Ever since Bitcoin, a Cryptocurrency, was invented by Satoshi Nakamoto in 2009 we have seen massive, near cult-like, support online for the technology, and in the last few years a flood of speculative capital for Bitcoin and the thousands of other Cryptocurrencies. After looking at the claims (given by the community or Coin founders) I came to the conclusion that all decentralized cryptocurrencies are going to always be a very inefficient way for speculators to speculate and for a niche community to stay alive.
Disrupt the financial sector? When? And how?
It seems everyone and their mother has some revolutionary technology or idea that will disrupt something. So far, nothing has been disrupted nor are we getting closer to disrupting anything. Here are the claims cryptocurrency proponents say about the superiority of cryptocurrencies compared to fiat currencies like the US Dollar.
The first set of claims I will debunk are found here:
Anonymized transactions protect users data through cryptographic techniques
Cryptocurrencies are sold as a great way to avoid spying by governments, to keep our financial life our own. However, this isn’t even true because at best it makes its users pseudonymous, meaning you can eventually be linked back to your real-world identity if you use the currencies in the general economy. Because all wallets in Bitcoin, the most popular cryptocurrency, is linked to transactions, you can simply walk them backwards to eventually find a link to a name or address. Example on how the government can still spy on you:
- You live in a Utopia where everyone accepts and uses Bitcoin
- Employer send you 1 Bitcoin a month
- A -> B
- You send 0.5 Bitcoin to your Mortgage company
- B -> C
- You send your friend 0.01 Bitcoin for drinks
- B -> D
Now on the surface, the government does not know who is wallet B, or wallet D, but they will know that wallet C is a mortgage company, and that wallet A is a registered company. They will simply force either entity, with say a search warrant, to tell them who wallet B belongs to (your employers know your address and name, so does your bank). And now the government can see exactly where you send money, and where it comes from, forever, as now they can see all your future transactions linked to your wallet. A much better privacy tool already exists, cash.
Providing a new financial model for 1.7B unbanked individuals around the world
This is an absurd claim. If someone, usually in the third-world, does not have a bank account there is a 99.99% chance they will also not have internet access. So digital currencies will do nothing for them.
Steep reductions in settlement time and efficacy could save consumers $16 billion annually
They did not provide sources for such a claim, nor is an impressive reduction, compared to the $4.4 Trillion in digital transactions we had in 2020 [source] that makes up a 0.36% savings. A rounding error, not a disruption.
Further, let’s not talk about how Bitcoin alone consumes 70 TWh of electricity year (that is enough electricity to charge 1.4 Billion Tesla Models 3s) to process 1.4 million transactions a year. [source]. Compared to Visa handling 150 Million transactions a day [source] and uses a tiny fraction of the electricity.
Bitcoin is so inefficient I say it should be outlawed just for being such a waste of electricity.
Providing immutable, traceable records of security-rich transactional networks
The system itself is secure, as you cannot manipulate the blockchain (in practice), but that does not mean the users should feel safe. Bitcoin’s real issue when it comes to security is that it is not managed by a central authority. This means if someone steals your Wallet (simply a private key) you lost all your money. In traditional banks, transactions can be reversed if fraud is involved, not for Cryptocurrencies. To 99% of the userbase that is less safe.
Smart contracts could drastically eliminate manual and administrative work— ultimately bypassing them altogether
I will cover smart contracts in a later article. But basically, it’s over promise and under deliver on a grand scale.
Fundamental issues with cryptocurrencies
Cannot replace fiat currencies
Despite what Libertarians might claim, Bitcoin or any other decentralized cryptocurrency will not End The Fed. Though the government cannot technically censor any cryptocurrency protocol, it can make it practically unusable by making trade of it to real currency extremely difficult. Shutting down all exchanges (including not allowing banks to deal with foreign exchanges) and outlawing retailers from accepting it means the only way to acquire cryptocurrencies will be through sketchy illegal means that the vast majority of the population will never consider.
Plus, why would anyone consider it? If they get paid in the national currency (by law) and they must pay taxes in the national currency than why would anyone accept cryptocurrencies just to eventually trade them (in a sketchy way) to the national currency? Only criminals will go through the process of trading with cryptocurrencies.
Won’t help anyone in Venezuela
Proponents often show how terrible Hyperinflation is in Venezuela, a stable currency for someone in Venezuela is very important. To that, I say yes, but cryptocurrencies won’t help them. First, if they don’t have any cryptocurrencies already buying them with Venezuela currency is extremely difficult and expensive as nobody will trade anything for Venezuela currency. Second, if the argument is that if they got the Cryptocurrencies before the national currency collapses than I say this could be applied to anything; if they bought dollars before the national currency collapse they will also be well off, actually, with dollars they will be better off as they are acceptable by anyone in the world. Hindsight is something everyone has.
Limited supply is terrible for the economy
This is related to my previous argument, Cryptocurrency proponents claim that because the supply is limited, for example, Bitcoin cannot exceed 21 million bitcoins (this includes any Bitcoins from lost wallets), therefore inflation is impossible.
Though it is true that inflation is impossible, the effect on the economy is that the economic engine will eventually come to a standstill. This is because as we start to approach the ceiling the Miners (entities that process transactions on the Bitcoin blockchain) get less and less Bitcoin reward for their work, the total supply of Bitcoin will be a Logarithmic function that approaches but never reaches 21 million, while the Miner reward approaches but never reaches zero. All this means is that eventually, not even that far away, practically no new Bitcoins will be created and the only reward left for Miners is fees. Over time, transaction fees will go up, choking the economy and making micro-transactions extremely impractical (one of the benefits of cryptocurrencies).
On top of that, the modern meme of the 1% “sitting” on piles of money will actually be real now. Because unlike in Fiat currency, where the economy pie is always growing, a cryptocurrency economy is a zero-sum game, you having a Bitcoin means I don’t have it. Social unrest will be much worse.
Simplified international transactions you say?
All transactional benefits cryptocurrencies offer rely on one prerequisite: everyone uses the same cryptocurrency and that cryptocurrency is accepted everywhere. Without that requirement all benefits are meaningless.
Here is the best-case scenario for sending cryptocurrencies internationally (if you already have the exact type of cryptocurrency that you need and it’s widely used in the nation you are sending to:
- Send cryptocurrency [pay fee for transaction]
- The receiver uses cryptocurrency to purchase goods or services
However, this is extremely unlikely. Instead, here is the real process:
- Convert your national currency into cryptocurrency [pay a fee for the conversation]
- Send cryptocurrency [pay fee for transaction]
- Receiver converts cryptocurrency into national currency [pay a fee for the conversation] assuming robust exchanges exist
- Receiver uses national currency to purchase goods or servies
This also assumes the receiver is 1) has an internet connection, 2) is tech-savvy enough understand WTF a Bitcoin is, and 3) hopefully nobody falls prey to the growing Crypto scams.
Or people will simply use reputable and well-known services like TransferWise or MoneyGram.
And if we finally get the Lizard People Illuminati controlled One World Government that Alex Jones is afraid of, then international money transfer will be as simple and instant as using Zelle inside the United States. I am hoping the World Government comes sooner than later. And a single world fiat currency.
More than one cryptocurrency exists you say?
Unless one of the cryptocurrencies becomes an overwhelming majority in terms of transaction volume the fragmentation within the sphere means none of them can succeed.
How can an economy function well if people are paid with one currency, pay rent with a second currency, buy groceries with a third, and pay for Netflix with a fourth? The amount of friction and fees to convert between them is going to be ridiculously expensive.
There are thousands of cryptocurrencies out there, meaning 99.9% of them must die for the industry to have a chance to thrive. It’s a chicken and egg problem except this time there are thousands of chicken breeds that are incompatible with each other and are all trying to succeed.