We’ve written a lot about cryptocurrencies, largely about bitcoin, here at Exponential Investor – and it’s certainly a big theme for our publisher. I don’t agree with my colleagues on everything – but I’d certainly encourage you to read their views on cryptos, as they’re very serious about this asset class. Even if you’re not an investor, it’s a field you need to be aware of.
But, in all the articles I’ve written about this subject, I don’t really feel like I’ve ever explored my personal views thoroughly. So, today that’s exactly what I’m going to do.
It might seem controversial, but I’m afraid I really don’t like bitcoin.
There are over a thousand cryptocurrencies (which is a problem, in itself). Bitcoin is the oldest and largest of these, being worth roughly half the cryptocurrency market’s total value. While my beef with bitcoin doesn’t apply evenly to all cryptos, many of the problems are systemic – so investors in all such currencies should take heed.
Now, I’ll give you a rundown:
Beef 1: bitcoin is bad money
As we’ve explored in previous articles, money has to do a few specific things. It must be a medium of exchange, a store of value, and a unit of accounting.
Bitcoin fails spectacularly on all those counts. In my view, that means it doesn’t really work as money. Let me break down why these problems exist.
Firstly: a medium of exchange. If bitcoin was a useful medium of exchange, then the range of venues which accept it would be rising over time. However, we in fact see the opposite. Bitcoin was never very useful, and it’s getting less useful over time. Maybe the recent attempts to speed up transaction times will turn the tide, but we’re still a very long way from a time when you can swap your Mastercard for a bitcoin wallet.
As well as the acceptability issue, there’s the issue of convenience. On the odd occasion when I’ve been given reason to consider buying bitcoin, the faff of the process has really put me off. Admittedly, the rise of support services is starting to change this. Coinbase’s recent $100m raise is just one example of how this market is maturing – hopefully addressing some of the convenience and security issues, for ordinary users.
Secondly: a store of value. Bitcoin is fluctuating wildly – and always has been. Although its long-term rise has been enormous, there have also been spectacular, sustained crashes. In terms of being a reliable place to keep you cash, it certainly doesn’t come up to any of the respected global currencies – such as the Swiss franc, the euro, the dollar, or even the beleaguered British pound. As such, it’s more of a tool for speculation, than a store of value. I admit, you could also say much the same about gold – but at least that’s got a much more substantial history, and some utility (for jewellery, and suchlike). By contrast, I’ve never seen anyone wearing a bitcoin ring.
Thirdly and finally: as a unit of accounting bitcoin is pretty much useless. Its wild fluctuations mean that you can’t really denominate anything in bitcoin, except perhaps other cryptocurrencies. This is similar to the issues described above, but it’s more about short-term movement than a lack of reliable long-term value. If you priced groceries in bitcoin, you’d be forever walking the aisles with a labelling machine.
So if bitcoin isn’t really working properly as money, than what is it? As I touched on earlier, bitcoin is primarily of “value” because of its use as a speculative tool. It’s a commodity which is in limited supply, and seemingly expanding demand – leading to price increases. At present this is causing an apparently unstoppable rise in bitcoin’s value. However, it’s an investment truism that “the trend is your friend; till the end, when it bends”. If the value of something is simply determined by the value other speculators place on it, then the market has moved away from the fundamentals.
Yes, fiat currencies have many disadvantages – not least that they tend to get debased by governments, to get out of temporary political funks. Yes, we do need to look at the opportunities that cryptocurrencies provide for us, as a society. But bitcoin isn’t really doing the job of money. Therefore, it isn’t filling the hole left by the failure of the fiat currencies.
Now, if that was the end of the story then I still may be tempted to take a punt. But frankly, there’s a lot more wrong with bitcoin than just that.
In any serious analysis, bitcoin is bad money. It is hard to use, isn’t widely accepted – and its fluctuating value means that it’s just not a good way to store wealth, or to account for it. In short, bitcoin doesn’t really fit economists’ definition of money.
But that doesn’t mean you can’t profit from bitcoin – and from other cryptocurrencies. My colleague, Sam Volkering, is an acknowledged expert in this field. He’s produced an investment guide, to help you avoid the bear traps in this confusing, crowded sector. Of all the 1,000+ cryptos, he can help you pick out on this link“>the ones that you should be backing.
But I’m not done yet – and there’s a lot more beef.
Beef 2: bitcoin is a waste of resources, and it’s polluting
Bitcoin is “mined” by solving hard, pointless maths. There are no outputs, other than bitcoins. This busywork mining process is certainly not benign. It uses a significant amount of electrical energy, and computing power – both of which could be put to different uses. Mining bitcoin essentially mandates the purchase of a complex, expensive electricity-wasting machine. It doesn’t produce anything of direct social benefit.
By contrast, my current investment portfolio includes a range of assets like housing. Such assets have undeniable social and financial utility. While people might speculate on the value of property, it is never completely divorced from the fundamentals – in that you can always live in a house. You can’t live in a bitcoin, and the only reason people ascribe value to cryptos is because they think other people also ascribe value to them.
If you bear in mind we have a limited amount of economically employable resources on our finite planet, it seems silly to deploy them in a manner which yields no social benefit – and, in fact, imposes significant social harm. Our electricity is currently generated in a rather polluting fashion, so bitcoins have a clear environmental cost – from both mining and exchange. Currently, the bitcoin network uses around as much electricity as Lebanon, according to the Bitcoin Energy Consumption Index. What’s more, we could use the miners’ pricey computers for doing other kinds of maths – such as searching for new kinds of medicines. Instead, we’ve built enormous arrays of virtual chocolate teapots.
I’m not one for pious investing, but I do try to ensure that the companies I back are providing at least some form of social utility – and I just don’t feel this way about bitcoin. If I saw the situation differently, then I might conceivably speculate on the currency (knowing full well that speculating was exactly what I was doing).
So, where does this leave us – from an investment point of view?
Personal morality is your own choice. You may be comfortable with investing in cigarettes, alcohol, weapons, etc – all investments that others may baulk at. But the economic fundamentals of bitcoin are something we can all see – even if we might have different opinions on them. And, right now, I think bitcoin’s fundamentals suck. Add that social element back in, and you can hopefully see why I regard bitcoin as rubbish money, which comes at high social cost.
Does that mean I dislike cryptos more generally? No it does not!
I’m well aware of the limitations of fiat currencies – and I can see how cryptos might ultimately replace them. However, I don’t think bitcoin is the right tool for the job – for a range of different reasons. There are other digitally tradable assets which perform much better. For example, there are blockchain-tradable forms of gold – as provided by OneGram, for example. (I’m no gold bug, by the way – and gold’s environmental costs make bitcoin look like it’s made of daisies.) However, at least some of these alternative cryptos avoid the obvious downsides of bitcoin.
So, it’s not the blockchain approach per se that troubles me, it’s what you’re trading on it. We’ve recently interviewed several firms, who are launching cryptocurrencies that get round many of the problems inherent in bitcoin.
I think blockchains have a great future, and I think cryptocurrencies could be an important part of that. But bitcoin is presently the world’s most important cryptocurrency, and it just does not appeal to me.
So if bitcoin isn’t where I’d suggest you put your cash, then what should you do?
There are over 1,000 cryptocurrencies to choose from – and you should get expert insight before you invest. If you’re keen to profit from this sector, you should hear what my colleagues have got to say. You can check out Sam Volkering’s guide to profiting from cryptocurrencies on this link“>on this link.
Have you got beef? Please let us know – email@example.com.