presented as “a peer-to-peer electronic cash system”, an “electronic coin” that would replace money transfers that are currently controlled by the financial system, and which would be almost immune to fraud.
The extreme value fluctuations of bitcoin effectively make bitcoin useless for its original purpose. Some may remember the world’s first real-world bitcoin transaction where one bitcoin enthusiast bought 2 large pizzas for 10 000 bitcoins. I hope those were tasty pizzas because with the bitcoin price as of today they would be worth 150 million USD. This level of currency fluctuation is usually associated with failed currencies that exhibit extreme inflation levels. An indication of bitcoins lack of usefulness as a currency is that Steam, announced that it would stop taking payments in Bitcoin. Valve, the service’s owner, said it had become “untenable”, owing both to its extreme volatility and the rising costs of using the network.
The latter is also an area where bitcoin is underperforming as a means of payment. In the early days of bitcoin, processing fees where at such low levels that bitcoin was a promising way to process microtransactions. This quickly changed as bitcoin increased in popularity, and where a bitcoin payment cost approximately 20 cents one year ago, the processing cost has now increased to an average of 7 USD, with peak fees as high as 20 USD.
Compared to government-issued currencies, bitcoins wild ride proves that it lacks the necessary predictability to act as a currency. If we take off our tinfoil hats for a while we should acknowledge that currencies are regulated for a reason. To provide financial stability.
Also as an asset class, there are reasons to question bitcoins usefulness. One of the characteristics that were emphasized when Coinbase in collaboration with ARK invest argued that bitcoin should be considered an asset class was the decreasing volatility. Until 2017, volatility had decreased each year, and in 2016, average daily volatility decreased from about 10% to about 4% compared to the previous year. After surging past $11,000 on Wednesday, the biggest digital currency has swung between gains and losses of as much as 20 percent on an intraday basis.
Another obstacle for bitcoin as a useful asset class is the recent ban of bitcoin futures made by South Korea.
Even with recent advances in the underlying technology to promote bitcoins functional value such as the bitcoin lightning network to increase scalability, the primary value driver of bitcoin is based on speculation and increase in demand from new bitcoin buyers. As long as there are new buyers, the price continues to increase with the invisible hand of supply and demand. It is estimated that there are 500 000 people buying their first bitcoin every day, moving bitcoin way into greater fool territory when it comes to bitcoins extrinsic value. As long as there are more buyers than sellers, the price continues to increase. It is not difficult to see that this increase in demand will diminish at some point.
While some may argue that the value of bitcoin is in no way different from our collective shared belief that one dollar is worth one dollar, it has one fundamental difference as dollars has an intrinsic value as it is used as an everyday currency.
According to Investopedia bitcoin will derive its intrinsic value both from its use as a medium of exchange and as a store of value. As a footnote to this assumption, it should be stated that bitcoin’s utility as a store of value is dependent on its utility as a medium of exchange. As bitcoin fails to act as a currency, it is no longer a medium of exchange, and therefore not a store of value either following to Investopedia’s assumptions. In short, if people do not use bitcoin for other purposes than speculation, it has no intrinsic value. On the other hand, bitcoin investor Alex Compton told the Wall Street Journal. “If people use bitcoin as a currency, it will lose value as an investment.” By this logic, bitcoin is only interesting as an investment opportunity as long as there is no intrinsic value.
Limitations in the bitcoin infrastructure also cause some issues regarding bitcoin as a trading asset resulting in a spread in trading prices of 3% between different bitcoin exchanges when the price was at $10,000 and reaching up to $2,000-$2,500 gap between Western exchanges and South Korea as the price reaches $16,000. While some may see this as an arbitrage opportunity, it is off-putting for institutional investors.
Another issue with bitcoin is the energy required to process transactions on bitcoins blockchain. As the chai increase in since the amount of computing power needed to verify each transaction rise exponentially. Bitcoin uses more energy than 19 European countries, and roughly 0.7 percent of total energy demand in the United States, equal to 2.8 million U.S. households. By some estimates, bitcoin would consume as much energy as the entire United States by July 2019 if the growth continues at the same rate as today. Even an optimistic scenario regarding developments in mining hardware states that mining one bitcoin in 2020 would require 5,500 kWh, and generate over 4,000 kg of carbon dioxide if we assume that only half of the energy required originates from fossil fuels. From an environmental perspective, the way bitcoin is mined and processed is highly unsustainable and by no means useful for the environment.
Despite this, bitcoin enthusiasts continue to celebrate the ever-increasing value of bitcoin and see no limits for the potential of bitcoin. Founder of McAfee and data security legend, John McAfee has gone as far as stating that he expects one bitcoin to be worth over a million dollars. If not, he will eat is own dick.
A good sign that the field is overheating is the official warning issued by Coinbase, encouraging its users to invest responsibly as the price leaped from $10,000 to $17,000 before dropping to $15,000. By now it is impossible to predict whether or when the bubble will burst. Saxobank predicts that bitcoin will peak at $18,000 in 2018 and then collapse. This is a fairly bold prediction, and only time will tell when there are no more greater fools out there and the roller coaster ride will come to an end.
The more bitcoin prices surge due to its speculative value and increasing demand, the more useless bitcoin becomes as a currency. And as bitcoin becomes useless as a currency, it loses its intrinsic value as an asset. I still believe that the underlying technology is revolutionary, and there are several use cases where crypto tokens may prove to be useful such as royalty distribution in the music industry or monetizing data and machine-to-machine payments like IOTA just to name a few examples. The future of bitcoin is impossible to predict as the underlying technology is still at an immature stage and there are continuous efforts to fix some of the fundamental issues regarding scalability and energy consumption. But bitcoin in its current state as something that exists almost solely for financial speculation and proves to be harmful to the environment is pretty useless in my book.
While I agree with you that the current frenzy regarding the Bitcoin price is not healthy for the currency, I think you, and many with you, overlook some very important aspects which makes Bitcoin useful regardless of the recent price movements. Let me just give you one fresh example of my own:
My daughter is going to spend her spring semester at the University of California, San Diego. She had to pay a tuition fee of $16 300 and because of slow case handling from Lånekassen I had to cover her her fee. I gave UCSD my credit card details, but got a message from them that the withdrawal was declined. I then had to contact my credit card company and they informed me that my credit limit did not allow this amount to me withdrawn so I had to pay them in advance. It took another day to get the confirmation that my payment was credited my account at the credit card comp. I then had to call the company again to make them raise the withdrawal limit on my card, for 24 h, in order for UCSD to complete their withdrawal. Next thing was to inform UCSD that my card was now open for redrawal of the said amount.
I also informed them that if they had accepted Bitcoin this would have been so much easier. Using a payment service they would not need to touch bitcoin at all. I think even this kind of use case represents a huge opportunity for Bitcoin (think also remittances) and could very well defend the current price.
Lastly, remember the dot.com bubble. Did it kill the Internet/the web? No, it laid the ground for a sustainable growth for the next decades. A sound correction in the crypto currency sphere will do the same for these new currencies I think.
Regarding energy consumption: Don’t just regurgitate numbers you find on the net. Check them against reliable sources (research). In this case, read the paper “Sustainability of bitcoin and blockchains” by Harald Vranken.
I agree that the crypto currency state has some obvious ues cases such as remittances. Although bitcoin in its current state is quite useless with volatility running out of control. Do you have a link to the research paper? I tried looking for some research that gave an opposing view on the sustainability, but the echo champer known as the internet pointed me in one direction only.
I’ll send it to you since it’s not open for downloading.
why not a normal bank transfer?
and christoffer, i like the article 🙂
Would you really have used bitcoin to pay the university with? Since the exchange rate to dollar is fluctuating enormously the dollar value could either have made you happy (rate down) extremely unhappy if the exchange rate doubled. 😉
If I bought the same amount of bitcoin as I would have paid the university, and at the same time, it wouldn’t have mattered.
My older son graduated from UCLA and my younger son graduated from UCSD. We used credit cards to pay UCLA without any issues and personal checks to pay UCSD, based on each school’s policy. Whenever possible, we use credit card to get cash back and/or free fly miles.
With excellent credit scores and always paying off the balance, I cannot imagine what Bitcoin can offer me. Credit cards give me one month grace period, protect me from any fraudulent charges, provide me detailed transaction records for tax purpose, in addition to giving me cash back and other free goodies. And one more thing, we have been enjoying the 0% balance transfer checks for years. Believe or not, one time we deposited a $50,000.00 check to my bank and get a 5-year CD with 5% interest rate while paying 0% interest rate and no transaction fee to the credit card company. We actually made money from the credit card!!!
When Bitcoin can offer something similar, I will take another look.
I have to argue on the power consumption critique. There is some misinformation spreading like wild fire these days. It’s not true that Bitcoin _requires_ the levels that are spent mining coins today. It’s solely due to popularity and the profitability of Bitcoin mining. Bitcoin just says everyone can join in mining Bitcoins, in return you might get some of the newly minted coins. It does not demand anything.
It would be like saying Apple demands enormous amounts of power and backing it by adding together the power consumption of all iPhones.
As far as the Bitcoin network goes it is true that more miners means a more secure network. But there would be probably no difference if the network only had 10% of the machine power it hastoday.
You can argue that the proof of work algorithm required for network security and consensus would better be enhanced or replaced by something more efficient
Like I say in my conclusion, bitcoin in its current state is useless. A switch from proof of work to proof of stake could perhaps change this, as could a successful implementation of the lightning network when it comes to scalability and speed. But again, this introduces a lot of what-ifs that introduce additional unpredictability of bitcoin as a currency.
“It does not demand anything.”:
https://www.nytimes.com/2017/09/13/business/bitcoin-mine-china.html
Please read again. Bitcoin does not demand anything. It works just as fine with a couple of miners as with a trillion miners. The clear misinformation is that Bitcoin will demands more power to scale. It is completely false. Please try to understand not just linking to all these articles which themselves are copies of other articles. Not adding anything useful to the debate. Use your own words. Yes Bitcoin mining happens to be so profitable that people chooses to take part in the mining. But there is no functionality in Bitcoin depending all the increasing mining power. It worked just as good a year ago, with 10% of hash power as of today. That is proof and you can look it up, I don’t need to link to a lots of articles saying this and that.
Please show me the numbers that prove me wrong. I’ll be happy to admit that I’ve fallen victim to internets group think if you provide me sufficient evidence that this is false. But so far, the only arguments I am served are “it is not true, it will be fixed if bitcoin abandons proof of work in favor of proof of stake” and similar arguments.
Daily transactions bitcoin stats – relatively stable the last year. Actually lower in july despite twice the hash power as in january
https://blockchain.info/no/charts/n-transactions
Bitcoin hashrate:
https://blockchain.info/charts/hash-rate
Has somewhere around 700% increase.
So no correlation between more transactions and hash power
This does not change the fact that the energy consumption is unsustainable. https://digiconomist.net/bitcoin-energy-consumption
I’m with Mr. Friedman: “there’s no such thing as a free lunch”!
“This level of currency fluctuation is usually associated with failed currencies that exhibit extreme inflation levels.”
In the case of Bitcoin it’s actually deflation rather than inflation.
But still extreme fluctuation levels that make btc unsuitable as a payment method
No disagreement there 🙂
Yet another author that has no clue what they are writing about. It will have to hit 1,000,000 / coin to take over as a standard currency. Mining is less than FIAT commodities, the energy consumption is governments trying to control economy and not a bitcoin flaw, issues are easily addressed with a single update … I’d say this article is useless and the author holds no coins. His loss, lol
Please explain the logic governing the correlation between bitcoin value and the potential as a standard currency? There is no logical argument that supports any correlation between a high value and usefulness as a currency, it more likely to be the other way around.
Also, every argument I hear to challenge my statement are usually the same: 1. Just wait and see, it will be huge! 2. The government is trying to control whatever for some reason 3. It is easily fixed by implementing some kind of change (lightning network, switching to proof of stake, forking the chain, etc). 4. You are sitting in a glass house 5. You are jelly (freely translated from you own no btc). None of these are factual arguments against my claim.
Every criticism here is a function of the period in the lifecycle of the currency. Despite its creation in 2008 it is not until 2017 that the currency has become more mainstream. The growing pains are extreme, and the limits and problems cited are evidence of that. But Should we have stopped car production because there was no notional highway system? Did electricity fail because of the fact the world was not wired? Net, all the problems here can/are/will and be addressed. The fundamental vision and promise are solid and as time passes the problems mentioned here will fade away. More compute power, more energy, more network bandwidth – that is all is already progress. Net, this analysis is looking backward not forward and for this reason its fundamentally flawed. Cryptocurrency is about the future – not the past. The rules have changed so start learning how to play the new game – or your going to be left on the bench. http://www.linkedin.com/in/frankjramirez/
If you read the whole post, I totally agree that cryptocurrencies are here to stay. But that doesn’t change the fact that bitcoin in its current state is useless.
But you said in your very first sentence that: “While the recent surge in bitcoin price is good news for many bitcoin investors, it should be seen as a death sentence for the functional value of bitcoin.” A death sentence is permanent. So are you saying that BitCoin is as good as dead, yet it is “here to stay” and is the future all at the same time?
And your title is misleading – but I guess you only have so many words to catch people’s attention. BitCoin is useless to the people of this world who don’t have the extreme amounts of money it now takes to speculate – I don’t know your blog audience, but I assume you write for the average Joe and Jane – but it is extremely useful to speculators! They’re loving this, and like any new technology or trend, the richest who have money to spend make the most, earliest. That’s the excitement of speculating. By the way, isn’t all currency trading considered speculating?
But you said in your very first sentence that: “While the recent surge in bitcoin price is good news for many bitcoin investors, it should be seen as a death sentence for the functional value of bitcoin.” A death sentence is permanent. So are you saying that BitCoin is as good as dead, yet it is “here to stay” and is the future all at the same time?
And your title is misleading – but I guess you only have so many words to catch people’s attention. BitCoin is useless to the people of this world who don’t have the extreme amounts of money it now takes to speculate – I don’t know your blog audience, but I assume you write for the average Joe and Jane – but it is extremely useful to speculators! They’re loving this, and like any new technology or trend, the richest who have money to spend make the most, earliest. That’s the excitement of speculating. By the way, isn’t all currency trading considered speculating?
You need a provocative title to reach a large audience
But you said in your very first sentence that: “While the recent surge in bitcoin price is good news for many bitcoin investors, it should be seen as a death sentence for the functional value of bitcoin.” A death sentence is permanent. So are you saying that BitCoin is as good as dead, yet it is “here to stay” and is the future all at the same time?
And your title is misleading – but I guess you only have so many words to catch people’s attention. BitCoin is useless to the people of this world who don’t have the extreme amounts of money it now takes to speculate – I don’t know your blog audience, but I assume you write for the average Joe and Jane – but it is extremely useful to speculators! They’re loving this, and like any new technology or trend, the richest who have money to spend make the most, earliest. That’s the excitement of speculating. By the way, isn’t all currency trading considered speculating?
A cyber ponzi scheme based on a viable algo, which should probably be implemented to some measure but mining for bitcoin is no better than mining for wave action or twinkling stars.
A cyber ponzi scheme based on a viable algo, which should probably be implemented to some measure but mining for bitcoin is no better than mining for wave action or twinkling stars.
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Thanks for any other fantastic post. Where else may anybody get that type of information in such a perfect means of writing? I’ve a presentation subsequent week, and I’m at the search for such information.|
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“First, I am a complete newbie here and i’m trying to buy a digital product. I am really open to more tips.
So, I am about to sign up to buy bitcoin from localbitcoin and they are asking for my email address. Is it ok to use my protonmail.com email address for privacy purpose? I’m taking your advise not to link my real life info, but I have to buy the bitcoin through paypal, which has my real life info. I’m confused! Please help! Thanks for your time.”
Don’t buy bitcoin 🙂
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Bitcoin’s identity crisis is largely to blame for the current downturn in its fortunes. It was originally designed as an international currency and borderless mechanism for daily transactions.
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