Saturday, January 06, 2018

Is bitcoin actually any use?

Proponents of bitcoin, many of whom have made huge amounts of real money off the speculative bubble that surrounds bitcoin, are fond of saying that bitcoin is not just a useless vehicle for speculative investment, but a functioning payment system, and one that can become a mainstay of the world's economy without being held to ransom by rapacious financial institutions and controlling national governments.
This sounds like a compelling argument, but is it actually true? Well, for the moment at least, not so much. It turns out that there are several reasons why bitcoin does NOT make a good functional currency.
Firstly, as things stand at the moment, a bitcoin transaction comes with a hefty transaction fee, averaging US$28 but often much more. Now, this might not be an issue if you are buying a car, but it would certainly put you off buyog a coffee (or even your weekly groceries with it).
Next, because bitcoin is built on bundles of verified transactions called blocks, which are generated every ten minutes, there can be a substantial delay in the transaction, particularly given that it us advisable to wait for several block to be formed AFTER the one containing your particular transaction.
Thirdly, as I have already explored in more detail in a previous article, it is extremely (and increasingly) expensive to create, or "mine", new bitcoins, particularly in terms of the energy consumption of the huge computing power that is required. By some estimates, worldwide bitcoin production uses more electricity than whole developed countries of the magniture of Ireland or Denmark. A single bitcoin transaction is estimated to consume more energy than 23,000 VISA transactions. Add to this the fact that most bitcoin mining now tales place in China, which has a notoriously dirty, largely coal-based electricity system, and the carbon footprint of bitcoin is simply insupportable.
Fourth, bitcoin is just not as flexible as current "fiat currencies" (legal tender backed by the issuing national governments). For example, the blockchain on which transactions are recorded is an "add-only" ledger, and transactions cannot be revised or edited or cancelled, so if a transaction needs to be reversed there is no mechanism to do this, and no-one to complain to if something goes wrong. Similarly, the anonymous and private bitcoin transactions cannot be used for lending, where a real name and a signature are essential to establish a lending/borrowing legal contract.
Fifthly, the very success of bitcoin as an investment vehicle makes pricing of goods and services very difficult. If the value of bitcoin continues to rise and fluctuate so profoundly and unpredictably, its uselfulness as a currency is severely compromised.
Another possible drawback of bitcoin is that it is essentially internet-based and, like anything and everything on the internet, it is potentially subject to hacking, fraud and scams. Although the blockchain itself is relatively secure, the digital wallets used to manage bitcoins and the exchanges used to trade them are more fragile. We already have the rather bizarre phenomenon of a decommissioned military bunker deep in the Swiss Alps which had been repurposed as a secure repository for the bitcoin holdings of multi-millionaires (although the main security seems to be that the computers stored there are kept offline!)
Proponents of bitcoin say that these are early days, and that these problems will be ironed out in time. But in fact it has been around since 2008, and little has been done in that time to address these shortcomings. Other cryptocurrencies, like Ripple, Etherium, etc, are attempting to present alternatives, and protocols like Segregated Witness, the Lightning Network and Bitcoin Cash, are attempting to deal with some of these issues.
But one can't help but think that, by the time bitcoin has effectively overcome its drawbacks, we will be left with something suspiciously similar to ... good old-fashioned money! Which, it has to be said, actually works pretty well.

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