A Skeptical Analysis of Bitcoin
My hate and love relationship
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Recently, I have analyzed in-depth the Bitcoin whitepaper. I believe it is time for reasoning about what you can find in those twelve pages.
Cryptocurrency
Bitcoin is not a currency. I’m sorry to disappoint many of you. Bitcoin is a technology, a distributed system to allow the exchange of value on the Internet. This is quite clear from the first page of the whitepaper; we are talking about a peer-to-peer system distributed timestamp server.
The Bitcoin whitepaper is very technical and clearly has no nerve to be a currency, especially a stable currency.
It is hard for many to imagine a world using bitcoin as a medium of exchange. This electronic cash has indeed some great features such as programmability, durability, ease of transport, and divisibility. However, it has some critical downsides, making me believe an orange future is not foreseeable. First, it is not a functional unit of account as prices set in bitcoin very from one day to the other. Secondly, it is a poor store of value. The value stored in a bitcoin will, quite likely, shift a lot over a short period. Would you be happy to receive your salary in bitcoin? Think it over the day. Probably not, even if you are a crypto fanboy.
The most critical side, which is also quite debatable, regards the limited supply.
It is interesting to see that such a decision was not part of the original Bitcoin whitepaper, but it was only a consequence of the incentive scheme put in place for the protocol. Starting at 50 BTC each block and halving this amount every 210 000 blocks, the math is quickly done. 21 Million is the limit.
This is in high contrast with the monetary policies we are experiencing for the last 50 years, where the supply of money is reacting to the change in demand. With bitcoin, this is not happening as the money supply is fixed and 100% deterministic.
Are you sure you would like to have your wealth in bitcoin when the next virus or economic crisis will hit? Think again about it. I am not sure you will be happy to experience a recession without a central bank covering the debit holes for you.
Maximalists will say that recessions are the symptoms of a wrong economic model, exactly based on an unlimited money supply, which bitcoin will fix. I do not have enough domain knowledge to argue against this claim but I feel bitcoin is not suited to be a currency.
I would love to hear some counterarguments, so please, feel free to comment with your thoughts on this. I would appreciated.
Coin
Bitcoin is neither a coin nor a balance in your wallet. In fact, bitcoins are defined as a sequence of digital signatures that is already mind-blowing for many, I believe. The fact you have a certain amount of bitcoin is not clearly written anywhere in the blockchain. It is just an abstraction of the underlying system (A set of UTXO for the geeks).
This is beautiful from a technical perspective but also scary from another. If bitcoins are a chain of signatures, it follows that my bitcoins are fundamentally different from your bitcoins. This is because the list of signatures is not the same. The bitcoins carry the history of the past owners, basically forever. The anatomy of bitcoins enables tracking of assets owned at some point by criminals, making it the worst place to recycle money, did you know it? You can also already read a detailed post about privacy on-chain.
We have discovered that bitcoins are not fully fungible, missing another fundamental requirement for being a currency. At this point, I find it difficult to see a future where I would use only bitcoin in my daily life.
Gold
Many people see bitcoins as digital gold. I quite agree. It sounds right to associate the two assets. Both are, as of today, financial instruments that do nothing else than increase the diversification of portfolios while hopefully increasing value over time. Both are precious and scarce. Both tried to be a currency at some point, still, they were soon replaced by something more manageable.
I see them as an investment, and I believe many have this impression. Talk to the people around you, and you’ll find a similar answer given by the majority. 100% sure. Speculation on the price is the driver. Utility, in the form of currency, is still limited and very unclear to me and the majority. It is scary to think of a world running on Bitcoin, from a strictly financial point of view. The same thinking of a world running on gold is alarming.
After having ruined the bitcoin dream (all its children included), let’s talk about why it is truly revolutionary.
Timestamping Transactions
Bitcoin, reading the whitepaper, is not much more than that. The first decentralized timestamp server preventing double spending of digital assets. Bitcoin created the Nakamoto consensus that enables many individuals to agree on a specific transaction’s history by converting world energy into a digital value. Of course, there is waste, but it is a clever and open process that enables the Internet to have its own medium of exchange. You just need to convert it back to something real and stable as soon as possible.
This simple transfer of value across the Internet without a third party is already incredible. There is no other medium in human history that can reach literally everyone with an internet connection and give them financial instruments to trade or do business with anyone in the world instantaneously. The game theory behind its consensus is easy but robust, making this Bitcoin protocol a real revolution.
On the other hand, Bitcoin is at the peak of Open Source Software development. It is the first financial infrastructure completely free, open to anyone, and truly permissionless. Privacy, Longevity, and Openness are the three pillars of this technology. It won’t last long until people realize the utiliy of this public good. Bitcoin is people driven, from the development to the sponsoring. You can participate in the coding, you can vote for changes, and much more. These core pillars will make it last for a very long time especially if surveillance over money will increase. An open medium of exchange that resembles how we exchange cash nowadays will be extremely useful in the digital future we are heading.
For the full analysis of the whitepaper click here. I have just opened a YouTube channel for sharing my view on blockchain projects from a technical perspective. Make sure to subscribe to my newsletter to start a debate with me and make this technology truly revolutionary.
