Bitcoin is a great step forward but it won’t succeed as a currency. Whether you’re new to crypto or already an expert, you’re about to find a compelling and easy to understand case against Bitcoin. And to start, here are four of the top reasons why Bitcoin will fail. I’ll explain the points in more detail below.
- Bitcoin is Inherently Deflationary
- Bitcoin is Recentralized (Fees and Security Concerns)
- Bitcoin is Volatile
- Bitcoin Wastes Energy
For more context, I’m not some Joe Schmo talking about crypto. Five years ago, I worked with an alt crypto company in Bejing. But I got out of the space due to the flaws I’m about to cover… Then briefly in 2017, a side project sucked me back into the crypto world. A project manager tasked me with sending out a total of $494,000 worth of Bitcoin to about 1,900 people.
Since then, I’ve stayed away from Bitcoin. And I’ve honed my knowledge in the financial space by finishing up the CFA exams. I now have a better understanding of the economy and monetary systems…
Modern Currencies are Already Digital
One flawed argument against Bitcoin is that it isn’t worth anything. Although, the same can be said for the U.S. dollar and any other major global currency. Governments have taken them off the gold standard and now they’re only backed by trust (further reinforced by the network effect).
On top of that, modern government currencies are already digital. There are about $1.8 trillion worth of Federal Reserve notes in circulation. That’s a big number, but it’s a small piece of the total money pie.
The official M2 money supply is $15.4 trillion. This number includes cash, savings accounts, checking accounts and positions in money market funds. And there’s still a lot more to factor in when considering fractional reserve banking and other financial tricks.
So, the number of dollars in circulation is small in comparison. You already live in a world that uses a digital fiat currency. So this argument won’t work against Bitcoin. Now let’s get to the real flaws holding Bitcoin back…
Here’s a Closer Look at Why Bitcoin Will Fail
1. Bitcoin is Inherently Deflationary
There’s a reason the Federal reserve shoots for low inflation. As the economy expands, so should the amount of dollars in the system. But if deflation kicks in, a single dollar would buy you more in the future.
That sounds great on the surface, but it pushes people to avoid spending today knowing they can buy more later. This can then lead to a vicious cycle of decreasing prices and wages.
So, deflation is bad and it just so happens that Bitcoin is deflationary. There’s a finite amount of Bitcoin that will ever be available – about 21 million. But on top of this, people lose access to their Bitcoins by forgetting their private keys (access to Bitcoin wallets).
Now, these Bitcoins don’t disappear from the system. Anyone can track them down in the public decentralized ledger, but they’re out of circulation.
I believe this is one of the big reasons why Bitcoin will fail as a currency. Although for now, the number of Bitcoin available will continue to climb thanks to Bitcoin miners.
2. Bitcoin is Recentralized
One big benefit of Bitcoin is that it’s decentralized. There’s no centralized body setting new rules. Everyone knows the rules and has to abide by them… but to make Bitcoin easier to use, third party exchanges have popped up. As a result, fees have climbed and so have security issues…
It costs a pretty penny to convert fiat money into Bitcoin. That makes sense with the volatility (explained below) and regulatory constraints… but it also costs to send Bitcoin from one wallet to another. When I sent out close to half a million dollars worth of Bitcoin, it cost thousands of dollars in fees. Bitcoin miners and exchanges are improving the network… but they’re also taking their cut. This makes Bitcoin less cost effective for transferring money.
Bitcoin Security Flaws
The Bitcoin blockchain is extremely secure but to leverage it, humans have to interact with it. And we all make mistakes. The transactions are also irreversible unless all parties agree otherwise. As exchanges have popped up, so have more flaws in security. There’s room for more error and other vulnerabilities like social hacking. For example, Mt. Gox and other exchanges have gone belly up. They’ve lost their users well over $400 million worth of Bitcoin.
3. Bitcoin is Volatile
Holding onto Bitcoin is a rollercoaster ride. It’s up 10% one month and down 20% the next. This makes it hard for retailers to accept it as payment. They can try to hedge the volatility but it cuts into their profits. This is a common stated reason why Bitcoin will fail as a currency.
Bitcoin volatility is an issue other cryptos have tried to solve. Stable coin projects like Basis have looked promising. It would have used auctions similar to bond offerings to adjust Basis supply and keep pricing in check. Although, the project never launched due to regulatory concerns.
Now, one of the best stable coin crypto projects is Libra. It has proposed using a basket of currencies to keep its price stable. But many regulators around the world are putting pressure on Libra. Still, it’s one of the most promising crypto projects for 2020 and beyond.
4. Bitcoin Wastes Energy
To verify transactions on the public ledger, Bitcoin miners are fighting to solve increasingly complex problems. Although, it’s using major amounts of energy and that energy could be put to better use. Most estimates for total Bitcoin energy consumption in 2018 are above two gigawatts. To put that in perspective, one gigawatt is enough to power about 700,000 homes for a year.
This energy drain from Bitcoin is unnecessary. Crypto currencies can use proof of stake and other techniques to verify the ledger. Or at the very least, instead of solving increasingly complex arbitrary problems, it can be put to better use. We can put all of that grid computing power towards protein folding research, weather mapping, and other intensive computing projects to benefit humanity.
Why Bitcoin is Good
Although I’ve given you four clear reasons why Bitcoin will fail as a currency, there’s still a sliver of hope. If enough miners on the network agree, they can fork the code. They can find solutions to these problems and create new rules for the Bitcoin blockchain going forward.
This happened in 2017 with a Bitcoin Cash fork. Some miners decided to split and support new blockchain rules. But this split polarized some participants and weakened the network.
As a result, I don’t have high hopes for future Bitcoin forks. Instead, I’m bullish on the technologies that made Bitcoin possible. Bitcoin has paved the way for new blockchain investment.
At first, big institutions and financial minds were pushing back against Bitcoin. In 2017 Jamie Dimon, the CEO of JPMorgan, called it a fraud and worse than tulip bulbs.
… but is it the owner of the horse farm who says automobiles are the future?
Not long after his negative comments, he did some backtracking. Since, JPMorgan has come out with a new cryptocurrency. And other firms are following suit. International Data Corp forecasts worldwide blockchain spending to reach $2.9 billion in 2019. That’s up 88.7% from $1.5 billion in 2018.
Overall, Bitcoin will likely fail as a currency, but it’s leading to some exciting innovation. I’m looking forward to the future of currency.
If you’d like a deeper dive, please reach out by leaving a comment below. Also, if you choose to, please share this article with others interested in Bitcoin and crypto currencies.