Bitcoin... the other side

Introduction

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Bitcoin discussions are always very difficult as there often are "pro Bitcoiners" and "Anti Bitcoiners".

To be fair, there are some "Pro Bitcoiners", lots of "No opinion" and some "Anti Bitcoiners".

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Some of you readers might tag me as an "Anti Bitcoiner", but read the article through, I don't feel like it at all. I've looked deep enough into the topic to have a pretty argued vision of it (but I don't know everything about it, nobody does I think) and I often feel the urge to "argue" with some posts or articles, that I consider being too partisan, votary and not enough "fair and square".

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I've written recently a small article responding to a French post, and I was asked by few to go a bit more in depth and in English.

This is the purpose of this article.

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I often use the term 'dogma', as my experience shows that lots of Pro Bitcoiners (I met) share a vision of the world that is very specific, through a very peculiar lens.

Knowing that Early Bitcoiners were referred to as "Cypher Punks" and "Anarchists", there is probably a genesis link.

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Bitcoin discussions often unearth some broader deeper discussions about society and the way the world is ruled.

Hence the fact I also often use the term 'sect' or 'values' or 'social principles/rules'

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I'm not a fan of Bitcoin (capital B) as a 'service', i.e. the 'token payment system', but I am a big fan of blockchain technology, and bitcoin (small b) as a technology is a well-oiled finely-tuned craftmanship to study.

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So I try to be as "neutral" and as "pragmatic" as I can, but some will tag me as "Anti Bitcoin" no matter what as I'll "hurt their beliefs". Which I am not. But I'm definitely not Pro Bitcoin as a service, that's granted. Or should I say, as the service it became, for I'm not sure it turned out as Satoshi planned it to be. Someone ought to ask him the day his identity is finally revealed.

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Now let's dive into the core of it.

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The statement that got me many "barks" is

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Bitcoin has no intrinsic value!

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Money has been created to facilitate trades, and more importantly deferred trades. Bartering bread that comes from the oven every day with wheat that is sowed once a year requires some "time differed" counterparts. That's how men came to create "means of payments", in the form of shells, coins, paper, ... But in most of the cases, these were "stubs" or "countermarks", giving right to something with palpable value. Based on Trust between the parties.

At the beginning, it was an IOU, i.e. a promise the payer will pay later that was accepted because the payee trusts that the payer would be honest.

But it was not "transferable", in the sense that for the payee to "pay" with that IOU, it’s required that its new payee also trusted the original payer.

That added complexity.

So it evolved in a way that means of payments became "backed by a (trusted) third party", i.e. not simply the payer nor the payee because we knew them, but a third party broadly trusted by payees globally so that the IOU was not anymore between the payer and the payee, but between the payee and the issuer of the means of payment, that is the final debtor. And to ensure that Trust that the IOU would be paid, the issued was "storing values" against the issuance of these means of payments. It was backed up by wealth of some sort.

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But Bitcoin, that logically preaches for a Trust-less world, is not backed up by anything you can "store", like cash, gold, mickey mantle's trading cards, ...

So users need to Trust the value of Bitcoin, while it has no collateral what so ever.

…some will say neither is FIAT money, i.e. cash!

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Well it is, by some store of valuable and by the capacity of the issuing party, here a state, to be liable for its debts.

Because yes, ANY money, besides money in a physical valued form (i.e. gold coin or silver coin or...), is a debt to its issuer.

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When a landlord was issuing its own money, it was for the same two reasons : he had Gold and gems in his vault, lands and houses and an Army to protect it. So the message was "I pay you with these coins issued by Lord ABC. If you don't recognise their value, please go and knock on his castle door."

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That's a huge difference with Bitcoin, that is a liability to..... nobody. Only possible upcoming buyers makes its value.

Hence 'Bitcoin has no intrinsic value', but a commercial value, i.e. a price someone is ready to pay for it, i.e. the minimum price the future buyer is sure (or hope) it will be able to resell it at …no one purchases voluntarily something with the goal to lose money...

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Bitcoin is the new Gold Rush!

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Bitcoin is often unproperly compared to Gold, while it has so few similarities with it.

The only real common point I can find is that both are scarce. And rarity increases value.... if there is an intrinsic value to it.

Gold's scarcity kept its value high because Gold is useful. One can use it for Jewelry, for long lasting products (since Gold doesn't corrode), for electric conduction, for it is easy to mold (like for teeth), ...

Other examples regarding scarcity and usage/need can be taken: take water, water is in great supply and therefore worthless in the middle of gorgeous Scottish sceneries (except to pour a drop in your dram of Whisky) but is a great value in the middle of any desert you can think of.

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But that's where the comparison ends.

First, to get Gold one needs to extract it. Take time, efforts and machineries to take it out of the ground.

I can hear already “just like for Bitcoin that needs time and efforts and computers”!

Unfortunately, even if the word ‘mining’, maybe carefully chosen for the precise purpose of mixing up minds, tends to refer to the same activity, the purpose and usage are totally different.

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First, Bitcoin miners don't "create" or "dig up" or "unearth" any bitcoins. Golddiggers do that.

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Yet, mining is of tremendous importance in Bitcoin and blockchains in general. But's not for assets creation.

To make a simple analogy, it's like playing Monopoly board game. There is the "pot", and each time a player completes a lap of the board's game, he receives 40,000 or something, until there is no more money left in the "pot".

It is the same thing with Bitcoin : miners compete against each other (hence the very bad technical efficiency of Bitcoin, but I'll cover this in a later section) and every circa 10 minutes, one of the competing miners wins the ‘race’ against the other miners and is "rewarded" by the system with some Bitcoins (amount depends on halving stage we are in), i.e. 3.125 BTC today (plus all the transaction fees of the proposed block).

So miners are rewarded with Bitcoin newly put in circulation for 2 things : 1- creating a new block and 2- winning the competition/"race".

But they don't dig up or unearth any Bitcoin. I’m not saying it is pointless or useless, as it is not : mining is very important for the security of the bitcoin network.

So yes, all the Bitcoin do exist, they are reserved since day one, and they are "waiting" in the system to be put in circulation.

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Bitcoin is store of wealth like Gold

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As much as Gold is genuinely a store of wealth, because it is rare, because it has various usages, and because it is non alterable, Bitcoin isn't for the same types of reason: it is indeed 'rare' as in ‘has limited supply’, but it is not useful (can't make a wedding band out of Bitcoins) and it is alterable. It can disappear as soon as all the BTC computers would shut down. Or at the first quantum attack on Bitcoin network, whichever happens first.

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While Bitcoins and Gold diverge on the "store of wealth" side, they share on the other hand the same use for speculation. Which can be considered to some extent as "store of wealth" but in the short run, while the hype is up.

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Bitcoins are a means of payment

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Bitcoins are not a store of wealth, but they are neither a means of payment. Not a Retail means of payment to be precise, as for "wholesale" usage, besides the risk attached to a Bitcoin transaction, i.e. risk/complexity linked to "buying BTCs", the 60 minutes turnaround time for unrollable transaction settlement, risk/complexity linked to "selling BTCs", change of value during the these 60 minutes (its value can be increasing or decreasing) and the "openness" i.e. lack of anonymity of the transaction (once the public keys are "attributed"/linked to someone), can be acknowledged.

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While most of the people praising Bitcoins are "regular folks", individuals like you and me, they are part of retail payment use case, not wholesale. And Bitcoin is reallllly bad at retail payments for many reasons :

-????????? few merchants do accept them (I've been told 600M recently, but I challenge this number with "merchants who are actually being paid for a noticeable part of their sales in BTCs", not merchants who did it once),

-????????? fees are high for low amount (retail is usually low amount) transactions (few bucks for each payment),

-????????? latency (up to an hour before being 100% guaranteed) and

-????????? complexity of exchange, i.e. turning Fiat into BTC and vice versa.

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I agree that part of the burden is taken away by Companies like CryptoExchanges who make it simpler for users and merchants... But at a higher cost. And with a strong divergence from the Bitcoin precept that is “be in sole custody of your money” (just like for cash, but as opposed to money on your bank account that is in custody of the Bank).

So, since merchants already complain about the cost of current classical payment means, unless a merchant makes the payer pay for the Bitcoin transaction fees, it is not flying for the merchant.

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Bitcoin frees us from (mean and bad) Financial Institutions

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The first commandment of Bitcoin is "Current Financial System is screwed (got to admit that it is indeed highly perfectible, and I have proposals to do so, but that's another story), don't trust Banks and Co. with your money! Use Bitcoins, you will own your money "in your hand", actually "in your digital wallet".

So, in pure logic, opening an 'account' at a crypto-exchange (like you do at a bank), to deposit your bitcoins (like you do with your money), so that they give you credentials to 'access' your valuable (like you get a checkbook or a card) so that you can write down IOUs to payees... sounds a lot like what we do in the current Financial system don't you think? It looks a lot like what we do we banks, doesn’t it ?

In that case, the cryptoiexchange has full custody of all the funds, and when someone from a given crypto exchange pays someone in the crypto exchange, it is just an "internal transaction", a good old "on us"... Like with banks.

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Unless one has full custody of its Bitcoins, and accept to make high cost payments to few Bitcoin-accepting merchants, with a slow confirmation time and full disclosure of the transaction, one does not really escape the “pitfalls” of current financial world.

But what about "Layer 2" for retail payments I hear in the back?

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Bitcoin Layer 2 promise

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Sure. When it works I would say, but my biggest concern is the following:

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Back to the first commandment of Bitcoin. The promise is for me to have custody of my money.

So why on Earth should I "give out" my Bitcoins I so preciously keep close to me to a "Layer 2 node" that I know nothing of, and trust it with doing low cost low latency transactions on my behalf?

Because I can read the code it uses? We don't read the term and conditions of any site in the first place, let alone proof reading in an efficient way some code I'm far from mastering!

Wrapping up

To conclude this section, Bitcoins are not Gold, not a store of Wealth, have no intrinsic value, not efficient retail payment method, not that private, but can be used for wholesale payments, remittance for some cases, but is in its greater majority used as a pure speculation tool.

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For those interested, next time we can cover the energy aspect, what Bitcoins really do look like (if anything), Privacy and Pseudo-anonymity, Security and efficiency of the protocol, its Business model… Like I said in the introduction, it is a fascinating and incredibly interesting topic. But quite different than the way it is usually exposed.