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Why I wouldn't recommend using Bitcoin as a lifetime investment

As Bitcoin approaches a new price record after 3 years delay a new wave of its popularity and advertisement is expected. In such waves all the risks, downsides, pitfalls are usually hidden and the bright future is pleasantly described. I want to highlight all those dark corners and also to give my view of this field.

Introduction

As the first decentralized digital currency Bitcoin’s main purpose was to serve as a digital money service that requires no trust in a central authority, and that will be free from control. But with an extreme raise of its value it gained another purpose — as an investment asset. Current data suggests that the second purpose greatly supersedes the original one.

In accordance with those two purposes, we’ll consider two types of downsides and risks — technical and economical.

Technical downsides

Two main technical downsides of Bitcoin are inefficiency and limited scalability.

According to Bitcoin energy consumption index, as of the time of writing, one single transaction consumes 700 kWh of energy, a huge waste. And this consumption will only increase with the growth of the network.

But increasing energy consumption isn’t the biggest problem since the growth of the total number of transactions is limited due to Bitcoin scalability problem. It is estimated that the whole Bitcoin throughput can’t be more than 7 transactions per second on average. This is the dead-end for its original purpose.

While the absolute majority of other cryptocurrencies are useless imitators or straight-up scams, some of them indeed have slight improvements or useful extensions. It’s hard to create something perfect from the first shot, after all. Technology advancement is an evolutionary process.

I find this risk the most important — an emergence of a novel cryptocurrency that will contain a critical mass of improvements and extensions. Or, it could be just decent cryptocurrency, but backed by strong financial institutions (though it’s unlikely that some government will ever release a truly decentralized currency).

Economic picture

Bitcoin proponents will argue that technical limitations are not an issue. They like to compare Bitcoin with gold, and gold isn’t transporting on the left and right. What they don’t say is that gold is a natural resource that has a lot of different uses in electronics, medicine, or even in food. Also, it’s naturally hard to obtain, it’s produced only in rare cosmic events, like supernova explosions or neutron stars collisions. And what is Bitcoin without its original purpose?

Well, it’s certainly a masterpiece, the first of a kind. But in this perspective it’s comparable with works of arts. They also have value, but no particular, instrumental purpose.

Thus, Bitcoin value will be pure speculation in the future with more advanced technologies. But in its current price there is also a huge amount of speculation. With no doubt the majority of people “invest” in Bitcoin just to raise a fortune, not to use it as payment. Though, I wouldn’t call it an investment. A typical investment is supposed to be spent on the production of new value. But no new value is produced when you buy Bitcoin. This is why it looks just like a financial pyramid — newcomers are the only reason for the price growth.

A huge oxymoron

Finally, I want to address the cryptocurrency ecosystem.

Despite imperfections, Bitcoin was built with great ideals in mind. Decentralization and freedom are the values that humankind must pursue, I believe.

But the ecosystem that arose around Bitcoin is mostly ignorant of those ideals.

Exchanges

A huge part of the cryptocurrency world is the exchanges. But they are centralized! They are in control of your funds. You have to trust them. So there is no difference with an ordinary financial institution. Well, actually, there is. A cryptocurrency exchange found on the internet can be run by a high-school kid just for fun.

Exchanges possess a great value in cryptocurrencies and are responsible for a big part of all Bitcoin transactions. They are entities that have the power and resources to play with the market.

The problem of exchanges can’t be solved since truly decentralized exchanges are impossible or impractical.

Mining pools

A mining pool is a clever way to unite the computational resources needed for mining new blocks. But again, they are centralized and as a single miner you have to trust them. There are pools that require no trust in a coordinator, but they don’t propose additional incentives for a single miner.

A dozen mining pools generate around 75% of new Bitcoin blocks according to these stats. Control them — and you can control the network. Note that big exchanges have their own mining pools. Yeah, decentralization…

Mixers

Bitcoin mixer is a way to hide a transaction sender and receiver. The story is the same as with exchanges and pools. They are centralized in nature and this can’t be solved.

Stable cryptocurrencies

This is the most ridiculous part and the best indicator of all of this farce. For me “stable cryptocurrency” is just an oxymoron. Operators of such mimic currencies are not only centralized and you have to trust them — they do not even comply with the laws of countries that print original currencies. They are worse than ordinary banks.

According to coinmarketcap, Tether, a USD mimic, is in the third place by a total market value and largely exceeds Bitcoin in transactions volume. A clusterfuck in the world of cryptocurrencies, in my opinion. Decentralization? What decentralization?

The future

While I’m a big proponent of decentralization, I don’t believe in the longtime future of Bitcoin. The only reason for its future survival is the respect of its users. I have no idea what price it can achieve, but I’m 100% sure the price will have a speculative nature.

This post is licensed under CC BY 4.0 by the author.

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