Bitcoin: Empty Promises and Broken Dreams?

Bitcoin was meant to be the golden child of the cryptocurrency world. It burst onto the scene with its grandiose claims of transforming the financial landscape, but let's cut through the smoke and mirrors and face the harsh truth: Bitcoin has left us with shattered dreams.

Bitcoin was released on January 8, 2009 through a blog post by Satoshi Nakamoto. If Satoshi really existed is a different story. Maybe yes, maybe not, maybe it was a group of people. Yet, what the blog post promised is that the new currency will be ?completely decentralized”. There shall be ?no central server or trusted parties, because everything is based on crypto proof instead of trust.”

Bitcoin was meant to be ?fully peer-to-peer, with no trusted third party”. This means that Bitcoin is not backed by central bank and not reliant on commercial banks. For centuries we trusted in the value of the money we hold for it was backed by the authority of the central bank. The US dollar until 1972 was backed by gold reserves. Then President Nixon withdrew from the gold guarantees to the dollar.

What is the ?gold reserve” to the Bitcoin? It is mechanism called ?proof of work”. It is a consensus mechanism used by certain blockchain networks, including Bitcoin, to achieve agreement and validate transactions. In the ?proof of work”, participants, known as miners, compete to solve complex mathematical puzzles, requiring significant computational power and energy consumption.

The notion of decentralization was at the heart of Bitcoin's seductive allure. It promised to liberate us from the clutches of central authorities, offering a peer-to-peer transaction system free from meddling intermediaries. Yet, what do we see in reality? A mining industry dominated by a handful of power-hungry entities, trampling on the very principle of decentralization. According to data from the Daily Pool, the top 5 mining pools control over 85% of the Bitcoin network's hash rate with two leading entities FoundryUSA and Ant Pool controlled 52 % of Bitcoin’s hash rate as of January 2023. This leaves little room for true decentralization. It's a classic case of "meet the new boss, same as the old boss.”

Proof of work causes enormous energy usage by the miners. It is estimated at 0,5-1% of the global energy usage. According to the University of Cambridge (cited by Eswar Prasad) ?nearly two thirds of global Bitcoin mining power originates in China (as od April 2020). ?This raises the possibility of a coordinated majority attack that could hijack the network”.

Bitcoin promised security of the currency through advanced cryptography and by the above described decentralization mechanism. Bitcoin enthusiasts sang the praises of its impenetrable blockchain, but reality has shown us otherwise. Long before the FTX crash there was Mt. Gox debacle in 2014, where approximately 850,000 bitcoins were lost due to hacking, which was a wake-up call to the vulnerabilities of the system. Since then, numerous exchange hacks, fraudulent schemes, and phishing attacks have ravaged the crypto landscape, leaving countless investors licking their wounds. The promise of security has become nothing more than a sad joke, as Bitcoin proves time and again that it can't protect its own.

By many commentators and policy makers Bitcoin meant financial inclusion. Bitcoin was supposed to be the great equalizer, empowering the unbanked and marginalized. But let's be honest here: it's nothing more than a digital playground for the privileged few. Access to the internet, digital literacy, and the means to acquire and store cryptocurrencies are prerequisites for participation. According to the World Bank's Global Findex database, around 1.7 billion adults worldwide still do not have access to a bank account. How can we expect them to navigate the complex world of Bitcoin when they lack the basic tools to participate? So much for leveling the playing field.

Transparency, you say? Sure, the blockchain is transparent, but transparency does not equal accountability. Bitcoin's shadowy underbelly is teeming with illicit activities, from money laundering to funding illegal enterprises. According to Chainalysis, a blockchain analysis company, illicit transactions accounted for around $14 billion of all Bitcoin transactions in 2021. The promise of transparency has turned into a cloak of anonymity, shielding criminals and leaving law-abiding citizens to suffer the consequences.

And let's not forget the elephant-sized volatility in the room. Bitcoin's value resembles a manic roller coaster ride, soaring to unimaginable heights one moment and plummeting to the depths of despair the next. Good luck buying your morning coffee with a currency that could lose half its value by lunchtime. In November 2021, Bitcoin reached an all-time high of nearly $64,000, only to crash to around $17,000 a year later. This kind of volatility does not inspire confidence or facilitate the stability required for a functional currency. This hardly makes Bitcoin a mean of exchange.

Bitcoin's regulatory nightmare is a quagmire of confusion and uncertainty. Governments worldwide are scratching their heads, attempting to wrangle this digital beast into submission. The lack of clear frameworks and conflicting regulations have left businesses and individuals in a perpetual state of limbo. Some countries have embraced cryptocurrencies, providing a regulatory framework that fosters innovation, while others have cracked down with heavy-handed restrictions. The lack of uniformity adds to the uncertainty and undermines the widespread adoption of Bitcoin.

Miners get rewards for their mining which decline over time. It is argued that it discourages miners from performing. Miners are also incentivized to validate larger transactions which include higher fees. This reduces in effect again Bitcoin’s liquidity. It makes smaller transactions wait longer to be validated.

Nouriel Roubini, whose book ?Megathreats” I reviewed here earlier, said that ?99% of crypto is scam”. Agustin Carstens, head of the Bank for International Settlements said Bitcoin is ?a combination of a bubble, a Ponzi scheme and an environmental disaster”.

Proponents of Bitcoin compare it to ?digital gold”. Like number of Bitcoins is limited and is to stop at around 21 million. It is coded into the alghoritm. So there is argument of the currency’s scarcity. Yet, real gold has also many practical uses like industry or jewelry.

And what is your take on Bitcoin? Is Dr Doom too harsh?

Great book on the future of finance which I used for this article:

Article in the Economist on crypto promises:

Recent podcast episodes: