Wall Street Pit

The Serious Disadvantages of Bitcoin

You’ve all heard about Bitcoin.  No one knows who created it, although some writers have made very educated guesses about the identity of the pseudonymous creator. I have sometimes wondered whether Bitcoin is the product of some transnational criminal organization or rogue state that wants to undermine developed economies by casting their payment systems into doubt.  I am less concerned with Bitcoin’s origin than with its flaws.  I shall enumerate those flaws forthwith.

Bitcoin enables fraud and other criminal activities.  This is absolutely the single most salient feature of Bitcoin’s anonymity.  Conventional currencies are indeed subject to laundering and counterfeit.  There is probably no way to eliminate those risks completely.  Bitcoin magnifies those risks because it can only be exchanged anonymously.  It dominates dark networks that have been known to traffic in narcotics.  Law enforcement efforts to shut those networks down will terminate the ability of any financial actor to transact in Bitcoins even for legitimate reasons.  When the network is down, your Bitcoins are gone.  Conventional currency doesn’t work that way in real transactions.  Banks and brokerages have offsite business continuity backups.  Securities exchanges and central banks maintain counterparty records.  These mechanisms lack Bitcoin’s anonymity but make up for that in resiliency and trustworthiness.

Digital QR codes make it vulnerable to theft.  One Bloomberg TV anchor learned this the hard way.  Transmuting digital Bitcoins into a paper medium means the QR code reveals their underlying location.  Scanning that QR code means anyone can anonymously steal Bitcoins.  That’s the bad part about anonymizing a currency.  Masking ownership means no audit trail to recover a thief’s digital fingerprints.

Mining Bitcoins is a health hazard and energy sink.  People run obsolete hardware just because the video cards can process random digits into raw Bitcoins.  This is a kind of “mining” that’s unlike the real-world mining I’ve studied for years, because it transforms nothing into an encrypted version of nothing.  Nerds who run multiple machines overnight to mine Bitcoin risk heat stroke from the machines.  If you don’t believe me, do a Google search of “Bitcoin heat” and note all of the cooling problems Bitcoin miners discuss amongst themselves, with the real world watching them fry.  Crypto-nerds advocate data furnaces as an economic solution to waste heat generation from Bitcoin mining.  Gimme a break already.  There is no way a distributed network of Bitcoin mining operations could ever be a backbone for currency transactions or an alternate energy grid.  No cloud provider in its right mind will ever farm out data storage needs to distributed servers with zero physical security.  Bitcoin’s so-called solutions just multiply its problems.

There is no central bank for Bitcoin.  Indeed, there never will be one, because Bitcoin’s evasion of central control appeals to its users.  The Federal Reserve, for all of its flaws, has enabled the US to withstand financial panics because it could manage a unified national currency.  A central bank manages fractional reserve lending that allows a national economy to expand.  The supply of crypto-currency is limited by algorithmic design, so an economy running on Bitcoin cannot expand to accommodate a larger population or natural resource base.  A Bitcoin economy cannot grow because it cannot deploy excess capital for innovation.

Minting copycat currencies is easy.  Run through the gamut of crypto-currencies like Litecoin, Dogecoin, Namecoin, Peercoin, and others to see how unserious most crypto-currency enthusiasts are about money.  Dogecoin in particular is obviously a joke based on an Internet meme.  Using a currency named after memes doesn’t impress me.  Imagine someone in the early 20th Century printing a dollar with Mickey Mouse’s smiling visage and convincing others to take it seriously.  The US economy tolerated decentralized currency minting for some of its history until the settlement of the frontier demanded a nationally integrated economy.  Copycat currencies destroy the credibility of Bitcoin.

I am totally convinced that Bitcoin is at best a joke and at worst a fraud.  Hi-tech startups should be be radical, disruptive, transformational, chaotic, revolutionary, and all that but those are not the characteristics of a currency.  People who use currencies as a medium of exchange and store of value need them to have conservative characteristics, so that one unit today has pretty much the same value next year.  Stability enables consumption and investment in reliable amounts at acceptable intervals among counterparties.  Bitcoin does not accomplish these purposes.

Bitcoin is baloney.  I’m waiting for some jokester to create Baloneycoin that will evaporate when minted and play some funny animation.  Look up “Cosbycoin” for an early attempt at turning this idea into a joke.  The parody site that features Cosbycoin is hilarious but the real joke is on anyone who takes Bitcoin seriously as an investment.  I do not use Bitcoin, nor will I do business with anyone who wants to transact in Bitcoin.  I may be a nerd but I’m far too intelligent to use something as stupid as Bitcoin.