This is not about a specific flaw in Bitcoin, however Bitcoin is a preeminent exponent of the crypto-currency galaxy. Any cryptocurrency that don't have a sufficient loan base have these problems.
Bitcoin, especially, looks more and more like a Ponzi scheme that is just ready to blow. Only that there will be no Charles Ponzi to sue, only a lot of people that lost money and a few winners that sold the bitcoins before the bang.
Or, with another metaphor, Bitcoin is like a global poker game where some will take the pot and the others will bite the dust. It may happen tomorrow or after years, but for me this is the only reasonable end. Until then, everybody believes they have a very good hand...
Here are my arguments:
No loans, no value
I said some time ago to my colleagues that Bitcoin would have a chance only if there would be loans denominated in Bitcoin. With all their problems, the fiat money (the regular money we are using) have a great advantage, that is often overlooked: they are created by loan, so there is a promise of value creation behind fiat money.
The mortgage is the best loan that can create money, because there is a guaranteed value behind the money created through that loan. If the loaner will not create the value that can be exchanged with the loaned sum, he/she will lose the house. Therefore, the money created by loan and spent by the loaner needs to be re-acquired to pay the mortgage, creating an intrinsic demand for it.
The value of that money, for the loaner, is at least the value of the house that can be lost if he cannot pay the mortgage. Therefore, there is an intrinsic motivation for the loaner to "buy" that money back by creating value, in order to preserve the house. If most of the money are created by loan, there is sufficient pressure to buy that coin and preserve, at least, most of it's initial value.
Thing are different for cryptocurrencies. I am not aware of any loans in cryptocurrencies, most of it's value is created by speculative investments. In particular, Bitcoin, being so volatile (rapid increase in value), is a really bad candidate for taking a loan. Therefore, Bitcoin does not have a sufficient intrinsic force that have a need for this coin in particular.
People could very easy switch to any other cryptocurrency at any time, without having anything to lose. If you just need to transfer value anonymously, why not switching to Bitcoin2, Bitcoin3, or TulipCoin? There are many emerging cryptocurrencies, people could switch very fast. The people that will sell Bitcoin early will get the increased value, the others will lost what the first people won. I see no significant value behind the Bitcoin that can be preserved or redeemed when speculators leave the game.
Unlike cryptocurrencies, fiat money cannot be dismissed by the people that needs to redeem the mortgage. Such people will still have an intrinsic need to "buy" that currency by exchanging other values they have (work, actives, other currencies). Even if all people would suffer a sudden psychosis that reduces their trust in a certain fiat coin, the reality of a mortgage will motivate many of them to still exchange other goods for this coin, assuring some value for it. I see no such force in Bitcoin and other cryptocurrencies.
On short, any currency have value if there is an en-forcible need for enough people to exchange goods for that coin. Loan repayment (with penalties) is one of such forces that can assure some intrinsic value to a coin, as long as there is no exceeding money creation that greatly overcome the need. Another case is when a company or state obliges itself to exchange some goods with that coin (like gold-backed certificates). We can also imagine coins backed on goods, like "good for 1 galon of oil", when there is an authority or "good will" that can assure that the issuer of the coin will actually redeem the issued coin. Without this, I say cryptocurrencies are all doomed to fail, sooner or later.
Other problems
Basically, the cryptocurrency systems require a lot of energy (cost) to assure a rather simple service: assuring a coherent image of the status of different accounts. One specific is that the accounts are anonymous, whoever have the secret key owns the account. But this can also be achieved by anonymous accounts, based on some password recognized by a bank. I'm not sure that the extra anonymity provided by a cryptocurrency is a significant win, as politics could regulate and even forbid Bitcoin. It could still remain an underground system for outlaws, but without being publicly available it would lose a lot of it's exchange mass that gives it's current value.
The advantage of a limited monetary mass is not such a big fuss. Any currency where you can provide a limit for the banknote serial number have the same property. You just need to provide a way to check the government that it will not print duplicate serial numbers. On the other side, someone could creat Bitcoin2, Bitcoin3, Bitcoin4 just by altering a bit the initial values. There are no guaranties that The Bitcoin will keep it's current cover in market products.
If we imagine a cryptocurrency that would replace a classical coin, there are also other problems. The classical economical Equation_of_exchange M * V = P * Q states that price (P) for a quantity of products (Q) does not only depend on the monetary mass (M), but also on the monetary velocity (V). Currently the variation in monetary circulating speed (V) is partially compensated by central banks that controls the actual monetary mass (M) that is available.
On a cryptocurrency there is no such mechanism that keeps the prices from big variations. The expectation is that a fixed mass (M) coin, like cryptocurrencies, would have huge variations in value (>10*X) depending on the currency velocity. And when the deflation strikes, there is no force to prevent a deflationary spiral where the cryptocoin keep increasing it's value and nobody want to spend it, waiting the bigger value. This continues until the coin, eventually, is not used anymore in the economy and becomes worthless for it's purpose (intermediate the exchange of goods).
The transaction limit
Bitcoin have a limited transaction rate (globally) that will further reduce as less Bitcoins are to be found in a day. This is likely to make the small transactions prohibitive in the future, therefore the small investments would might not be an option anymore. Chances are that the likely solution will be for the people to switch to another system that can faster operate the needed transactions.
The price can be easily manipulated
With a relatively small capitalization and no regulation, it is easy for people with a lot of money to manipulate the Bitcoin price by arranged transactions inside the same entity. Such entities could artificially increase the market value of Bitcoin (or other cryptocurrencies) with the plan to sell it's investment at the bigger price. The remaining players will take the hit when the price would go back to a realistic value. Even without an evil entity, the price might rise because of enthusiastic players, falling down when the rate of new investments will be overcome by the people that secures their gain selling the cryptocurrencies that they invested in.
The moral argument
When you invest and win money from company stock, you create some value by orienting capital to an endeavor that is valued by consumers. What value is created by investing in Bitcoin or other cryptocurrency? Bitcoin&Co systems mainly worth the invested energy per transaction because of their anonymity when trading goods that are forbidden by law: illegal drugs, illegal guns, person traffic. Do yo really want to invest in it?
Disclaimer
I have no formal training that certifies me for investment advice. These are my personal ideas that might be right or wrong. I also don't have any cryptocurrency investments or other interests that can benefit from investment decisions on cryptocurrencies. Just take care!
P.S. Dear reader, please leave a message if you exist! ;) Also, please share this article if you find it interesting. Thank you.
Bitcoin, especially, looks more and more like a Ponzi scheme that is just ready to blow. Only that there will be no Charles Ponzi to sue, only a lot of people that lost money and a few winners that sold the bitcoins before the bang.
Or, with another metaphor, Bitcoin is like a global poker game where some will take the pot and the others will bite the dust. It may happen tomorrow or after years, but for me this is the only reasonable end. Until then, everybody believes they have a very good hand...
Here are my arguments:
No loans, no value
I said some time ago to my colleagues that Bitcoin would have a chance only if there would be loans denominated in Bitcoin. With all their problems, the fiat money (the regular money we are using) have a great advantage, that is often overlooked: they are created by loan, so there is a promise of value creation behind fiat money.
The mortgage is the best loan that can create money, because there is a guaranteed value behind the money created through that loan. If the loaner will not create the value that can be exchanged with the loaned sum, he/she will lose the house. Therefore, the money created by loan and spent by the loaner needs to be re-acquired to pay the mortgage, creating an intrinsic demand for it.
The value of that money, for the loaner, is at least the value of the house that can be lost if he cannot pay the mortgage. Therefore, there is an intrinsic motivation for the loaner to "buy" that money back by creating value, in order to preserve the house. If most of the money are created by loan, there is sufficient pressure to buy that coin and preserve, at least, most of it's initial value.
Thing are different for cryptocurrencies. I am not aware of any loans in cryptocurrencies, most of it's value is created by speculative investments. In particular, Bitcoin, being so volatile (rapid increase in value), is a really bad candidate for taking a loan. Therefore, Bitcoin does not have a sufficient intrinsic force that have a need for this coin in particular.
People could very easy switch to any other cryptocurrency at any time, without having anything to lose. If you just need to transfer value anonymously, why not switching to Bitcoin2, Bitcoin3, or TulipCoin? There are many emerging cryptocurrencies, people could switch very fast. The people that will sell Bitcoin early will get the increased value, the others will lost what the first people won. I see no significant value behind the Bitcoin that can be preserved or redeemed when speculators leave the game.
Unlike cryptocurrencies, fiat money cannot be dismissed by the people that needs to redeem the mortgage. Such people will still have an intrinsic need to "buy" that currency by exchanging other values they have (work, actives, other currencies). Even if all people would suffer a sudden psychosis that reduces their trust in a certain fiat coin, the reality of a mortgage will motivate many of them to still exchange other goods for this coin, assuring some value for it. I see no such force in Bitcoin and other cryptocurrencies.
On short, any currency have value if there is an en-forcible need for enough people to exchange goods for that coin. Loan repayment (with penalties) is one of such forces that can assure some intrinsic value to a coin, as long as there is no exceeding money creation that greatly overcome the need. Another case is when a company or state obliges itself to exchange some goods with that coin (like gold-backed certificates). We can also imagine coins backed on goods, like "good for 1 galon of oil", when there is an authority or "good will" that can assure that the issuer of the coin will actually redeem the issued coin. Without this, I say cryptocurrencies are all doomed to fail, sooner or later.
Other problems
Basically, the cryptocurrency systems require a lot of energy (cost) to assure a rather simple service: assuring a coherent image of the status of different accounts. One specific is that the accounts are anonymous, whoever have the secret key owns the account. But this can also be achieved by anonymous accounts, based on some password recognized by a bank. I'm not sure that the extra anonymity provided by a cryptocurrency is a significant win, as politics could regulate and even forbid Bitcoin. It could still remain an underground system for outlaws, but without being publicly available it would lose a lot of it's exchange mass that gives it's current value.
The advantage of a limited monetary mass is not such a big fuss. Any currency where you can provide a limit for the banknote serial number have the same property. You just need to provide a way to check the government that it will not print duplicate serial numbers. On the other side, someone could creat Bitcoin2, Bitcoin3, Bitcoin4 just by altering a bit the initial values. There are no guaranties that The Bitcoin will keep it's current cover in market products.
If we imagine a cryptocurrency that would replace a classical coin, there are also other problems. The classical economical Equation_of_exchange M * V = P * Q states that price (P) for a quantity of products (Q) does not only depend on the monetary mass (M), but also on the monetary velocity (V). Currently the variation in monetary circulating speed (V) is partially compensated by central banks that controls the actual monetary mass (M) that is available.
On a cryptocurrency there is no such mechanism that keeps the prices from big variations. The expectation is that a fixed mass (M) coin, like cryptocurrencies, would have huge variations in value (>10*X) depending on the currency velocity. And when the deflation strikes, there is no force to prevent a deflationary spiral where the cryptocoin keep increasing it's value and nobody want to spend it, waiting the bigger value. This continues until the coin, eventually, is not used anymore in the economy and becomes worthless for it's purpose (intermediate the exchange of goods).
The transaction limit
Bitcoin have a limited transaction rate (globally) that will further reduce as less Bitcoins are to be found in a day. This is likely to make the small transactions prohibitive in the future, therefore the small investments would might not be an option anymore. Chances are that the likely solution will be for the people to switch to another system that can faster operate the needed transactions.
The price can be easily manipulated
With a relatively small capitalization and no regulation, it is easy for people with a lot of money to manipulate the Bitcoin price by arranged transactions inside the same entity. Such entities could artificially increase the market value of Bitcoin (or other cryptocurrencies) with the plan to sell it's investment at the bigger price. The remaining players will take the hit when the price would go back to a realistic value. Even without an evil entity, the price might rise because of enthusiastic players, falling down when the rate of new investments will be overcome by the people that secures their gain selling the cryptocurrencies that they invested in.
The moral argument
When you invest and win money from company stock, you create some value by orienting capital to an endeavor that is valued by consumers. What value is created by investing in Bitcoin or other cryptocurrency? Bitcoin&Co systems mainly worth the invested energy per transaction because of their anonymity when trading goods that are forbidden by law: illegal drugs, illegal guns, person traffic. Do yo really want to invest in it?
Disclaimer
I have no formal training that certifies me for investment advice. These are my personal ideas that might be right or wrong. I also don't have any cryptocurrency investments or other interests that can benefit from investment decisions on cryptocurrencies. Just take care!
P.S. Dear reader, please leave a message if you exist! ;) Also, please share this article if you find it interesting. Thank you.
Comments
https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/Stanford_02_01_1991.pdf
What I am saying is that, without a force that assure a real need to buy that coin when the perception changes, the coin will lose most of it's value.
For gold/silver coins a minimum value comes from the direct usage, for jewelry and electronics (think CPUs)
For fiat money, the intrinsic demand comes from the people that NEED to get that coin to repay their loans, debts, contracts that are denominated in that coin.
For a store voucher, the intrinsic value comes from the company that... vouched to exchange goods for that voucher, and could lose "good will" and even legal penalties if it does not do so.
You could have isolated systems based on limited number of stones or tokens, that keeps track of who owns what to the other. In these systems the NEED comes from keeping the personal honor and obey the established rules. However, this does not scale large.
The interesting thing is that fiat money are fundamentally a way to keep track of unpaid debt in goods from the society to the individual, while the bought possessions are already re-paid goods.
If there is no real use, and no intrinsic NEED to get THAT money instead of other coins, people will eventually switch to another coin.
There are no loans in gold. Does gold have no value?
Gold has intrinsic value, CPU manufacturers are buying it to use it in products - along with jewelries.
System 1: Analyze article's claims.
4❓:
Why claim Bitcoin will fail?
Issues like lack of loans, energy use, price manipulation.
Why are these issues?
Challenge traditional economics and currency value.
Why not consider other side?
Bias; ignores technological or decentralization benefits.
Why equate Bitcoin with all cryptocurrencies?
Weak generalization.
🌳:
Methodology: Fishbone Diagram
Main Problem: Article claims Bitcoin is doomed.
Bias: Anti-crypto; ignores counterarguments.
Weak Assumptions:
Loans only way to give value; ignores decentralization.
Energy use a significant downside; no comparison to traditional banking.
Price easily manipulated; ignores same risk in traditional markets.
Bitcoin = All Cryptocurrencies; no differentiation.
2️⃣:
Bias Analysis: Heavily biased against Bitcoin. Ignores value of decentralized systems.
Weak Assumptions:
Loans: Bitcoin doesn't need to replicate traditional money.
Energy: Not unique to Bitcoin.
Price: Exists in all markets.
Bitcoin = All Cryptos: Different features and limitations