Bitcoin is useless
Christoffer Hernæs: “Bitcoin in its current state proves to be harmful to the environment”
While the recent surge in Bitcoin price is good news for many Bitcoin investors, it should be seen as a death sentence for the functional value of Bitcoin. As the price continues to reach new record levels, it becomes obvious that Bitcoin is useless for anything else than speculation.
Looking back at Satoshi Nakamoto’s original white paper, Bitcoin is presented as “a peer-to-peer electronic cash system”, an “electronic coin” that would replace money transfers that are currently controlled by the financial system, and which would be almost immune to fraud.
The extreme value fluctuations of Bitcoin effectively make bitcoin useless for its original purpose. Some may remember the world’s first real-world Bitcoin transaction where one Bitcoin enthusiast bought two large pizzas for 10,000 Bitcoins. I hope those were tasty pizzas because with the Bitcoin price as of today they would be worth $150 million. This level of currency fluctuation is usually associated with failed currencies that exhibit extreme inflation levels. An indication of Bitcoins lack of usefulness as a currency is that Steam, announced that it would stop taking payments in Bitcoin. Valve, the service’s owner, said it had become “untenable”, owing both to its extreme volatility and the rising costs of using the network.
The latter is also an area where Bitcoin is underperforming as a means of payment. In the early days of Bitcoin, processing fees where at such low levels that Bitcoin was a promising way to process microtransactions. This quickly changed as Bitcoin increased in popularity, and where a Bitcoin payment cost approximately 20 cents one year ago, the processing cost has now increased to an average of $7, with peak fees as high as $20.
Compared to government-issued currencies, Bitcoins wild ride proves that it lacks the necessary predictability to act as a currency. If we take off our tinfoil hats for a while we should acknowledge that currencies are regulated for a reason. To provide financial stability.
Also as an asset class, there are reasons to question Bitcoins usefulness. One of the characteristics that were emphasised when Coinbase in collaboration with ARK invest argued that Bitcoin should be considered an asset class was the decreasing volatility. Until 2017, volatility had decreased each year, and in 2016, average daily volatility decreased from about 10% to about 4% compared to the previous year. After surging past $11,000 on Wednesday, the biggest digital currency has swung between gains and losses of as much as 20% on an intraday basis.
Another obstacle for Bitcoin as a useful asset class is the recent ban of Bitcoin futures made by South Korea.
Even with recent advances in the underlying technology to promote Bitcoins functional value such as the Bitcoin lightning network to increase scalability, the primary value driver of Bitcoin is based on speculation and increase in demand from new Bitcoin buyers. As long as there are new buyers, the price continues to increase with the invisible hand of supply and demand. It is estimated that there are 500,000 people buying their first Bitcoin every day, moving Bitcoin way into greater fool territory when it comes to Bitcoins extrinsic value. As long as there are more buyers than sellers, the price continues to increase. It is not difficult to see that this increase in demand will diminish at some point.
While some may argue that the value of Bitcoin is in no way different from our collective shared belief that one dollar is worth one dollar, it has one fundamental difference as dollars has an intrinsic value as it is used as an everyday currency.
According to Investopedia, Bitcoin will derive its intrinsic value both from its use as a medium of exchange and as a store of value. As a footnote to this assumption, it should be stated that Bitcoin’s utility as a store of value is dependent on its utility as a medium of exchange. As Bitcoin fails to act as a currency, it is no longer a medium of exchange, and therefore not a store of value either following to Investopedia’s assumptions. In short, if people do not use Bitcoin for other purposes than speculation, it has no intrinsic value. On the other hand, Bitcoin investor Alex Compton told the Wall Street Journal. “If people use Bitcoin as a currency, it will lose value as an investment.” By this logic, Bitcoin is only interesting as an investment opportunity as long as there is no intrinsic value.
Limitations in the Bitcoin infrastructure also cause some issues regarding Bitcoin as a trading asset resulting in a spread in trading prices of 3% between different Bitcoin exchanges when the price was at $10,000 and reaching up to $2,000-$2,500 gap between Western exchanges and South Korea as the price reaches $16,000. While some may see this as an arbitrage opportunity, it is off-putting for institutional investors.
Another issue with Bitcoin is the energy required to process transactions on Bitcoins blockchain. As the chain increases, the amount of computing power needed to verify each transaction rises exponentially. Bitcoin uses more energy than 19 European countries, and roughly 0.7% of total energy demand in the US, equal to 2.8 million US households. By some estimates, Bitcoin would consume as much energy as the entire US by July 2019 if the growth continues at the same rate as today. Even an optimistic scenario regarding developments in mining hardware states that mining one Bitcoin in 2020 would require 5,500kWh, and generate over 4,000kg of carbon dioxide if we assume that only half of the energy required originates from fossil fuels. From an environmental perspective, the way Bitcoin is mined and processed is highly unsustainable and by no means useful for the environment.
Despite this, Bitcoin enthusiasts continue to celebrate the ever-increasing value of Bitcoin and see no limits for the potential of Bitcoin. Founder of McAfee and data security legend, John McAfee, has gone as far as stating that he expects one Bitcoin to be worth over a million dollars.
A good sign that the field is overheating is the official warning issued by Coinbase, encouraging its users to invest responsibly as the price leaped from $10,000 to $17,000 before dropping to $15,000. By now it is impossible to predict whether or when the bubble will burst. Saxo Bank predicts that Bitcoin will peak at $18,000 in 2018 and then collapse. This is a fairly bold prediction, and only time will tell when there are no more greater fools out there and the roller coaster ride will come to an end.
The more Bitcoin prices surge due to its speculative value and increasing demand, the more useless Bitcoin becomes as a currency. And as Bitcoin becomes useless as a currency, it loses its intrinsic value as an asset. I still believe that the underlying technology is revolutionary, and there are several use cases where crypto tokens may prove to be useful such as royalty distribution in the music industry or monetizing data and machine-to-machine payments like IOTA just to name a few examples.
The future of Bitcoin is impossible to predict as the underlying technology is still at an immature stage and there are continuous efforts to fix some of the fundamental issues regarding scalability and energy consumption. But Bitcoin in its current state as something that exists almost solely for financial speculation and proves to be harmful to the environment is pretty useless in my book.
By Christoffer O. Hernæs, chief digital officer, S-Banken
Read his blog here.
