Let me start by saying that I do believe that blockchain-based money is the future, but there are mountains to climb and financial crises to endure before we get there, and when we do, Bitcoin will undoubtedly NOT be part of the landscape. I’ve previously outlined some of the reasons it simply won’t work in the long-run, but rather than go through all the issues in separate blogs, I thought I’d consolidate the issues I raised previously, and add a few more nails to the coffin for good measure:
- Acceptance: In The Cryptocurrency Trap, I made the point that Bitcoin’s meteoric rise was largely due to speculation and hype – everyone was buying and relatively few were selling, or using it for its intended purpose: to buy stuff. As such, the price was bid up to almost $3,000 at one point. Not too many people would argue with that observation, but what got the cryptobugs enraged was that I also claimed you can’t buy anything with Bitcoin as very few merchants accept it. This was viciously denied by the ‘believers’ who pointed to their Visa Bitpay cards as evidence they could buy whatever they liked from any merchant that accepted Visa (which admittedly is most places these days). The reality about Bitpay is when you use it, you’re not spending Bitcoins, you’re spending Dollars. You can ‘top-up’ your Bitpay card by converting Bitcoins to Dollars at the spot exchange rate, and that’s about it. If you convert a Bitcoin into $2,300 on your Bitpay card and the price goes up to $10,000, guess what? You still only have $2,300 to spend. I’ll say it again: you can’t buy much with Bitcoin as very few merchants accept it, so it’s therefore isn’t a. Defendants argue this will change over time, and perhaps one day more merchants will accept Bitcoin, but that’s highly unlikely for reasons that will be clear as you read on.
- Scarcity: A key feature of Bitcoin is it’s apparent scarcity. Like gold, the supply of Bitcoin is limited, prompting the godfather of Bitcoin himself, Andreas Antonopoulos, to describe it as gold 2.0. But while the supply of Bitcoin may be limited, the supply of competing crypto’s is not. Bitcoin dominates market share because it was the pioneer, but there are already over 700 other cryptocurrencies out there, and many more will undoubtedly pop up as the madness continues. I say madness because what most people don’t seem to understand (yet) is that an unlimited supply of crypto’s makes no single currency ‘scarce’, and since their value is derived from scarcity, a competitive market will reduce them all to worthlessness at some point.
- Destruction: In Satoshi Nakamoto is Dead! I raised what is, in my opinion, the most critical flaw of Bitcoin – a loss of keys. If you lose the access code that enables you to transact with your Bitcoin (the ‘keys’), then that’s it, it’s gone. You can still view your balance, as the ledger is public, but you can’t claim ownership as the system is anonymous (a supposed benefit of Bitcoin), so your coins are effectively locked in cyberspace, forever. Effectively, destroyed. Gold, Bitcoin and government issued legal tender can all be lost or stolen, but only Bitcoin can be destroyed. Over time, this means its supply is not limited, but decreasing.
- Government intervention: So far, governments have largely refrained from interference, but make no mistake, they can and will intervene at some point. It would be incredibly naiive to think they won’t. The only question is how? Well, a very simple and highly effective tool they could use would be the application of capital gains tax on a FIFO (first in first out) basis. This would subject most Bitcoin users to a considerable tax burden since many would have acquired their coins for practically nothing, and given they’re now trading at over $2,000, a 20% capital gains tax would make them liable to pay over $400 for every coin spent. But Bitcoins are anonymous you say? Not if you want to spend them! Referring back to Point 1, Bitpay Visa requires identification to open an account. Technically the government wouldn’t even need to wait for you to make any purchases – as soon as you convert Bitcoins to dollars to ‘top-up’ your Bitpay Visa, a capital gain has been realized and you’d be liable to pay tax! Now of course there are many tricks one could use to hide from the taxman, and no doubt a few would try their luck, but a well-publicized fine or jail term for Bitcoin tax evasion would severely damage its appeal and cause the price to plummet.
At the end of the day, Bitcoin will fail for one or more of the aforementioned reasons, but that isn’t to say the Blockchain has no place in the monetary system. Our current monetary system, controlled by the banking sector, is hanging by a very fine thread and will likely collapse in the near future as detailed in my book, The Economics of the Economy. A blockchain-based cryptocurrency has great potential to succeed the failing banking system, but in order to do so, cryptobugs must first realize and accept that government authority is necessary to legitimize the currency. Scarcity alone isn’t enough to command genuine value.