While any prognostication about Bitcoin is bound to make the writer look like a moron, so be it, let’s have at it.
Last night at about 1am, the cryptocurrency dropped below US$9,000. It appears to be in the middle of a “correction”. Except, it is not a correction; it is a tanking and the price will continue to drop.
Many Wall Street pundits will get on television, Twitter and Facebook to announce they predicted this bubble, and the inevitable popping. There will be self-congratulations and champagne all around.
They would be missing the plot.
The saddest part of the “Bitcoin 2017” story was the core justification for the coin got hijacked. Bitcoin became an investment vehicle and the “future of the Internet”. Of course, the extremely clever folks would point out that it’s actually Blockchain (with a capital B) that is the future. We know.
When it was clear the biggest player in cryptocurrency investment would be Wall Street, the entire community should have revolted, but they didn’t. Everyone is getting rich, why should we stop this?
But for a lot of bitcoin loyalists, it was like watching a favourite band go mainstream. Sure, it was nice to see them have success, but deep down, you knew it would never be the same.
There are a few of us who have been here for awhile. No, we are not part of the community, we are not investors and we do not evangelise the product. But, we also understand it, and we have for a few years now.
We are the people who quietly buy every album a band releases, but probably don’t wear the t-shirts and we get the nosebleed seats at the concerts.
In some ways, these people (and by using the word ‘us’ I betrayed my loyalties) are both bitcoins’ harshest critics and its most fierce advocates.
So let me explain
The fundamental flaw is that there simply isn’t enough Bitcoin to go around. We could hard fork every day for a century and the supply simply could never keep up with seven, eight, nine BILLION people who all have their own wants, need and desires.
In its most basic sense, a hard fork is a protocol change that validates previously invalid nodes, but in doing so breaks away from the old protocol and thus becomes a separate entity (Bitcoin Cash being the most famous). The two new protocols are seperate entities and cannot talk to one another (yet).
The big question is if Bitcoin truly starts to impact the global economic system, will the technologists allow the coin to ‘fork’ beyond 21 million? It would solve the not-enough-to-go-around problem, but it would also likely create a serious inflation issue.
The capping of Bitcoin creates two problems. The first is of the environment, the second is of power.
If Bitcoin takes over fiat currency it will destroy the planet. Period. End of story.
In 2009, when Satoshi Nakamoto first started sending Bitcoins to Hal Finney, the process crashed. A lot. It required so much computing power that eventually Finney stopped accepting Bitcoin because, as he said, the cooling fan annoyed him.
That was when transacting a bitcoin took about as much computing power as downloading a new MacOS.
(Don’t worry, Finney still got enough to be a very rich man these days. He understood what he was a part of.)
The point is, that was ten years ago, when two people were working out the bugs. If Bitcoin were actually the future, and we were about to onboard an entire planet on the distributed ledger, we might as well pack up our bags and ship off to Mars.
There are some intriguing initiatives from large companies like Samsung building new chips, but for now, we need to operate under the reality that mining for Bitcoin requires an absurd amount of energy consumption.
The support system of mining rigs, payment gateways, server farms, wallet companies, government infrastructure and day-to-day transactions is enormous. Because it requires so much computing power, more of an energy suck than paper cash by an order of magnitudes.
The amount of energy it would require to mine enough bitcoin to support a global economy is fundamentally unsustainable. Period.
The interesting part (and the ethos that attracted people like myself) about bitcoin is its anti-authoritarian soul.
It was born out of the cypherpunk movement, a group of libertarian-leaning activists that used cryptography to challenge government authority. The movement peaked in the 1990s and they were the first people receive the Bitcoin pitch.
To get an idea of the type of people we are talking about, one of the first adopters suggested using bitcoin as an anonymous pooling method to pay for an assassination of Ben Bernanke (the chairman of the Federal Reserve who had to navigate the Financial Crisis).
So what’s not to love?
Well, again, a it goes back to not having enough Bitcoin (it’s the same bugaboo that makes gold an impossible pegging standard).
Even if the bitcoin anarchists got their way and they managed to topple the global financial system, they wouldn’t be disrupting the levers of power, they would simply be moving it. Furthermore, it would be moving away from the Rule of Law.
Yes, the Fed would no longer have its global bullying power because of the fact that most of the global economy is pegged to the US dollar. But, the Fed works because the system is designed to restrain power.
Today in the US, Janet Yellen stepped down as Chairman of the Federal Reserve. Jerome Powell is the new leader. Some people may fundamentally disagree with this move, while others love it and applaud into the weekend.
In the context of Bitcoin, the point is that this move can be made. Neither Yellen nor Powell owns the Federal Reserve. They are political appointees who come and go with the wind.
Instead, the power would be held by the early adopters and whales. As we are already seeing, hedge funds are a major whale swimming in the ocean. I am not sure the goal of Bitcoin is to topple the Fed and then pass that power to Wall Street.
This is not so with Bitcoin. In the system of crypto, the people who own the power are simply those who own the most coins. We can’t throw Satoshi Nakamoto out of power. Why? Because he/she/they owns 63,000 Bitcoins and I own three. (Actually, I don’t own any, but the point remains).
If I want to accomplish something in the crypto space, I am entirely dependent on the whales. Whales with no political oversight, no legal structure and no incentive to do me right. Whales that also happen to be swimming at Citibank and Goldman Sachs.
To think cryptocurrencies are blowing up the system is naive. It is not democratising cash, it is simply moving the power structure from ‘traditional politicians’ to ‘nouveau suave politique’. The difference is in the new system, it is not the law that drives business, it is the miners and whales who have complete control over the system.
No, thank you.
Why I still believe
I swear, despite what you just read, I actually really like cryptocurrencies, I just think in our fast-paced, instant-gratification society we got sucked into a serious hype-cycle and are about to spend 2018 realising it was fraudulent.
But let me explain why I am a believer in the idea — although I have serious misgivings about Bitcoin as the vehicle to facilitate these changes.
The reason I like Bitcoin is because its creators understood that a central banking system was created by the imagination of mankind. It is neither a truth nor a fallacy. There is no reason for a Central Bank and for much of human history, no such system ever existed.
Even the United States has operated as a country without a Central Bank longer than it has had one (135 years versus 105 years). The idea of a Central Bank was a core disagreement amongst the nation’s founders and for 135 years the country fluctuated between one, a few and thousands of national banks. Only after a period of boom-or-bust financial instability was the Fed founded in 1913.
Having a national central banking system is a political decision, and the idea behind Bitcoin is that humanity can operate fine without it. Actually, Bitcoin believers think the world will probably function better.
This is why the idea of Bitcoin is cool. It not only challenges our current financial system, it provides an EXTREMELY solid alternative to how the system could work. It is easy to criticise, but the hard part is critiquing and then suggesting a better alternative. This is what Bitcoin has accomplished.
Technology is rapidly changing our society, and currency will certainly look far different over the next decades. But the solution isn’t Bitcoin and it will never be. Maybe it is another alternative-coin, or maybe it’s an idea just now being emailed to a bunch of cyber-anarchists who respond with tepid enthusiasm.
Whatever the change may be, we can thank Bitcoin for blazing the trail.
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