With Bitcoin’s price rising again (over $33,000 per coin at the time of this writing and up over 200+% in the past 6 months), I am revisiting a few questions that I have had since the first Bitcoin boom a few years ago. Here are the questions and my thoughts.
Don't we already have digital money?
I really don't see the long term useful value of Bitcoin because it seems to me that we already have digital money. Many if not most people have credit cards and or bank accounts, and the vast majority of money is already represented as digital values on those accounts. So why do we need Bitcoin? I understand that there are parts of the world where many don't have bank accounts or credit cards, and for those I can see some value. I would think however that those folks aren't running around buying Bitcoin at $33K a coin so it's a curious argument. I also understand that the fees of the banks and credit cards can be high, and thus Bitcoin transactions can be a cheaper alternative. To that argument I say good luck. First of all based on the charges I have seen from Coinbase, it doesn't seem that bitcoin transactions are very cheap. Also once the major banks and credit card companies feel a pinch from Bitcoin rate competition, if that ever happens, they will lower rates and thus that won't be an easy fight.
Is the original promise of Bitcoin still relevant?
The original promise of Bitcoin, going back to 2010, was of a currency that was independent of government oversight and free of the major institutions. Well that clearly has already gone by the wayside. China is moving closer to launching its own digital currency. Big government and institutions were never going to give up control, and in fact, it’s now only that major institutions are backing Bitcoin that it’s rising again.
Do you know where your private keys are?
The security behind Bitcoin is somewhat sloppy. On the one hand it's supposed to be inherently secure because it's based on cryptography and the nature of the distributed blockchain - however there have been many high profile hacks of exchanges -- not necessarily the blockchain, but still the end result is that security is more of a concern than a strength as its been promised to be. The fact that the private keys are so easily lost, makes it inherently risky. If you want to read a good suspense or horror story (depending on your perspective), check this one out about a guy who lost his crypto wallet password and only has 2 more guesses left before he loses $220M worth of Bitcoin forever. It is estimated that 20 percent ( a whopping $140 Billion worth) of the existing 18.5 million bitcoin is lost or stranded.
Would you trust Facebook with your digital money?
Facebook has announced that they will create their own digital currency - the LIBRA. It’s supposed to launch this year 2021. Given the lack of trust many have in Facebook and the recent lawsuit against Facebook by the DOJ, I can't imagine that anyone is anxious to have Facebook now control their money. Do you really want a company that is infamous for selling your most private data to also be able to view every financial transaction you make?
Do you care that Bitcoin mining is so wasteful?
Bitcoin mining is super energy inefficient and wasteful. According to this tool, annual mining for new Bitcoins is estimated to have the same carbon footprint as New Zealand, and use as much electricity each year as Chile. A new report estimates that as much as half of all the computing power in data centers around the world are dedicated to mining for Bitcoin. It is always curious to me that so many that are against fossil fuels, and/or are in favor of electric cars due to their energy efficiency, don't seem to have a concern when it comes to the wastefulness of Bitcoin mining.
Would you use Bitcoin for everyday purchases?
There are many who think Bitcoin will be used by the masses to make every day purchases, and some are using it just this way today. However I think Bitcoin prices are way too volatile right now. Since this weekend Bitcoin's price has dropped over 12%. Prices have dropped 5% just since I started writing this article. Lets say you buy a $35,000 car today with one Bitcoin. Next week that car could have cost you $50,000, or if it goes the other way, the seller could be left with just $20,000. Of course there is the case of the most expensive Pizza purchase ever for 10,000 bitcoin or over $330 million.
Is Bitcoin a good investment?
This is probably the granddaddy question of them all as it relates to Bitcoin. There are arguments on all sides. Some compare Bitcoin to Gold and say because of its limited and built in scarcity, it is a good hedge on inflation. Just like the last bull run, there are many projections of Bitcoin going up over $100,000 or more. One analyst at CitiBank predicted a $318,000 per coin price target. Much of Bitcoin’s recent rise has been due to tech companies and institutional investors going long on Bitcoin. This past October Square announced it was buying $50 million worth of Bitcoin. That's a relative paltry number compared to Microstrategy’s $250 million dollar bet on Bitcoin or PayPal's $300 million buy. Many big banks and institutional investors are keeping a small percentage of their assets in Bitcoin. Big fin tech and institutional buys are probably the biggest reason to be bullish on Bitcoin as an investment. When you consider Bitcoin’s scarcity and then consider that even a small 5% holding by institutional investors represents a tremendous amount at the macro level, then its easy to see how this could drive the price up. Not everyone is bullish however. Warren Buffet vows he will never touch it, and Mark Cuban just compared Bitcoin's price rise to the dot-com bubble. Cuban recently admited that he does hold crypto however. Another reason to be bullish on bitcoin is all the spending being done by the US government to combat Covid19 is driving up inflation. The recent $2 trillion dollar spending plan anounce by Biden could add fuel to the fire. Personally I do own Bitcoin and have been buying for the last few years especially on dips. I consider it a high risk alternative asset, so I have some money in Bitcoin in case it goes way up, but also it's an amount I can risk to lose, and to some extent expect to lose, if it collapses.
Where are the killer Blockchain apps?
During the first Bitcoin boom, I would often hear people say something like “I don't know about Bitcoin, but the blockchain is really game changing technology”. I tend to think the opposite could be true. I think Bitcoin may end up having some long term value, but Blockchain has been generally way over hyped and over promised. It's basically a distributed database that at some levels is over complicated, slow and does not scale. (I know that there is work being done to make it faster and scale, but then that compromises its inherent security.) Blockchain has had a lot of money and energy behind it as a technology, but aside from the crypto currency platforms themselves, I have yet to see a real world killer application or system that is based on Blockchain. I did some research recently, and I know there are a few applications and systems out there based on blockchain, and there still seems to be a lot of people working on it, but I still don't see anything special given all the time and energy that has gone into it. I saw some articles that suggested that Lemonade, the new AI tech enabled insurance platform that IPO’d last year and has really taken off, is based on blockchain. When I dig deeper, however, I see no evidence that Blockchain is in their tech stack. I remember reading statements that said “Blockchain is bigger than the Internet”. I think anyone who suggests that doesn't really understand the technology revolution that the Internet has enabled - including Bitcoin itself. Blockchain tech’s contribution is very far from it, and I'm still wondering where are all the killer blockchain apps?
2/21/21 update: Someone recently suggested to me that Blockchain is still in it's early stages similar to dial up Internet. That's an interesting analogy, but during the dial up Internet era mega companies like Google, Amazon, Yahoo, and eBay where created. The list of innovative successful companies created during the dial up ear of the late 90s and early 2000s goes on and on. My own previous company Intercontinental Exchange (ICE) was created during this time in 1998. We have tremendous computing power today including cloud computing which also didn’t exist back then. After years of hype, where are all the killer blockchain companies?
Bonus Question: Can you change my mind?
Like I said, I have had these questions for some many years now, and my initial impressions of Bitcoin from a few years ago still mostly stand. I’m not 100% convinced I am right which is why I continually revisit, research, and talk to friends and experts in the field about it. I really want to understand where Bitcoin and Blockchain technology are today and where they are headed. These are my thoughts at the moment, but I remain open to being convinced otherwise and changing my mind. What are your thoughts on Bitcoin and Blockchain? Do you think Bitcoin is here for the long term? Are you a buyer? Do you know of some killer apps or systems being built on Blockchain?