Last week I told you why Bitcoin could be awesome. This week I tell you why it could be BS.
Now let’s look at the arguments against. I’m going to divide this into two sections. First I’ll look at the block-chain in general, and then I’ll have a look at crypto currencies and Bitcoin in particular.
Disruptive technologies are all the rage these days. Like the way Uber disrupted the taxi market, or the way AirBnB disrupted hotels. It’s very buzzy.
And people point to block-chain as the next big disruptive technology. The most recent example of anything like it was the birth of the internet, they tell us.
And I am loving what block-chain has to offer, but when I look into it, it looks less like a disruptive technology and more like a “foundational technology”.
So email disrupted regular mail. The internet was the foundation for email.
But even that’s not entirely right. The block chain is more like TCP/IP (transmission control protocol/internet protocol), which created the shared language that made the internet possible.
Before that, computers had to connect to each other directly (or network to network). TCP/IP enabled all participants to join together in the world wide web, without the need for a central exchange.
It was ‘distributed’, and that’s why it’s a better metaphor for block-chain I think.
But TCP/IP launched in 1972. It would then be over 20 years before the first commercially viable internet-based companies launched.
So how long do we have to wait before the commercial promise of the block-chain is realised?
What’s more, you couldn’t monetise TCP/IP itself. You couldn’t make money of it. It was a common good. It was owned by everyone, it benefited everyone. That was precisely the point.
Same story with the block-chain. It’s set to make a whole bunch of amazing things commercially viable. But it doesn’t mean that the block-chain itself, or the first generation of block-chain thingys, are going to make money.
The other thing I’d say about the block-chain is that while it contains seeds for a social revolution, that revolution will take many, many years to materialise.
So say, you have smart-contracts based in the block-chain. That contract says that I owe you $5. There indisputable proof that it’s true. We know the block hasn’t been tampered with. It clearly says that I owe you the money.
But I refuse to pay.
So what do you do?
Contracts are useless unless they can be enforced. For that, you need some wholesaler of violence – historically the government.
But then you might say, but it’s a trust system. If you diddle someone, it’s recorded. You get something like an e-bay profile score. That disincentives cheating.
But hang on. I thought anonymity was one of the great selling points for the block-chain? And what’s to stop me from setting up a string of fraudulent identities?
A huge amount of social infrastructure goes into simply proving to others that we are who we say we are, so we can enter into contracts with each other.
If you take governments out of the equation, you take all this social infrastructure with them.
Ultimately, we may find better way to do all this, and block-chain may be a start, but it’s far from the final word.
The first point with crypto-currencies is that money is power. If you think that governments are just going to sit back and hand all that power over to the people, I think you’re a dreamer.
But, you might say, “It’s too late. The block belongs to everyone. They can’t control it now.”
I think it is probably true that they can’t kill it, but I don’t imagine they’d want to. They’d either side-line it or co-opt it. Currently, neither option strikes me as particularly hard.
(China recently shut down all its crypto-exchanges and went and seized all their records. So much for anonymity.)
Of course there are ways round this. But if your solution involves every person in the global economy running their own virtual private network and putting time and energy into staying a step or two ahead of the crypto-police, again I think you’re dreaming.
The other big draw-back for cryptos is that transactions are not free. People talk like they are because, there’s no central fee processor (like PayPal), but there’s still a cost that needs to be borne.
Currently the processing that drives the Bitcoin network is driven by miners. They receive rewards in the way of coins, and fees from individuals who want to see their transactions moved to the front of the cue.
And currently, that whole system is being driven by five to ten companies, according to Business Insider.
That’s not sounding that awesome.
It’s not immediately evident to me that a global financial network organised by a couple of hundred nations is inferior to a financial network powered by five to ten companies.
Especially if those five to ten companies have an ability to control fees…
But the point is, unless transactions are free, there is a cost that must be borne. There is a price that must be paid, and a fee that must be collected.
Money is concentrating somewhere, and with it, power.
This might sort itself out in time, but the current generations of cryptos all seem burdened with this flaw to me.
The final point is about Bitcoin in particular.
Have a read of this statement from Amazon’s 1997 letter to shareholders:
“We established long-term relationships with many important strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy.”
Of course they did. These were THE players in the internet space in 1997. Netscape was the first personal web browser. These companies dominated the internet just as it began to launch.
And how many still exist?
Maybe Yahoo, kind of, but apart from that, they’re all dead.
Now if block-chain is the next internet, as people like to claim, is Bitcoin the next Netscape?
Even ten years is a long time in business these days. If you’re betting on Bitcoin, you’re betting that no other player comes along and cuts bitcoins turf in the next.. what? 30 years?
That’s quite a gamble.
The way I see it, Bitcoin is very vulnerable to disruption. Its cost structures seem high, so there’s always the potential for undercutting.
Or, let’s say Amazon – the largest retailer in the world – launches its own coin – the Amazonian. At the time it says that you can only buy things with Amazonians but it will accept any Amazonians from anywhere.
(Remember when governments launched money in the past, they decreed that all taxes had to be paid in that money, to enforce widespread use. This would be Amazon’s equivalent play.)
People would find that they’d be happy to accept Amazonians, because there is a guaranteed use for them. If, at the same time, governments tried to block Bitcoin, but gave the green-light to Amazonians because Amazon committed to submit to the tax structures of the day (dodging tax seems to be one of Bitcoins supposed selling points) then the bulk of coin users will gravitate to Amazonians. It would just be easier.
In this game, user-numbers are king.
Bitcoin has the numbers for now, but there’s a long road of uptake ahead of it before it can claim to be the dominant player for sure.
And even then, how long do dominant players in any industry last these days? 10-20 years?
So to me, betting on Bitcoin is really a bet that no better system will evolve in the next 10-20 years. And I’m not talking about better from the perspective of an anarchist utopia, but better simply from the point of convincing more mum and dad users to get on board.
That is a HUGE bet in my mind.
So if you’re investing in Bitcoin – and really we should stop saying “invest”. If Bitcoin is actually currency, you don’t ‘invest’ in currencies. You speculate in them. You buy them on the speculation that they will increase in relative price. There’s no underlying value.
So if you’re speculating in Bitcoin, I would say that you need to be aware that the massive returns that are possible are equally balanced with the massive risks involved in any single crypto-currency.
Block-chain is a revolution. It’s amazing. But so was and is the internet. And a lot of money got poured down the toilet during the dot-com boom.
To me it feels like a case of history repeating.
What do you think? That’s my case against Bitcoin. Stronger than my case for?
I’ll leave it to you to be the judge. I’m just trying to shed a light on a world that has become very confusing very quickly.
And of course. I’m no expert. I’m just a smart guy with a few hours up his sleave. There could be huge parts of the story I’m missing.
Very happy to hear about it.
NEXT TUESDAY: I’ll look at wether Bitcoin is a bubble (what you need to be in a bubble) and look at ways you could still make money, even if it is. Look out for that.
What did I miss?