My Problems with Bitcoin.
Something being new doesn't mean it's better.
Before going too far into this, I’ll say that everything I’m about to write is essentially distilled to “I am inherently suspicious of anything that people get mad at you for questioning.” So if that’s all you care about then feel free to save yourself the read. If you’re interested in hearing more, then here we go:
I am not a fan of Bitcoin. I’m not an opponent of Bitcoin. Bitcoin is just a thing, like many other things, that can be bought or sold for whatever people are willing to buy and sell it for. That being said, there are a number of fundamental problems that I see with Bitcoin (and with DeFi in general I guess) that seem to be completely glossed over in the narrative around decentralizing the financial world. What I’d like to cover here are my qualms with Bitcoin, which range from some fundamental questions around it to the practical realities of it that seem to be glossed over far too often.
Practicality
I break the practicality argument into a couple major segments, but generally when I talk about practicality I am referring to both practical issues with Bitcoin and the practical outcomes that are counter to the impractical narrative around what Bitcoin is and how it works.
For me, the number one practical issue with Bitcoin is the intense amount of inputs required to get one to exist. Everything from the minerals to create the chips that go into the mining boxes to the inputs to generate the electricity to effectively mine one, it’s an insane amount of shit. Some would actually point to this as an example of why Bitcoin is so good to use as a metric of value. Like, because it can’t just be willed into existence like a USD that inherently impacts its value in a positive way. This is a bad argument that I’ll go into later (at the end I think).
We have practical concerns around things like climate change, resource availability, and things of that nature as a civilization. The intense amount of electricity required to “quickly” mine a Bitcoin “cheaply” is always going to prioritize speed over sustainability. There will always be countries willing to let miners dump into their borders with the promise of cheap coal power often at the expense of the local grid. In many countries this is actually an issue, where the amount of power sucked by a mining operation can destabilize poorly managed energy grids and cause issues for the local population.
I’ve read some people trying to contort themselves into this position of saying that Bitcoin is actually sustainable. That is one of the dumbest fucking things I’ve ever heard in my life. It’s not and there’s no legitimate argument to say that it is. Now, that’s not to say that that alone makes it something that shouldn’t exist. There’s lots of stuff we do and use in our daily lives that is unsustainable as good or bad as that is. But the argument that something that uses more energy than the entire state of Ohio and that can be used for almost nothing is somehow magically sustainable is completely asinine.
Aside from those basic practical issues, here are my practical outcomes vs the impractical narrative issues:
Practicality of Decentralization
Bitcoin is not decentralized. To believe it is is it to be enraptured by a sales pitch. Roughly 95% of all Bitcoin is owned by 2% of wallets. This is the exact opposite of something that is decentralized. In fact, in this case Bitcoin appears to be more centralized than USD fiat currency.
Glassnode tried to debunk this a while ago with some really stretched out arguments that don’t really stand up to scrutiny. Like for example they specifically state in their article that they don’t even account for custodial institutional holders.
This is insane. How on Earth can you even make an article like this and then say by the way you’re not including the largest holders of Bitcoin? One important thing to keep in mind with this paragraph is the linguistic acrobatics they use that are very common when people try to argue that Bitcoin isn’t actually so centralized. They claim that Grayscale’s BTC holdings are “owned by multiple participants” which is complete and total bullshit. It’s a fabrication. They use this terminology because GBTC is a tradeable asset that people can buy so “technically” all these people own the BTC in the trust collectively. What an incredibly asinine argument.
It is an argument that’s used a lot though. That somehow because custodial holders often have large amounts of BTC “owned by multiple participants” it’s somehow decentralized. Let me make it very clear for you: if you do not have custody of your Bitcoin then you do not own any Bitcoin. Having a wallet on an exchange with Bitcoin in it does not mean you have custody of Bitcoin. If you think that’s being hyperbolic, take a minute to look up Mt. Gox and get back to me. Bitcoin is the exact opposite of decentralized.
Practicality of Adoption
From a practical standpoint, the reality is that Bitcoin is unadoptable as a legitimate store of value in the world we currently live in. Fees, volatility and the need to pay taxes make this impossible.
The tax part of this is pretty simple. If you take payment in Bitcoin, you owe marked-to-market taxes on the value of the Bitcoin at the time you were paid in it. This is referred to as a “realization event” in the United States. You can’t pay the taxes in Bitcoin and have to use USD for that. If you sell your Bitcoin for the cash to pay your taxes, you can realize a capital gain which you owe taxes on and have to pay exorbitant fees to even do the conversion (which I’ll get into below). So what the fuck is the reason for me to take payment in Bitcoin and deal with all this hassle when I have USD available? As a buyer or a seller of goods and services, this is a painfully obvious choice.
Adding to that is the practicality of the fees and volatility that will hinder widespread adoption:
Practicality of DeFi and Fees
Decentralized finance is expensive when it comes to fees. This is especially true when you’re working in a decentralized exchange (PancakeSwap, UniSwap, etc). For ease of discussion I’ll just focus on the centralized exchanges here.
This is a screenshot from my Coinbase Pro account buying one Bitcoin. $177.37 in fees. So if someone wanted to buy something that “cost” one Bitcoin, they would have to pay $177.37 in fees just to get the coin. Then comes the fees of moving a Bitcoin between wallets to complete the payment. In all, you would end up having to buy more than one Bitcoin to buy something that costs one Bitcoin in a practical sense. This is just straight up asinine.
Keep in mind that you are guaranteed to realize these fees when you use crypto. It is for all practical purposes a guarantee, especially if you “take payment” in crypto. So you want to buy a car and the car dealer accepts Bitcoin. The car costs $35,000. So you can either pay $35,000 USD or you can pay $35,500 in Bitcoin when you take all the fees into account. That is nonsensical.
Practicality of Volatility
With broad adoption comes an increase in scrutiny of the volatility of the underlying. In practical terms, in order for Bitcoin to be broadly adopted (or any crypto) you have to have large companies accepting it for everything. No one cares if the libertarian coffee shop owner near your apartment takes it. Kroger needs to accept it for groceries.
When large companies take payment (including banks and anyone else you can think of), there’s not an instant reconciliation of these payments. It happens nightly, biweekly, monthly, quarterly or whatever the cadence of the business is. Larger businesses (especially publicly traded ones) have a lot of people they are held accountable to. If you think about this in practical terms, the idea of a widespread movement of publicly traded companies carrying a large part of their profits on their books in something that can literally lose half its value overnight is just a nonstarter. It will never happen. And this isn’t some pie in the sky “maybe the worst case could happen” thing. It’s a thing that has actually happened multiple times throughout the history of Bitcoin.
To think that there is going to be some movement of large companies to take on this level of financial risk to satisfy some “fite da powa” boner for decentralized finance is a joke. It’s nothing but magical thinking. If big companies don’t normalize it it will never happen, case closed.
Practicality of Traceability
I mean, Colonial Pipeline. The government can trace it (as can anyone via a public ledger) and they can get access and take it from you. They just proved this. This argument shouldn’t be one anyone is making at this point but it’s still common.
Practicality of Value
It’s a common refrain that the fact that a Bitcoin can’t be just created by fiat makes it inherently more valuable than a dollar. That is, because there is a finite supply that some people can’t just decide to make more of this inherently makes Bitcoin more valuable. This is an incredibly stupid argument. There are very few pictures of my asshole floating around the world. Doesn’t mean anyone’s willing to pay money for them. This is a thing that tons of people jumping into the “get rich quick” world of NFTs during that craze happened to learn but not internalize when their dumb art didn’t sell for 100 ETH on OpenSea.
Something being rare means nothing. It means literally nothing. The only thing that matters is what people are willing to buy and sell it for. That’s the exact only thing that matters. This is not derived by the “rarity” of Bitcoin but by the narrative around it. If something’s value is derived by a narrative and only has value because of this narrative then when faith in that narrative dies the value of the underlying dies. Some would say that the value of fiat currency is also derived by faith, which is a legitimate point to make. However, it’s also a thing with levers that can be pulled to correct course as necessary. Despite what you may want to believe, when it comes to an economy we made up and a world we’ve largely invented for ourselves, the ability to do this with our currency really is not a bad thing. If USD was the “one” asset class then yeah I can see the argument. But diversifying to multiple different asset classes as a store of wealth is still very easy to do. In this environment, not subjecting our “proof of work” and day to day transactional capacity to an uncontrollably narrative driven instrument just doesn’t make a whole lot of sense.
Summary
I think one thing people might push back on here is my focus on Bitcoin as a means of payment vs just a long-term store of wealth. I think that’s a legitimate criticism of what I’m doing here. I have decided to focus on the transactional impacts of Bitcoin because that is still a large, commonly cited narrative around its use and because (frankly) the horrifying fees on Bitcoin transactions are generally better than a lot of the other shitcoins being thrown around. I wanted to give a “best case” scenario with the “gold standard” crypto.
If you use Bitcoin as literally nothing more than a speculative instrument, then good for you. Make your money, King. The biggest thing I wanted to write about here was a breakdown of the absurd, ridiculous, unbelievably dumb narrative around crypto being “the future of finance”. It is the future of very specific types of limited transactions and the future of speculative investing almost certainly. But no matter what happens, no matter what you do, if your country or state doesn’t accept it as a means of paying your tax bill, then it’s just what you’re already doing with extra steps and more fees. The cult around this stuff is ridiculous and I encourage anyone who invests in crypto as a means to grow or store wealth to be a little less credulous of the magical claims being thrown around about it.
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