3 Lies Bitcoin Skeptics Tell Themselves
Bitcoin’s amazing price rise in 2017 led to everyone and their mothers commenting on the topics of blockchain technology and cryptocurrencies over the past few months, which means there were plenty of skeptics around who wanted to tell everyone about how bitcoin is a fraud that has no underlying value at all.
Whether they’re claiming Ripple is a fork of Bitcoin or GPUs are still useful for mining bitcoin, so-called “experts” are responsible for a lot of misinformation regarding this new technology in the mainstream press. This is possibly due to many of the people quoted in various media outlets specializing in more general areas of study rather than just Bitcoin itself.
Bitcoin skeptics have been proven wrong more than 200 times when it comes to predicting the death of the digital bearer asset. Here are three of the lies these critics tell themselves, which are at the root of these false predictions.
Lie #1: Bitcoin is a Ponzi Scheme
The claim that bitcoin is a Ponzi scheme is likely the oldest and most-often argument used by those who have a negative view of Satoshi Nakamoto’s invention.
Skeptics point out that those who wish to profit from their early speculations on the bitcoin price rely on more people to enter the system for their gains, in addition to talking about how there is no practical use of the cryptocurrency network. As Eric Posner wrote in Slate back in 2013:
“Unless a bitcoin has value as a currency, it has no value at all, and its price in dollars will fall to zero. A regular Ponzi scheme collapses when people realize that earlier investors are being paid out of the investments of later investors rather than from the returns on an underlying asset. Bitcoin will collapse when people realize that it can’t survive as a currency because of its built-in deflationary features, or because of the emergence of bytecoins, or both. A real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.”
One of the points Posner missed in his 2013 assessment of bitcoin as an asset is that it provides an censor and seizure-resistant store of digital value. This property was further solidified in 2017 as the Bitcoin network proved resistant to the contentious SegWit2x hard fork attempt and the bitcoin price continued to rise despite historically high on-chain transaction fees (see my explanation for why this happened).
Furthermore, if one considers bitcoin a Ponzi scheme, then the same logic must be applied to all other forms of money. Is gold also a Ponzi scheme due to the non-industrial uses of the precious metal? Are the fiat currencies widely used in the world today Ponzi schemes since they were bootstrapped by a peg to gold?
Posner referred to bitcoin as a “collective delusion” in his piece for Slate, but as Derek Thompson pointed out in The Atlantic late last year, this has been a property of every form of money throughout history.
The IMF has referred to bitcoin as a “naturally occurring Ponzi scheme,” which may be applicable to all forms of free market money.
"Money is a bubble that never pops," said AngelList CEO and co-founder Naval Ravikant at a digital currency conference late last year.
In short, there’s a reason people have decided to store value in bitcoin, and it has to do the intrinsic properties of the system such as a trustless monetary policy and resistance to seizure by governments.
A final point that needs to be made here is bitcoin may very well be in a short-term price bubble (see Chain CEO Adam Ludwin’s arguments for why this price mania has occurred).
Lie #2: Bitcoin is Not Secure
There have been many hacks and thefts in Bitcoin land over the years, but this does not mean the system is not secure. These thefts have occurred at the layers above the base Bitcoin blockchain.
Hackers often steal large amounts of credit card data from centralized servers that store this sort of data (usually a merchant like Target). With Bitcoin, security is pushed to the end user. Each user controls their own financial data in the form of private keys, so there is no central server for hackers to target.
Of course, points of centralization still pop up in Bitcoin — mainly in the form of exchanges. When someone gives their bitcoin over to a centralized entity, they must trust that entity to secure the money. This turns exchanges and other bitcoin custodians into the biggest targets for hackers in the Bitcoin ecosystem.
In reality, the hacks on bitcoin exchanges illustrate the value of the underlying Bitcoin blockchain from a security perspective.
It should be noted that Bitcoin is likely to become even more secure due to technical developments that have taken place over the past few years. By implementing the Lightning Network or a federated sidechain (such as Blockstream’s Liquid), the level of risk associated with trading on a bitcoin exchange can be drastically reduced.
Covenants are another innovation that could reduce the potential for theft, even when users are taking responsibility for their own funds. This solution would effectively allow a Bitcoin user to cancel a transaction made by a nefarious actor trying to steal funds.
Obviously, hardware wallets and secure enclaves have also played a role in making it much easier to secure one’s own bitcoin.
Lie #3: Bitcoin Cannot Be Used as Money
The idea that bitcoin cannot be used as money is one of the more puzzling clams made by skeptics. It’s similar to someone pointing out that Crocs are not shoes. Whether they’re called shoes or not does not matter. What matters is people are walking around with them on their feet.
(Note: I forget the original source for the above Crocs analogy, so someone point me in the right direction if they remember where it came from.)
The main criticism usually made in terms of bitcoin’s usefulness (or lack thereof) as money is that the price is far too volatile. A point that is missed here is those who are already using bitcoin as a store of value don’t care about the short-term price volatility (see my explainer on this point using an analogy of Bitcoin as a social network).
It should also be mentioned that the bitcoin price has generally become more stable over time.
There are also certain types of people in the world who have no option other than to use Bitcoin due to its permissionless properties. Whether it’s a teenager trying to buy some pot from a darknet market vendor in Kansas or a teenager in Venezuela who just wants to buy a new game on Steam or Xbox, Bitcoin is able to provide digital payment services to those who are unable to gain access to the global financial system.
Now, I know what you’re thinking: “Steam stopped accepting bitcoin! It’s useless for payments due to the high costs of making a transaction and network congestion!”
Yes, it has become uneconomical to make on-chain, low-value Bitcoin transactions. But claiming that Bitcoin is useless for these sorts of payments right now is like saying the Internet is useless for streaming video in 1993. The technology just needs time to mature.
Layer-two solutions, such as the Lightning Network, are an attempt to build a payments layer on top of the base Bitcoin protocol. With the Lightning Network (or something like it), bitcoin-denominated payments can be instant and nearly-free while retaining the trustless properties of the underlying blockchain.
Whether a specific good is useful as money is in the eye of the beholder. It may not make sense for everyone in the world to use bitcoin as money right now, but for some people, it’s the best option available to them (see BitPesa Elizabeth Rossiello’s points on the usefulness of bitcoin in Africa).
The reality is people have found Bitcoin to be so useful that the developers working on the project have been unable to scale the system to keep up with demand while also retaining its decentralized properties.