Is Bitcoin Dead (Again)? by Samuel Patterson
RIP, tech journalism
Vivek Wadhwa published a piece at the Washington Post about Bitcoin. Here’s the takeaway, in his own words:
Bitcoin did have great potential, but it is damaged beyond repair. A replacement is badly needed.Corsair Took A Hit From Small-Cap Underperformance In Q3; Says Evergrande Not The Next Lehman Brothers
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Vivek is wrong. His article shows he has little knowledge of Bitcoin himself but relies on the word of others to form his opinion. This post will respond line by line to counter his claims.
Not long ago, venture capitalists were talking about how Bitcoin was going to transform the global currency system and render governments powerless to police monetary transactions.
Some venture capitalists may have said this. I’m guessing most VCs didn’t actually publicly endorse the idea that Bitcoin would “render governments powerless,” since that’s not the type of things investors like hearing. Regardless, his point is that VCs used to be excited about Bitcoin — implying that they are no longer excited. Is there evidence that the same VCs that were excited about Bitcoin previously are no longer excited? He provides no evidence of this.
Now the cryptocurrency is fighting for survival.
Fighting for survival means that Bitcoin is nearing collapse. It may not survive if people don’t keep fighting for it. This is a strong claim; let’s see if he follows this up with any evidence.
The reality came to light on Jan. 14, when its influential developer, Mike Hearn, declared Bitcoin a failure and disclosed that he had sold all of his Bitcoins. The price of Bitcoin fell 10 percent in a single day on the news, a sad result for those who are losing money on it.
It is true that a prominent member of the Bitcoin community quit, leading to a 10% drop in Bitcoin price. Of course, anyone that has followed Bitcoin for any length of time knows that a 10% change in price is not unusual at all. Lamenting about this “sad result” is ridiculous; Bitcoin’s value increased 35% in 2015, but lost 52% of its value in 2014 — only after gaining an incredible 5,429% in value in 2013! Bitcoin has always been volatile.
[As an aside, has the author not been watching the US stock market? The S&P 500 is 10% off its all time high, set less than a year ago.]
Bitcoin did have great potential, but it is damaged beyond repair. A replacement is badly needed.
This is the core argument of the piece, so the author needs to establish that Bitcoin is “damaged beyond repair.” We’ll be looking at all his claims to see if they are truly irreparable, or if they are even true.
Our Current System Is Flawed
Most currency and transaction systems today are opaque, inefficient, and expensive. Take the North American Stock Exchange, the NASDAQ, as an example. It is amongst the most technologically advanced in the world.
Yet if I buy or sell a share of Facebook on the NASDAQ, I have to wait several days for the trade to finalize and clear. This is unacceptable; it should take milliseconds.
Bitcoin does take milliseconds to transfer value.
In Venezuela, citizens wishing to buy anything of value on supermarket shelves wait all day in lines to do so, because hyperinflation causes the paper currencies in their pockets to lose significant value every day.
He’s right that central banking fails many people, and Bitcoin isn’t controlled by any central banks.
When migrant workers there send money back to their families in places such as Mexico, India, and Africa, they are gouged by money-transfer companies — paying as much as 5–12 percent in fees.
Bitcoin is much cheaper to send.
And even in the United States, payment processors and credit-card companies collect merchant fees of 1–2.5 percent of the value of every transaction. This is a burden on the economy.
The author is making a clear case for Bitcoin. Not only is it cheaper, but it eliminates the ever-present threat of hackers getting into the databases full of credit card numbers which are the keys into the bank accounts of millions of people around the world.
Instead of explaining why Bitcoin isn’t compelling given all the flaws with the current system he’s just listed, he shifts over to the problems with Bitcoin.
Bitcoin was born with serious flaws.
It was unregulated and provided anonymity, so it rapidly became a haven for drug dealers and anarchists.
This is one of many lines that reveals the author’s ignorance of Bitcoin. Bitcoin is not anonymous, but pseudonymous. This means that a user has an identity, but it isn’t necessarily attached to their real world identity. But Bitcoin also makes all transactions public to everyone. This makes using Bitcoin for illegal activity difficult since there’s a permanent record out there of your transaction.
Yes, drug dealers did use Bitcoin. Of course, this isn’t a compelling reason to say that it has serious flaws: drug dealers primarily use cash, and the author isn’t calling cash “seriously flawed.” It is worth noting that the most prominent place that used Bitcoin for drugs (the Silk Road) was actually shut down by law enforcement years ago.
Lastly, pointing out that “anarchists” use Bitcoin is just a hand-wavy scare tactic. Who are these anarchists, and what are they doing? Not all anarchists are violent bomb throwers. Maybe these anarchists just want to use their own money between themselves, peacefully? How does that reveal a flaw?
Its price fluctuated wildly, allowing for crazy speculation. And, with the majority of Bitcoin being owned by the small group that started promoting it, it has been compared to a Ponzi scheme.
Bitcoin isn’t a ponzi scheme by any stretch of the imagination. Ponzi schemes are fraud; there is no real investment taking place. Bitcoin is a real thing, used around the world constantly. Check out this chart of daily transactions if you don’t believe me.
Exchanges built on top of it also had severe security vulnerabilities.
This has nothing to do with the security of Bitcoin itself, but with the security of some companies and websites that dealt with Bitcoin. I typically don’t rely on these third-party services to hold my coins for me (I think that mostly defeats the purpose of Bitcoin), and I’ve never lost any of my Bitcoin as a result.
And then there were the venture capitalists who got carried away. Several of them purchased considerable coinage and then began to hype it as a powerful disruption that could underpin all manner of financial innovation, from mobile banking to borderless, instant money transfers. They also poured millions of dollars into Bitcoin start-ups hoping to reap even greater fortunes.
Saying that VCs got carried away is an opinion. Some believe that the entire tech sector has VCs going too far; I have no idea. So far the author hasn’t shown any reason to explain why these VCs shouldn’t be doing what VCs do, which is pouring money into new technology and hoping to reap greater fortunes.
I co-founded a company with VC money. It takes a long time to build new software. Many companies are still building their products with VC funds. Claiming that all these VCs will see no return is premature. No one knows yet.
But Bitcoin was not ready for primetime. Hearn’s criticism has laid bare the nightmarish reality — a list of negatives that is both long and frightening.
Finally we’re going to get into the meat of the argument.
Chinese Bitcoin miners control more than 50 percent of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China. This slows down the entire system because, as Hearn explained, it is the equivalent of a bad hotel WiFi connection. It also gives the People’s Army a strategic vantage point over a global currency.
Only two claims in this part matter: 1) Chinese miners slow down the system, and 2) The People’s Army can control Bitcoin (gasp!).
It’s true that a large part of Bitcoin mining happens in China, but it’s unclear why that’s a bad thing apart from the scaremongering reference to the People’s Army. The Bitcoin system is functioning fine right now; Chinese Bitcoin miners are doing the same things as miners across the world. The network isn’t noticeably slower due to Chinese miners. And there’s zero evidence that the People’s Army is controlling these miners or doing anything nefarious at all.
Also, it’s important to remember that the author claimed at the beginning that the problems with Bitcoin are irreparable. Let’s assume for the sake of argument that China having the majority of Bitcoin miners is a problem: Is this irreparable?
Not at all. For one thing, the Bitcoin network isn’t static. If these Chinese miners did attempt to do something malicious then it would be noticed immediately and the rest of the network would take whatever action was needed to prevent the attack. From that point on, those miners would likely have a much smaller role in the network, or be banned outright. Also, there’s no reason to think that China will always have more miners then everyone else. Anyone can join the network anywhere in the world.
The Bitcoin distributed network can process only a handful of transactions per second. That causes unpredictable transaction-resolution times and other behaviors that one really does not want as part of a monetary system.
Transaction resolution times aren’t unpredictable unless you opt to pay no transaction fees. They are typically instant for transactions with fees included; only in rare cases do they take longer. Yes, the capacity of the network is fairly low at this point, but this is an artificial constraint which can be lifted (and is a heavy subject of debate).
This is not irreparable. There are various different methods which people have proposed to increase transaction capacity on the network. Since we haven’t quite hit the upper limit at the moment, none of them have needed to be adopted yet, but they will be soon.
Bitcoin fees can, at peak times, exceed credit-card fees, for example.
I would really love to see his evidence for this claim. I’ve used Bitcoin for more than 3 years now, and I’ve never paid more than a few cents for a Bitcoin fee. Ever. This claim is likely a complete fabrication or cherry picking of the worst kind.
As if all this weren’t bad enough, the Bitcoin community appears to be engaged in open civil war. Its members have been censoring debates and attacking each other’s servers.
Again, we need to ask if this is irreparable. This isn’t a failing with the technology at all. It’s a human failing. Pointing out that people in the technology community aren’t playing nice together doesn’t mean the technology is a failure. I do hate the censorship of debates and DDoS attacks we’ve seen, but this is a result of people being so committed to Bitcoin that they want their own vision of it to win the day. In the long run, technology projects don’t die because they have strong, vocal communities. That’s a positive sign.
A tiny committee of five core developers that controls the Bitcoin codebase has become the Star Chamber that guides the future of Bitcoin.
There’s a lot wrong with this statement.
I have a political science education, so the Star Chamber reference intrigued me. I suppose he means that the core development team can act arbitrarily and in secret. So is it true that only five people can make arbitrary and secret decisions that guide the future of Bitcoin?
No, and this statement again proves that the author doesn’t understand what’s going on. Bitcoin is open source. This means that all the code is public and can be reviewed by anyone. All proposed changes are public and can be reviewed. There are no secrets.
And it’s not only five people who propose changes. There are hundreds of people who have contributed to Bitcoin core. Also, Bitcoin core isn’t the only game in town. Right now there’s an alternative Bitcoin client being developed called Bitcoin Classic that wouldn’t be maintained by the current core development team.
Again, we need to ask if Bitcoin has been “damaged beyond repair.” The very fact that Bitcoin is open source means it is malleable enough to change when the community wants that to happen, and the Bitcoin Classic client shows that the community is willing to exercise this right.
This has been a severe blow to the reputation — and wallets — of VCs. Yet some of them are still staunchly defending Bitcoin.
There’s no evidence here that VCs have had their reputation or wallets harmed by this. This is simply an assertion by the author. Some still “staunchly defend” Bitcoin because — unlike the author — they understand that nothing about the fundamentals has changed.
It’s time to admit that the current Bitcoin needs to be scrapped and to take advantage of the innovations behind the technology that underlies Bitcoin, the blockchain.
The blockchain is a transparent ledger of transactions — concurrently hosted on numerous computers around the world — allowing the creation of digital currencies and virtual banks.
Implemented correctly, it will, I believe, prove to be a better transactional and verification model that we presently use for the global financial system and for many other types of activities such as voting, public registries, provenance of works of art, and real-estate transfers.
Here the author stops trying to be subtle about his technical ignorance around cryptocurrency and decides to display it proudly. This “blockchain without Bitcoin” idea is hardly new, but it only appeals to those who don’t understand how either works. You need Bitcoin — or an equivalent — for a blockchain to work. Since the Bitcoin blockchain is by far the most widely adopted and secure blockchain in existence, there’s a huge disadvantage to creating a new blockchain which uses NotBitcoins instead of using Bitcoin itself. If you like the blockchain then you like Bitcoin.
From Bitcoin’s failures, we have learnt how digital communities shouldn’t operate.
How? Don’t argue with each other? That’s hardly a useful admonition. Maybe in a hierarchical system where there is centralized control over a product this is possible, but we’re talking about an open source project with no barriers to entry other than an internet connection.
You’re going to have discord and disagreement; it’s the wild wild west of the internet out there. That’s the price to pay for not having central control over your money. Completely worth it in my opinion.
We have seen how ledger systems can be hijacked.
Have we? When did this happen exactly? Who hijacked it? Is Bitcoin not working right now?
Nope, I just checked and the system is working fine. Exactly the same as a few days ago, before Mike Hearn left. Hijacked is a strong word to use without explaining what happened.
And we have seen the wastage in a mining system that consumed gigawatt–hours of electricity and spawned giant server farms in China solely to crunch numbers to “mine” Bitcoins.
This sounds like an old man lamenting the growth of social media online. “Those giant server farms up in Washington State using all that electricity just to let people share pictures of their lunch with each other.”
Bitcoin miners are validating transactions on the network and securing it against attack. I believe that having permissionless money that is nearly free to use and not controlled by any company or government is incredibly valuable and worth the energy expenditure.
We need to learn from successful open-source technology projects such as the Linux Foundation, which is thriving largely because it has proven its worth as a neutral body to govern all manner of open-source projects that grew too big for small groups to manage in a casual manner.
Again, this implies that Bitcoin cannot move to this model, but the author gives no reason to think it cannot.
We also need to rethink aspects of the blockchain, along the lines that Hearn and Bitcoin loyalists have suggested.
“Rethink aspects of the blockchain” is code for “I’m pretending I know how the blockchain works and how it can be improved” because he gives zero specifics here.
What suggestions is he referring to?
Let’s also bear in mind what it is that makes some venture capitalists Bitcoin zealots: pure greed. That is the reason clearest to me for Bitcoin’s failure.
I hope I’ve established here that the author has made no case at all for Bitcoin’s failure. The defection of a single member in a huge global community is practically a non-event. The technical aspects of Bitcoin — which the author (thankfully) only touches on briefly in the entire article — are completely unchanged. More people are using Bitcoin now than they were last year, and more than the year before, etc.
These growing pains are where the divisions in the community are coming from. It’s hardly compelling to be claiming that “Bitcoin is a failure because it’s grown large enough that decisions aren’t made easily anymore.”
It’s also wrong to claim that most people in Bitcoin are in it for the money. I’ve been involved in this community for more than three years now. Most people I know that are most passionate about Bitcoin are excited because it is a technology that empowers individuals to take control of their own money. We don’t have to be reliant on central banks or traditional banks anymore; that’s something worth fighting for.
Intended as a level playing field and a more efficient transaction system, the Bitcoin system has deteriorated into a fight between interested parties over a pool of money.
Over what pool of money? Bitcoin itself? Everyone in the space knows that fighting isn’t the way to make Bitcoin more valuable. They fight because they believe in different core visions of what Bitcoin should be, not because they are fighting over how to make it more valuable.
In the beginning, Bitcoin was a noble experiment. Now, it is a distraction. It’s time to build more rational, transparent, robust, accountable systems of governance to pave the way to a more prosperous future for everyone.
Since the author hasn’t proposed any alternative to Bitcoin other than an impressive string of adjectives, it’s not clear what Bitcoin is distracting us from. This is practically the definition of the Nirvana Fallacy; A better digital money could be built therefore Bitcoin is bad.
That’s not how this works. Building new technologies is hard to do under the best of circumstances, but building them in a transparent way with a global community is much harder. It doesn’t mean it’s not worth doing.
You know what isn’t hard? Writing an article which dismisses a technology you know very little about. Anyone can do that. It doesn’t mean it is worth doing.
This article first appeared at Sam Patterson’s blog.