Dear ValueWalk,
I have just read your article “Myths (about bitcoin) that must die” and have some concerns about your claims that bitcoin, or any other crypto-currency, should be considered as money in the true sense of the term. Crypto-currencies have some major drawbacks that prevent their being considered as true forms of money.
The primary drawback to bitcoin and ethereum is that, due to their blockchain nature, everyone has to download and maintain the entire blockchain file on their computer/server. This requires and increasingly large amount of electrical output as the number of users grow.
How much? According to this article it is currently 14.54 TWh with every bitcoin transaction taking 163kWh/transaction and ethereum requiring 49kWh.
If these power consumption claims are true, one has to understand that 14.54 TWh of electricity requires an installed capacity of electricity generation of 1.65GW. The cost of the capital equipment to generate that power is something on the order of $2b using conventional generation sources. The annual retail cost of that electricity produced, at 10cents/kWh, is $1.65b.
With expanded use of crypto-currencies there will be increasingly costly parasitic loads on an already strained infrastructure. Due to such power supply costs some of the fundamental characteristics of money are not met by crypto-currencies:
Uniformity – since electricity rates differ considerably depending on location the cost/unit is not uniform.
Durability – not only is there a power requirement to create crypto-currencies there is also a power requirement to maintain the blockchain database. Hence, there is no static durability since there is a shelf life cost – it is not free.
Infrastructure risk – We have to consider infrastructure risk, if the grid goes down there is simply no crypto-currency to be had. This risk does not exist with conventional money. Consider the current situation in Puerto Rico. Where would those people be if they depended on crypto-currencies?
Power surges over an unstable power grid could also damage stored data. As more traditional base load power generation is shut down the grid becomes more unstable, harder to balance and such surges could become commonplace. And should there be a naturally occurring electromagnetic pulse from a solar flare the entire system could go down causing significant loss of one’s “money”.
And what happens if the internet itself should “go down”. We would no longer have any “money”. We take the flawless performance of this digital infrastructure completely for granted – should we?
Additionally, there are some other concerns regarding security, reliability and store of value – I know of a case where someone lost their laptop holding bitcoin data and there is no way for them to retrieve the value of the lost bitcoin – total loss. We don’t usually travel with our entire savings of conventional money so less risk there.
There is a lack of long-term security and reliability since computers can be hacked and regulatory changes can fundamentally change underlying values of these financial instruments. Just look at the price volatility of these crypto-currencies. How do you reasonably value something over time using a medium that has such enormous volatility? Is this truly a store of value?
Most of these risks are non-existent when it comes to longer-term stores of value such as precious metals or other more tangible goods. Even fiat currencies, though they do fluctuate these variations are somewhat transparent and reasonable to understand. Sure, all of these forms of money can be stolen but they don’t have the risk of degradation in any of the forms mentioned above.
Thus, using these arguments, it appears that, once a more encompassing perspective is taken, your refutation of myths about bitcoin ring a bit hollow.
I would be very interested in learning if you can refute the claims described above that preclude crypto-currencies (bitcoin and ethereum) being legitimate forms of money.
I look forward to your response.
Best regards,
Anonymous
