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The Top 9 (Bad) Arguments Against Bitcoin

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In my last post I shared with you my thoughts on cryptocurrencies. As I said in it…

Now I figure you might want to hear from someone who actually has researched these things. Someone who has invested in them and who knows the arguments against them probably better than most who make them.

You might remember him from his guest post on the subject back in 2017. I should have listened then. Maybe I will now.

Here’s Lucas:

One of the most influential economists of all time, Nobel Prize winner Friedrich Hayek predicting Bitcoin in 1984:

It has been 3 1/2 years since my first jlcollinsnh guest post on cryptocurrency, and once again you cannot escape the Bitcoin headlines everywhere you turn. We’re right in the middle of another crypto-mania bubble, but this time it feels different. The media salvos have a little more bite. The supporters sound like religious zealots preparing for the rapture. The detractors sound like angry luddites shaking their fists at those new fangled gas-powered horses.

Maybe the stakes feel higher because the crypto ecosystem has added an order of magnitude more money to the pot. Bitcoin is up 500-1000% since I was last here. I don’t have to quote you the current price because it’s on every financial ticker in the world.

But “the price keeps going up” is not an argument. Today I want to look at the most common arguments against Bitcoin that you are likely hearing every day.

Note I said, the “most common” arguments against Bitcoin. These are not even remotely the best arguments against Bitcoin. Like all big things in the world, when you get down to the gritty details the best arguments for and against anything important are nuanced, complex, and involve trade-offs.

I want to help you dispense with these shallow headline hot-takes and level up your understanding so next time we can debate some of the genuine issues facing crypto adoption.

First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you.

-Nicholas Klein, trade union activist 1914.

1. Energy Usage

Your Christmas Lights Caused Global Warming and Destroy the Planet!

In the US alone, Christmas lights use enough electricity to power the entire country of El Salvador for an ENTIRE YEAR.

Do you still support using Christmas lights you selfish entitled assH%&*!? Don’t you know they are destroying the planet! They don’t even produce anything, the energy is just wasted!

The Christmas lights stat is true, and this is how ridiculous it sounds to complain about how much energy Bitcoin uses, but no self-righteous representatives are proposing legislation to outlaw Christmas lights.

There are several sneaky slight-of-hand fallacies they are trying to slip past you with this argument because nothing generates clicks and views like climate outrage.

Bitcoin energy usage compared to traditional banking and gold. https://finance.yahoo.com/news/galaxy-digital-bitcoin-consumes-less-064229894.html

First, electricity usage is not the same thing as pollution, but the headlines pretend they are synonymous. If I use a diesel generator with no emissions filters to charge a Tesla, am I saving the planet? Obviously not, because the method of producing the electricity is the cause of the pollution.

Likewise, if I use 100% solar power to mine my bitcoin, how exactly is that hurting the environment?

Second, Are you in favor of free markets? If you are reading the jlcollins site, I’ll assume that you are.

Would you like the government to get in to the business of telling you exactly what you are or are not allowed to use electricity for? Me either.

Bitcoin mining itself does not generate pollution. Can you name another instance where we blame the non-polluting electricity usage instead of the method of electricity generation that created the pollution?

Why don’t we blame all of the pollution from coal fired power plants on your Christmas lights?

The answer to Bitcoin energy usage and pollution is the same as every other form of energy usage on the planet: Renewable energy. If we need to regulate the negative externalities of polluting energy production, that is fine, but it is not Bitcoin’s fault. In fact, Bitcoin is accelerating the adoption of renewable energy sources.

Third, Bitcoin energy usage is not tied to transaction volume. Meaning the amount of energy used in mining will NOT scale up based on the number of transactions. So all of the breathless headlines about “amount of energy per transaction” and “if Bitcoin continues at this pace by 2040 it will eat the world” are just misleading.

Bitcoin can and will scale to many millions of more transactions totally irrespective of the amount of energy used. If you don’t understand how this works, you do not understand Bitcoin, see #7 below 🙂

2. Inherent Value

“Bitcoin has no inherent value” they say. “It’s just numbers on a computer, created from nothing”

This is debatable, but true on the surface. It’s also true of gold, which is has had no inherent value for the 6000+ years humans have been using this “useless” metal as a store of value.

It’s also true of the US Dollar, and everything else humanity has ever used as a unit of exchange.

Bitcoin, like all other units of exchange in history only has the value that people give it and only functions as a store of value when people collectively use the value system together.

If this is your argument against Bitcoin then you should give me all of your US Dollars which have no inherent value either.

3. Bitcoin is not “real”

You may have seen Bill Maher’s tirade against crypto a few weeks ago. Which included such gems as:

  • “I understand out financial system isn’t perfect, but at least it’s real”
  • Bitcoin is “Easter Bunny cartoon cash”
  • “we knew money had to originate from and be generated by something real somewhere”

I agree…

So his position is: When Wall Street does it, that’s just how the Very Serious People™ do things. But when Bitcoin does it’s fake funny money. You can’t have your cake and it eat too.

I will let you in on a little secret: Bitcoin issuance is capped at 21 Million, now and forever. No un-elected cabal of banks can choose to debase Bitcoin whenever they feel like it.

If you think Bitcoin is fake, just WAIT until you hear how our financial system works!

If you are inclined to take Maher’s opinion on things, here is his outlook on so called “smart phones” circa 2003. Yes, this is an ad hominem attack against Maher himself – because he’s a talking head that gets paid to talk, not to be correct and his arguments are silly.

4. Criminal Usage

Bitcoin is the second most used currency in the world for money laundering and criminal activity.

Second only to…the US Dollar!

 

 

All of the largest banks in the world launder hundreds of billions of dollars every year, yet still we have banks.

People said the same thing about the internet. Should we outlaw the internet because criminals use it? How about cars? It was true then and it’s true now – Criminals did use the internet and they use Bitcoin, but that doesn’t mean we don’t use them too.

In fact, because the Bitcoin ledger is public, immutable, and visible forever many law enforcement agencies are finding it easier to track illegal transactions made through Bitcoin.

5. Insane Market Caps

This one is partly true. Just like during the last crypto-mania in 2017: frauds, scams, and pump-and-dump schemes abound. They will ultimately fail and I agree their so-called “Market Caps” are a fairy tale.

But what about the established Cryptocurrencies – specifically Bitcoin and Ethereum. Can we justify their huge market-caps?

First ask yourself, do you really understand what Market Cap is measuring? Market Cap is simply the value of a single share (or coin) multiplied by the total number in circulation. Does that mean the company (or coin) is “worth” that total value?

Yes and no.

Yes, in that the market value of that share or coin is what the open market shows and you could sell 1 share (or coin) for that value on the market.

No, in that Market Cap is an instantaneous measurement subject to all other market forces. Tesla’s current market cap is $600 Billion. If Elon Musk suddenly dumped his 60 million shares on the open market, how would Tesla’s “Market Cap” fair? Not good. Does that make Tesla’s market cap “wrong” somehow?

6. High Transaction Fees

Another common complaint against Bitcoin or Ethereum is the high cost of transactions and the slow transaction speed that goes something like this:

“you fool – it costs $70 and takes 10 minutes for one bitcoin transaction – Nobody will ever use that for everyday purchases like coffee or groceries”

If this is your best argument against crypto, I would say you lack imagination – or even just the ability to learn from history.

Yes, it is entirely true that transaction costs are high right now. Settlement times are slow, right now.

Are you old enough to remember dial-up internet? When a single web page or image took 30-60 seconds to load in 1999 and monopolized your home phone line, how crazy would I have sounded to tell you that in 15 years or so, multiple wireless devices in your house would be simultaneously live streaming 4k video non-stop – gigabytes and gigabytes at a time?

The history of technology is the history of underestimating the future capabilities of technology.

“Layer 2” solutions to Bitcoin and Ethereum are in development and coming soon. ETH2.0 is expecting 100,000 transactions per second throughput capability and a 99.95% reduction in energy usage.

7. I Don’t Understand It

Warren Buffet has famously said many times: “I do not invest in anything I don’t understand”. You know what else Buffet didn’t understand? Google and Amazon. So I both do and don’t take his advice on this one. I do understand Bitcoin, therefore I invested in it. I do not think Warren Buffet does, therefore he did not invest in Bitcoin. Fine either way.

Outside of Warren Buffet, a common refrain – echoed recently on Bill Maher’s rant against Crypto – goes something like this:

“Bitcoin is complicated and I don’t understand it – it seems like black magic to me, therefore I think it’s fake or a scam“.

I don’t understand rocket science, but I see NASA and SpaceX launching them all the time so I don’t think they are a scam. In fact, I don’t really understand physics very well either, but I don’t think it’s a scam and I avoid jumping off bridges too.

The logic chain of “I don’t understand X, therefore it is a scam/fake” makes no sense. Only by understanding something could you possibly know if it is a scam.

I’d wager that all of your money is invested primarily in things you don’t understand. Do you know how to refine oil? make toilet paper? produce cars? If you wisely invest in VTSAX as JL Collins recommends, you are invested in THOUSANDS of things you don’t really understand but still enjoy the benefits of.

That said, if you are at least honest enough with yourself to say “I (me, myself) do not understand Bitcoin, therefore I will not invest in it” then I respect your decision.

8. X is Better Than Bitcoin

Where X is whatever crypto flavor of the month is hot right now. This was prominent during the last Crypto bull run, but still gets pushed quite often – Most recently by Elon Musk.

Unfortunately for the critics, Bitcoin has some giant tail winds here:

1. First Mover Advantage. Virtually any reading of the history of business proves this out to be an incredible advantage. Not always and not permanently, but often it is enough.

2. “Bitcoin is Worse is Better“. This outside of the scope of this article, but interesting additional reading for the curious.

3. Doing Bitcoin better than Bitcoin is harder than you (and Elon) think.

9. Actually Good Arguments to Debate Bitcoin

These and many others are genuine concerns about the future of Bitcoin that deserve intense debate and scrutiny, but they don’t fit into an outrage headline and don’t have clear answers so you won’t hear them everyday.

If you want some compelling optimism for why Crypto could change the world for the better (or be the investment of a lifetime) try these:

Finally, if you are still interested in Crypto and want to buy in, you can use this link for Coinbase.com and you’ll get $10 of Bitcoin for signing up.

Coinbase is the largest and most trusted Crypto Exchange in the US and I use them for all of my crypto purchases.

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Filed Under: Guest Posts, Money

Comments

  1. When I saw the headline of this email in my inbox, I almost decided not to read it. I bought Coinbase stock and it has been a bumpy ride.

    With that said, I bought into the stock because I do see a future for crypto. I also think it’s kind of crazy how many naysayers there are with regards to it. The energy to mine is one I hear all the time, but nobody stops and thinks how much energy it takes to mine US currency.

    I am excited to see where it goes, hopefully (and eventually) up!

    Reply

    • Thanks for the comment Christina. I’m curious – did you buy the Coinbase IPO instead of buying crypto directly? If so, what were your reasons?

      Reply

  2. I do not understand Bitcoin, therefore I will not invest in it. The Dunning-kruger effect tells me there will be many people who think they understand bitcoin, before they actually do.

    Reply

    • I’ve been in bitcoin for years, but it took me a good 6 months of reading and thinking before I finally got it. If you ever decide to go down the rabbit hole, I recommend starting with an Andreas Antonopoulos video or 2.

      Reply

  3. Great article, the energy consumption argument bothers me so much because it’s such an easy thing to look up!
    Props to you Lucas and to JL Collins for sharing the pro- side of things.

    Reply

  4. Lucas, I would argue that the US Dollar does have inherent value in the sense that the US government backs it. If Bitcoin drops to zero, those who hold it have no recourse. If the US Dollar drops to zero, it won’t matter because the only way that’s possible is if the United States ceases to exist, and if that happens in a disorderly way (the only plausible way at this point in history), we’ll have a lot bigger problems to worry about than which currency our assets are held in.

    Reply

    • Thanks for the comment Tom. I think we are just defining “inherent value” differently, and really you are making the same point I am making.

      Water has inherent value, as does food, shelter, and clothing. So does Electricity, because it can do work. Things that have value that is inherent within them regardless of what anyone or any government or any of system outside of the physical object itself thinks or says.

      In that sense, a US dollar is a green piece of paper that can do nothing for you. If you had a whole pile of them you could burn them to keep warm in the winter. US Dollar bits and bytes in a bank computer system can’t even do that.

      In a sense, you are proving my point: The US Dollar has value because and ONLY because the US Government says it does and we all agree to abide by the narrative.

      EDIT: Incidentally – this is why Salt was the store of value and medium of exchange before Gold, because it has truly inherent value – no life is possible without it.

      Reply

      • Great (and quick!) reply. I agree with your last sentence, and see it as critical: Bitcoin (and gold and many other things) have value only because we all agree to abide by the narrative. And that may well be enough, if enough people agree. That has been more-or-less true for gold over the millenia. But I would assert that the vast majority of people holding Bitcoin at this point are treating it as an investment asset, not a currency. To do the latter would be insanity given its volatility (as you allude to in part 9 of your post).

        Further, critically, as you say, the Dollar also has the government saying it has value. And that is different because the government is sanctioned to enforce rules with violence, which is what makes them hard to break.

        Reply

        • The other critical difference between Bitcoin and the USD is that anyone can copy the source code of Bitcoin, run a find/replace to rename it SuperBitcoin. This new crypto would have exactly the same functionality as Bitcoin, and the only thing keeping it from taking off would be support from miners/users. The thousands of cryptocurrencies that have been created show just how easy this is. Some have significant technical differences from Bitcoin, but many are largely the same, and there’s nothing keeping thousands more from being created. As Mr Money Mustache pointed out a while ago this is why the 21 million coin cap on Bitcoin is pointless. USD has no cap, but it’s very difficult to compete a whole new government that competes with the US gov (the EU is trying though).

          https://www.mrmoneymustache.com/2018/01/02/why-bitcoin-is-stupid/

          Reply

  5. I tried to leave a thoughtful comment with my questions and opinions, but WordPress just flags it and won’t post it. I don’t even know why.

    Reply

  6. Couple issues I’ve seen with bitcoin:

    1. Nobody is happy for a crypto winner: Some granny finds her stash of beanie babies, or some adult finds their stash of Pokémon cards, resulting in big windfall? Woohoo, lets go celebrate together. Somebody gets a crypto windfall? First one might be seen like a vegas/lottery win, but when its everybody and their grandma the sentiment fast switches to unrest/frustration/anger (devaluation of money/labor etc). Why that may be is another question, but lottery like winning flooding a lot of typically young (read: unearned) speculators tends to breed contempt not joy.

    2. Its fundamentally anti-big organizations/gov: While everyone in the space touts that as freedom, it starts to ring more and more like the people who go on taxation as theft etc etc – yet riding the coattails of all the societies perks. While hating the man is nothing new, the current state of bitcoin is its owned/mined by whales and economic frenemies (e.g. China), all the while not really offering anything better than the status quo. At least with US currency taxation of say 50% you get clean food, roads, public services, some level of stability etc.

    3. There is absolutely no reason to not screw over existing holders: Bitcoin isn’t the only crypto network but yet there appears to be a notion that whenever crypto goes full mainstream that (some) existing networks and assets will be maintained. There is neither social or technical contracts to that effect. Bitcoin is one of the now many casinos, nothing stopping it from winding down and opening up with new basket of different chips – and it has already happened to different extents (forking, new cryptos, etc).

    4. Mutability is a feature: The whole financial system is set up on true ups/rounding, rather than absolutes. Immutability sounds right, but it falls apart when ledgers have to be adjusted for reasons beyond the control of the ledger (e.g. court ruling, true ups, or just plain clerical errors etc). In other words, perfect immutability is closer to a nirvana fantasy because ideally rest of the bajillion systems in the world would be similarly (near-)immutable – the hurdle of that is akin to imperial to metric transition (doable, but falls closer to nirvana fantasy than reality). Sure a bunch of fixes can be added to accommodate this, but then back to place that is too similar to status quo.

    5. Narrative around crypto being some kind of saving grace of people hurting in other countries seems like fluff: Society doesn’t care, potentially even thrives, and in a number of cases almost certainly creates the hurt. USA has school lunch programs where kids accrue food debt. Its messed up.

    6. “Are you in favor of free markets? If you are reading the jlcollins site, I’ll assume that you are.” – Many people don’t favor an absolute free market system because there are other actors beyond our control that will not behave in the free market way (including themselves). This introduces inefficiencies, unfair practices, BUT has maintained status quo for society.

    7. No one really wants bitcoin: People want VTSAX because it represents a piece of the largest companies, their workers, their wins and losses. Stock markets may be an elaborate house of cards, but it still represents the production of a company/country. Bitcoin represents none of that, or rather, what it has represents is at base level cessation/no faith all the way to the extremes of mass scale fraud/skullduggery/murder/ransomware and other crimes. There is no feel good message about dumping 100k into bitcoin – it doesn’t turn into an excavator leases that becomes developed land that produces houses. Yes there are smart contracts etc, but people know loans/mortgages/liens and not the crypto alternatives – most importantly the former has established federal/society backing (Fannie/Freddie) and the latter is akin to community lending notion but with fangled tech behind it (that doesn’t really solve anything with regards to defaulting etc).

    8. On electricity: Perhaps the reason people aren’t up in arms about Christmas lights is that it heralds THE MOST PROFITABLE PERIOD OF THE YEAR for many companies and spreads notions of warmth happiness generosity, a time when people come together who otherwise wouldn’t. But when it comes to bitcoin, there was a leash of “well if its mostly a harmless Pokémon/baseball card thing can let it slide” that has now been disputed as actually maybe industrial type of impact – suddenly it isn’t some non-consequential impact, its factories/whole regions being built to purely burn energy. Even if you don’t care about environment, idea of creating of new potentially industrial level of pollution is not something that should be slide under the table as “oh its okay, some of them are using renewables/energy otherwise unused”. It also rings a bit hollow that collectively crypto just wants to start making a bunch of money first and solve the energy problems later (sounds like the same evil corporations everybody doesn’t like).

    For the average person crypto is digital beanie babies, wrapped in what most people view as a rube goldberg tech. So far it doesn’t represent a novel financial system, it addresses alot of issues nobody really cared enough about, and its getting flack for potentially making energy crises even worse.

    For the crypto investors, crypto represents legalized gambling open to previously excluded markets and/or wider (and arguably more desperate) audience. With it being unregulated, we have professionally trained/practiced financial gurus (e.g. Goldman sachs etc) running wild in those markets (something they are more precluded from in the stock markets) – as an average Joe I like those odds much less than index fund. Not to mention far to much flux over pumpers and dumpers.

    But hey, its all good fun and just some fun points to toss out over pizza and soda, all happy vibes here. I Like Pizza. Lets invest more into pizza nights.

    Reply

  7. Lucas- You can add to the list of legitimate concerns that the technology has inadequate architecture to handle mass usage as an everyday medium of exchange in its current form. That “Layer 2” solutions to btc/eth are in development and coming soon’ is code for ‘those features will forever be in development, always just around the next corner as they have been for years now.’
    JL- its great that you are open minded but something about posting an affiliate link to a product you yourself aren’t completely sold on doesn’t sit quite right with me. You are independently wealthy, why bother with that?

    Reply

    • Thanks for the comment Michael. I’m not sure I agree re: Layer2 solutions.

      Lightning Network on Bitcoin has been live for 3 years now. It is not waiting on development, it is waiting on adoption.

      On ETH side – It has been a long time coming I grant you that, but Phase 1 of EIP-1559 is launching in July (next month). The code has been on TestNet for many months – so again, I don’t think it’s vaporware either.

      Reply

    • Layer 2 for the US$ are banks, swift, paypal, visa.
      Cheap, fast payments are the easy part. We’ve been innovating on it for decades and banks, swift, PayPal Visa can easily substitute any currency in (and do country to country).

      Creating a decentralised money with a perfectly finite supply was the hard part (zero to one).

      Reply

    • A lot of people commenting on a space they don’t understand in these comments. Check out Optimism on Ethereum. Just launched, layer 2, cheap as chips, but a limited supply at present.

      The whole “crypto” environment is developing, interfaces and dev tools are still being created. We don’t all sit here typing DOS commands, or in code – we use nice GUIs. As this comes along, so the technologies will be adapted.

      Reply

  8. This is the worst article I have ever read on your blog. I know you want to present a balanced assessment, but the author is clearly a crypto zealot.

    Just take this one quote: “In fact, Bitcoin is accelerating the adoption of renewable energy sources.” The only “benefit” Bitcoin provides here is that it increases the demand for energy. I put “benefit” in quotes because the energy we have now could be put to more productive uses like, say, building out more renewable energy infrastructure. Energy is a zero sum game and Bitcoin is just pointlessly trying to reverse hash functions.

    A better argument would be to point out proof-of-stake algorithms that don’t rely on custom hardware heating up the planet just to prove that you wasted more energy than the next guy.

    Reply

    • Eric,

      What about when cryptomining subsidizes the building out of renewable energy? There are many instances where capacity needs to be overbuilt in a geographic location to anticipate future demand, but that demand does not exist today, so the power is wasted because the transfer losses are too large to be economically viable. Cryptomining can subsidize the building / production in the mean time. Hence: Increasing adoption of renewable. Like I said many times in the article – it’s not always so clear cut.

      on PoS – Did you miss where I mentioned the ETH2.0 migration (which is Proof of Stake) will decrease energy usage for Ethereum by 99.95%?

      Reply

  9. Crypto’s volatility is a concern if it’s ever going to be used as a stable store of value. Perhaps it will become less volatile over time but for now it’s difficult to imagine it being useful as a currency when it’s price can swing up or down so significantly in such a short period of time.

    Reply

    • Thanks for the comment. Personally I see “store of value” and “currency” as two slightly difference use cases.

      Bitcoin is clearly already a store of value.

      But I totally agree that as a medium of exchange / transactional currency the volatility is too high on Bitcoin in particular.

      Reply

        • It’s only a loss if you sell 🙂

          If you bought 0.1 Bitcoin at $60k, you still have 0.1 Bitcoin.

          If you are trying to gamble by timing the market to make quick cash that is the very opposite of store of value.

          Check back on the purchase at $60k in 3 years or so.

          Reply

  10. Hello Lucas. Great article. I do own some bitcoin, but my main issue is asset allocation and I have less than 5% of my investments in bitcoin. I would love to hear your thoughts on stable coins and the safety of them. The interest rate on some of these stable coins are crazy. I’m getting 9% on USD coin at Voyager. I have about 5x more money in stable coins than bitcoin as it’s mainly cash that I will need in the next 1-2 years and just want to persevere my capital with a little bit of a return from the high interest. Is this safe? And how long do you think this high interest rate environment for stable coins will last?

    Reply

    • Frankie – I am not a financial advisor. This is not financial advice.

      My understanding is that the stablecoin market is SUPER sketchy. Some might even call it a house of cards.

      If I were way up in that market I would take my money and run, FAST.

      You might ask yourself: Who is the counterparty in those transactions? What exactly is the business model that is allowing those stable coins to issue you crazy high interest when the rest of the world is at almost 0% interest or even negative? If it seems to good to be true…

      Reply

  12. JL, I have to say I am very disappointed that you seem to be now pushing bitcoin. I found your blog years ago and thought it was a great reality check for anyone wanting to get rich quick. How can the author of the simple path to wealth now be jumping onboard the most speculative frenzy, possibly ever?! Can you please stick to your routes and if you have to talk bitcoin to get the blog views, at least report on it with a healthy dose of scepticism? I feel you should take the responsibility you have towards your readers more seriously. You may well have more sway over many of them than you realise. Anyone who “invests” in bitcoin should be prepared to lose it all.

    (1) Rather than comparing total energy usage, would it not be a fairer comparison to compare energy use per transaction? Yes, this is how it should be compared – if interest in bitcoin increases, mining becomes more difficult and requires more energy. You can’t really expect to get away with comparing the total energy usage of worldwide banking systems to the relatively minuscule bitcoin, can you? At roughly half the energy use of the worldwide banking system – the chart displayed goes to prove how much energy use bitcoin actually uses.

    (2) Bitcoin has no inherent value. This is not debatable. It produces no income streams and has no industrial uses. This is not the same as gold. Suggesting USD has no inherent value is patently false too. USD is backed by the full force of the US Govt and even bitcoin fanatics need to pay any capital gains in USD.

    (3) That you even have to argue that something is real is concerning in itself.

    (4) Again, please compare like for like. USD may be used for more criminal activity overall, but per transaction, bitcoin wins. When it comes down to it, bitcoins only use it to assist criminals or to speculate on.

    (5) Market Cap is a pointless measure of bitcoin. It should not be valued like a company. Also, if you insist on using this measure, please take account of the free float. Most bitcoin ins never transacted.

    (6) Wishful thinking – transactions costs for bitcoin are not falling in the way you suggest they should.

    (7) I have not seen any solid arguments for what bitcoin is actually for? It is a solution to a problem that does not exist. Any possible benefits can be stripped away from bitcoin itself.

    Reply

      • I see that this is a guest post, but he should not be giving the ‘other side’ the time of day. Your arguments could persuade the gullible to lose all their savings. Will be receiving a newsletter arguing the positives of tulips as investments next time?

        Reply

        • Hi Adam, I rather think it simpler that people learn “buyer beware” and to do their own research. We can’t “protect” people by censoring debate. Debate is everything. “The other side” is a relative term. You might learn something! It’s called the scientific method…

          Heck, anyway, the scientific method appears to have a died a death in the last fifteen months… some people still think we’ve been living through a deadly pandemic…!

          Stay sane.
          Vorlic

          Reply

    • Adam I couldn’t agree with you more. There are plenty of charlatans teaching people why they should have faith in bitcoin, including my 63 year old work friend who has a gambling problem but he us “all in and winning” the bitcoin table. I send young and old people to learn your conservative “simple path to wealth” maybe I was too gullible JL
      I’ll rethink my recommendations.
      Maybe I’m too sensitive. I did not buy bitcoin when I heard Steve Gibson explain it in 2012 because I do not believe in get rich quick pyramid schemes. Or is that what VTSAX is?

      Reply

  13. I’m suprised about this article on this website. I agree that in a way you can compare crypto to gold. However, this feels funny, because I would assume holding gold would not be advised by JLcollinsnh. The problem with both gold and crypto is that it doesn’t generate value over time.

    To me crypto is a perfect example of a zero sum game. No value is created, only stored. Furthermore, using Bitcoin as a store of value is flawed, because it fluctuates so much, it’s not a stable store of value. Using it as a means of currency is flawed because of the same reason, and also because of the high costs of transactions.

    Saying the cost of using Bitcoin/Ethereum is going down in the future has also been said by a lot of people in 2017, but it hasn’t been solved yet, so I’m sceptical.

    On the other hand I think the blockchain as a technology can change the world. But I fail to see why the current crypto currencies would benefit from this, as a government or other organisation will likely creaty their own blockchain for these new usages.

    By the way, I actually own a little bit of both Ethereum and Bitcoin, but I am still very sceptical about the real life use of it.

    And lastly, just because people use a stupendous amount of energy for christmas decorations you can’t say other usage of a lot of energy is fine. I think the use of so much energy for christmas decorations is dumb, I would very much like some regulations before we burn up the entire planet 😉

    Reply

    • Thanks for the comment Jelle. I think your skepticism is well warranted – nobody knows how this is going to play out.

      As to why Bitcoin may survive when it is so easy to spin up additional cryptos, I’d recommend watching this talk if you are really interested in understanding:

      https://www.youtube.com/watch?v=rsLrJp6cLf4

      It is a little long, but goes into great detail. Way too much to put in a comment here.

      Reply

    • Agree 100% with your last point. It’s an untenable argument to essentially say, “Well, other activities/sectors/industries waste even more energy so crypto ain’t so bad”. I would also welcome regulation regarding wasteful energy use in order to promote the public good. I also support speed limits and building codes.

      Reply

    • Agreed, one wasteful, poor use of energy does not justify another wasteful, poor use of electricity. What we need now is not a race to the bottom and rationalization, but a real reckoning on how we both generate and use power regardless of ho its generated. It’s nothing against bitcoin itself. I feel the same way about legal marijuana grown in energy intensive grow houses and people driving giant trucks to work in the suburbs. Let’s do away with the all the wasteful ways we burn fossil fuels and not use one bad use to justify or rationalize another. Whatever problems in the financial system BTC is hoping to solve, they pale to the consequences of unmitigated climate change. I don’t own a large SUV or truck, I don’t put out a large Christmas light display, I don’t buy marijuana grown in grow houses(or fruit out of season), and I won’t be buying any BTC until and unless they figure out the energy issue.

      Reply

  14. Very disappointing post. This website was always a no nonsense financial view. Allowing this kind of guest post with a referral link to cash in on the latest fad is beyond disappointing.

    All of these “bad” points are solid points and the rebuttals above are vapid. Crypto fell for 3 years straight and then tripled in 5 months only to halve again. To give any validity to it beyond gambling is irresponsible and unethical.

    Shame on you JL Collins for approving this.

    Unsubscribed from the list.

    Reply

  15. Thanks for the article Lucas, an interesting read.

    A question for JL – I’m interested to know whether you are in any way invested in cryptocurrency? If not, is it something you are considering going forward?

    Reply

  16. One thing I want to better understand is that money serves two roles:
    – medium of exchange
    – store of value.

    An inherently deflationary currency should be better as a store of value than as a medium of exchange. And any currency subject to debasement is a risky store of value, but b/c nobody wants to be stuck holding worthless paper, it moves around faster and may serve as an adequate medium of exchange. Is an inherently deflationary currency going to have liquidity issues? I don’t know, but want to.

    Reply

    • Excellent question Steve!

      I don’t have a good answer for you – This is one of the big open questions in the crypto space. You can find people arguing both sides persuasively.

      Reply

  17. Bitcoin is here to stay IMO. But anything that is as volatile as bitcoin or any other cryptocurrency is not a store of value. Additionally, bitcoin is illegal in some countries and Chain is cracking down on it. I think that keeps it from being a universal investment.

    Reply

  18. I think that whether or not it becomes feasible for use as a means of exchange, the more pertinent question is how Bitcoin makes sense as an investment, as opposed to currency speculation.

    Reply

  19. Lucas, where can we find more of your work? Blog, Twitter, etc? Sorry if I missed it earlier in the post.

    Reply

    • Hey Joe,

      I actually don’t really post or write anywhere else at the moment. I’m flattered you would be interested though!

      Reply

      • That’s too bad! I really enjoyed both articles. If you have any pointers on where else to get quality information on crypto/blockchain I would really appreciate it. Thanks for all of the good insight. It has been very helpful.

        Reply

        • Joe – Absolutely. I would recommend anything from Andreas Antonopoulos.

          His youtube channel is an amazing source of info and he is totally independent and is one of THE BEST educators in the crypto space. He has nothing to sell you.

          He also has 2, soon to be 3, books on Bitcoin and Ethereum

          https://www.youtube.com/user/aantonop

          Reply

  20. I want to thank you, JL, for bringing in someone to argue the other side of this Crypto thing. I personally still don’t understand it, so I don’t invest in it. However, I am very aware that the amount of what I know is quite small in comparison to the amount of things I do not know. I appreciate you bringing in someone to explain a little bit about why some of the headlines around this issue might be inaccurate.

    I have to say though, I find that Christmas lights do have a purpose: they make the darkest time of year a little less dark and easier to navigate. As a dog owner who has to take my pup on walks during that time of year when the sun is not up, or goes for early morning runs without daylight, I greatly appreciate the benefit of the extra lighting from both a safety point as well as a feeling of good cheer. So I wouldn’t say that these lights don’t produce anything… far from it. They’re quite useful to the many people that are out and about for various reasons when there isn’t sun to light the scenery.

    Reply

  21. I’ve been learning about crypto for years now and the more I understand it the scarier it gets. This post is clearly written by someone invested in it and wants bitcoin to become main stream, while I want this to go away. Why?

    – We don’t know how capitalism, as we know it, would function without a competent centralized monetary management, kept in check by voters (directly or indirectly) and with a mandate to create stability above all else. Do they always succeed? Obviously not, but their absence would make any Country to collapse in days. History is filled with examples.

    – Economies need a healthy (read low) dose of inflation so to entice investment and activity, hence the constant need to print or create money at a pace that is deemed appropriate or necessary. The capped issuance of Bitcoin completely eliminates that desirable feature, resulting in constant deflation in the economy, which we know is catastrophic. There is no way to solve this unless someone presses a button and create more bitcoins, potentially disorderly.

    Forget the other arguments, although some are still not properly addressed by this article. The two points above alone make me detest this whole development. Mind you, when people say they don’t understand bitcoin, they may be referring to the non-sensical nature of investing on something with a extremely weak case.

    Reply

    • Pedro – Thanks for the comments.

      Yes – I am invested in Bitcoin and I do want it to become mainstream. I hope we made that clear in the intro to the article, and in the previous article.

      “competent centralized monetary management” is being VERY generous to the Fed, in my opinion, but I take your point.

      I think it is very unlikely we get to a decentralized-crypto-only based economy or monetary system in our lifetimes, so I’m not worried about capitalism not being able to function under such a system because I think it is extremely unlikely to happen.

      On deflation – While Bitcoin issuance is capped, the cap will not be reached until roughly the year 2140.

      Between now and then Bitcoin has built in issuance (inflation). Which currently sits at 1.65% annual – which is almost exactly what the “expert central banks” claim is optimal.

      So, Bitcoin is not deflationary in the traditional sense.

      Reply

  22. “I would recommend anything from Andreas Antonopoulos.

    His youtube channel is an amazing source of info and he is totally independent and is one of THE BEST educators in the crypto space. He has nothing to sell you.” [emphasis mine].

    “He also has 2, soon to be 3, books on Bitcoin and Ethereum”

    ….. Not only does he has 2 books to sell you, he has 6 books, workshops/courses he would like to sell to you, a patreon where he sells you access to himself and the community he builds, and he literally runs a store where he sells you all of the above and mugs, onsies, clocks, yoga pants etc. Not to mention the rest of the media empire (podcasts, public speaking, etc.). Then there is their whole history of being in bitcoin space, not as participant, but like actually involved to an controversial extent. And not to mention his holdings in bitcoin are suggested to be rather large amounts (millions of dollars worth).

    Disclosures are important part of financial world because it indicates vested interests. For you to not be able to see/understand basic principle of what Antonopoulos vested interests are suggests (at best) dangerous naivety.

    (Admin Note: This comment was moved out to it’s own thread, previous replies reached thread limit.)

    Reply

    • Calvin,

      Why are you on JLCollins site at all – He’s obviously just trying to sell you Vanguard funds and push his own book…err..I mean Media Empire!!

      Seriously?

      I like to think anyone with half a brain can tell the difference between:

      “This online video creator sells books and coffee mugs”

      vs

      “This person wants me to spend large amounts of money and/or invest with them.”

      You really think he’s getting rich off selling books? You really think books require a financial disclosure?

      Andreas has got to be the least controversial figure in all of crypto.

      Also – If you actually had any idea what you were talking about, you would know that Andreas does have millions in Bitcoin….

      …but ONLY BECAUSE the Bitcoin community loves him so much hundreds of people literally chipped in and donated him more than 100 Bitcoin, COMPLETELY UNSOLICITED because he spent years of his life doing the same thing (Teaching people crypto) without actually owning any himself:

      https://qz.com/1151233/andreas-antonopoulos-got-1-5-million-in-bitcoin-donations-after-roger-ver-bitshamed-him/

      https://twitter.com/aantonop/status/936288356069183488

      Reply

  23. This is the BEST crypto article I have found on the internet. Thank you Jim and Lucas. Crypto networks have incredible value just like the internet “network” does. Crypto networks transfer valuable info – this is power. Thank you Lucas!

    Reply

  24. I think another argument against Bitcoin would be the short length of its existence, which suggests that it might disappear shortly. Nassim Taleb calls this the Lindy Effect.

    Reply

  25. Everyone posting about crypto misses the real point. Crypto is almost exactly analogous to cash. The real problem is the ‘systems’ that have been put in place for cash over the past £100 years are simply not there for crypto.

    Crypto is still in the pre-currency phase, Bitcoin could be dead tomorrow or the perfect global currency. We just don’t know.

    Investing in it is pure speculation betting on which Cryptos will make it, and you know there is a high chance the ones that make it haven’t even been invented yet.

    Reply

  26. JL & Lucas,
    Thank you for providing info on a topic that is great interest to me. I have applied the principles laid out in a Simple Path to Wealth and have recently become financially independent, but am really excited about cryptography & Bitcoin.

    Reply

  27. Why nobody mentioned the most problematic feature of the Bitcoin? If you lose access to your crypto it is forever. Nothing can be done to recover lost coins. Imagine 7 billion people using crypto on a daily basis. Daily at least one million people will lose their coins forever with no one to help them, no one to “reset the password”. In case of a fatal accident the families will lose access to the savings of their relatives. And there are a lot more this kind of examples. Even now there is probably not a single week without a report that someone lost access to a large amount of their coins.

    Reply

  28. The argument in Market Cap isn’t convincing. So if the price for one coin you think is ok, but a large quantity wouldn’t be, does that mean the current price is flattered? Market Cap I understand simply is just the value of the currency as a whole, and right now it looks too high. To make it a currency, it must be stable. No one holds 1 USD and hoping it x100 value, like most of the holders of cryptocurrency.
    But netherness, crypto is the future of currency. Give it some time to educate the crowd, rugs all dump-bump get-rich-fast, it will stable and replace the current system.

    Reply

  29. I think this topic is worthy of discussion and debate on a FIRE blog such as this, despite the speculative nature of BTC. JL did not endorse buying BTC. He allowed a guest poster to make the case for BTC. I appreciate the calm and respectful manner in which Lucas has responded to so many comments on his article. I do think he is brushing aside some real issues with many of his defenses though.

    1) Intrinsic value, yes BTC has no more or less intrinsic value than a piece of paper (dollar), but its disingenuous to not recognize that having the US government and economy backing the dollar does not add value to the dollar as a currency. The ability to set monetary policy, raise additional funds through taxes, reduce federal spending, provide FDIC insurance, pursue counterfeiters, the relative stability of our democracy, strength of our military, etc. does make the dollar a better store of value and currency, which is why its the world’s default currency.

    2) Volatility makes BTC too risky and unusable as a currency for routine purchases. What’s the point of currency that can lose half its value in a matter of days?

    3) The environmental impact of mining BTC and other currencies is real, and pointing to other inefficient or wasteful uses of energy does not make BTC mining any less wasteful or lessen its contribution to a worsening climate crisis.

    4) BTC is disproportionately used by criminals to collect ransoms, launder money, and buy and sell illegal goods and services on the black market. Again, the use of traditional currencies in nefarious ways does not negate the disproportionate use of BTC to transact illegal activities.

    5) While BTC is the clear leader in the crypto space at the moment. There is very low barrier to entry and the number of competitors that could enter the market is limitless. The only thing propping BTC coin up over the competition is the popularity (name recognition) of BTC. BTC is not a superior product and it does not offer a competitive advantage beyond its own popularity. Popularity is a fickle thing and can change quickly. There is no competitive moat.

    6) Lastly, governments around the world are not going to willingly surrender autonomy and control of their nation’s currency and fiscal policy. With one piece of legislation (democracy) or one declaration (totalitarian regime) BTC can effectively be banned from use and thereby devalued.

    There are other issues, but I think those are the biggest in my mind. I have nothing against the idea of crypto or the underlying blockchain technology. I think the unintended consequences and speculative nature make it a poor investment.

    Reply

    • Hey Justin – Thank you for the thoughtful comment.

      I’ll try to respond to your points as you labelled them.

      1. Point taken. If we are saying: “No medium of exchange has inherent value unless people give it, but group organization / coordination can imbue something inherently valueless (green paper) with real value.

      Following that line of reasoning wouldn’t PoW give Bitcoin value? What about the fact that is cannot be debased? What about censorship resistance? Immutability? etc? Are those not the Bitcoin equivalent of “this green paper has inherent value because US Gov things” ? Bitcoin’s “things” are just different.

      2. Agreed – Which is why it wasn’t wasn’t one of my Bad Arguments in the article. This is a fair point.

      3. I feel like you are missing my point on the power issue. I was not simply stating that other things are wasteful of power, therefore Bitcoin is fine.

      My point is that Bitcoin power usage is not unique – TONS of things use lots and lots of power that was produced by polluting methods and they should ALL be changed over to renewable energy. Singling out Bitcoin (or Christmas lights) in particular is what I take issue with. It’s about Production, not Usage.

      4. BTC is used disproportionate to what? On a dollar-value basis the USD is used WAY, WAY, WAY more for illegal activities than Bitcoin.

      Are you saying a larger percentage of Bitcoin transactions are used for illegal things relative all Bitcoin transactions when compared to the percentage of illegal USD transactions relative to all USD transactions?

      So perhaps 10% of Bitcoin transactions are illegal and only 0.5% of USD transactions are illegal? (Again, by value USD still way ahead).

      If so, that is only because Bitcoin was adopted by criminals quickly and society slowly. As it scales up, that percentage will fall.

      5. This is true, yet it has not happened over the last 10 years despite many attempts.

      Did you read this article that I linked? https://www.gwern.net/Bitcoin-is-Worse-is-Better

      6. Agreed. This is another very strong argument and worry about Bitcoin. My article was about Poor arguments against Bitcoin. This is one of the good ones I alluded to, which I too worry about.

      Reply

  30. I largely agree with you but have two quibbles:
    1) The zero intrinsic value is supplemented by “network effects.” If there’s only one person holding BTC it’s worthless, just like there’s zero value in a telephone network with only one phone. But a network of a billion nodes has a bit more value. No, I can’t quantify the value of a cryptocurrency’s network effects. Wish I could.

    2) Even the Soviet Union had a black market that bypassed the regime’s commandments. And at that time one could buy marijuana in putative democracies like the US of A.

    These are mere quibbles, but they undermine your thesis.

    Reply

  31. Interesting article. But with that said, I still don’t understand crypto and I don’t like my investments that volitile, therefore I don’t invest in them.

    Reply

  32. Hello,
    Lots to be learned from the above thread…
    Lucas, in your opinion, what is the best way to buy Ethereum2, or any crypto… Im learning about crypto and joined coinbase app, which is cool, because I have earned free “stuff”…paypal also has options.
    Thank you in advance, G

    Reply

  33. I agree there are many arguments there against cryptocurrency, but let us not forget the reality of the currency. Firstly, it is not federally insured. Anyone can create one, hype it into popularity, soak up peoples’ money and fold. Unlike currencies backed with gold, the Feds will not work to get your money back. These have happened in the United States and some developing countries.
    Secondly, you CANNOT COMPARE gold with cryptocurrency. Gold inherent value is not from the one society has given it, but due to its chemical properties. It is a great electrical conductor. It is highly sourced for high tech innovation, since it resists corrosion too. Besides this fact, gold inherent value as a great metal with its high heat and light reflective index makes it valuable in certain heavy industrial suit production. Particularly, in space suits where a small amount of gold layer (about 0.000002 inches) is transparent yet effective enough to reduce sun’s glare and protect astronauts. Even if society didn’t give gold its value as a means of financial exchange or its decorative status, the value of gold will still be close to its value today given these inherent qualities amongst others. Therefore, the point that gold is a useless metal with no inherent value IS NOT VALID.
    This makes gold very inherently valuable, unlike cryptocurrency which does not have any inherent qualities or value whatsoever. If cryptocurrency is not driven by demand and supply factors, there will be no value whatsoever. The currency is not backed by gold, federal government, silver or anything, other than massive speculation on the part of its investors. Hence, the highly erratic volatility in its value today. Let’s not put gold down to hype cryptocurrency.
    Thirdly, the lack of security analysis makes it very risk for conservative and traditional investors. I mean no one on their right mind would put a few million dollars without being brave enough to lose it all or at least a majority. That is why cryptocurrency is suitable for the brave hearts out there.
    Listen, maybe Bitcoin will be backed by the Fed or gold some day. Right now, I will not advice young hardworking adults to go for it without due diligence. Especially, when the need for such an investment is based solely on greed and a not-too-thorough approach of investing. The stock, ETF, mutual fund and commodity markets out there are better than what cryptocurrency has to offer right now. This is especially if you are investing for retirement purposes.
    But hey, it is just me. Cryptocurrency has great potential, but until it fixes its problems, it is not an attractive investment for any conservative or traditional investor. All adults, particularly the young working class adults, should be aware of this reality prior to being hyped into investing their hard-earned money.

    Reply

    • Hi bagel,

      I don’t find your gold argument convincing. Gold has been a medium of exchange and store of value for at least 5000 years, perhaps 6000.

      The “inherent value” use cases you mentioned have been used at most for 100 years, most less than 50 years.

      How was it inherently valuable before, say 1900?

      Furthermore, the best estimates I have seen are that approximately 10% of current gold production is used for the industrial uses you mentioned. Which by your argument, would make gold worth ~10% of it’s current price.

      Finally – It sounds like you are saying there are fiat currencies backed by gold. Perhaps the Swiss Franc still is? or some other “sound” fiat currency, but the USD has not been meaningfully back by gold for more than 50 years. It’s just green paper backed by the guns of the US Gov.

      Reply

  34. Great piece. I’m trying to broaden my knowledge of bitcoin, it’s truly fascinating. Although I’ve never bought any, I met a guy when I was traveling South America in 2014 who told me he was trying to travel with BTC. Hindsight is always great.

    As much as it’s considered a store of value, I’m more interested in the use of it in daily exchange. But as you said in the final point, the volatility is too high. The transaction fees are also high. I’d love to never need to exchange money again and live using a deflationary currency but on top of all that, no one in my rural town accepts BTC too.

    I think I might invest 2% of my net worth in it for fun. Do you recommend cold storage wallets if one was to hold for the long term? Also, what are your thoughts on crypto ETFs?

    Cheers.

    Reply

    • Hi Ben,

      There is a saying in crypto: “Not your keys, not your coins”.

      In my opinion, your own private cold storage wallet is the only option for long term holding. That said – You need to know what you are doing.

      For self-custody learning I would start here: https://aantonop.com/workshops/introduction-to-bitcoin-and-open-blockchains/

      Crypto ETFs make no sense to me. The entire point of crypto is to get rid of intermediaries. When you own a crypto ETF you don’t own the underlying crypto at all – you are just buying a little slice of a financial product. Which is fine I guess, you still have the investment exposure (if you trust the intermediaries) but you lose all the other benefits of crypto.

      Reply

  35. Uhm, gold had use value. It still does today particularly in the electronics to manage the infrastructure for your coin.
    Pointing to the banking system of today being corrupt also isn’t a refutation. I am not going to defend the US dollar or the federal reserve either.
    The fundamental problem here is that crypto doesn’t actually solve any problems. It takes the current crappy system and puts a computer chip in it.

    It’s a waste of human, computer resources, and electric energy that could be dedicated towards becoming post scarcity, folding proteins, and eliminating the need for money instead.

    Reply

    • Show me you know absolutely nothing about crypto without telling me you know absolutely nothing about crypto…
      At least do a tiny bit of digging mate! 30 years ago you would have said “yeah, the internet doesn’t solve any problems”

      Reply

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