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What are the arguments against Bitcoin?

What are the arguments against Bitcoin?

The market capitalisation of Bitcoin exceeded $1 trillion in 2021 as institutions began to appreciate its potential as a store of value. It shouldn't be a surprise that at the same time criticism of Bitcoin became more vocal. In order to offer a balanced view of the potential for wider adoption, this article will analyse the most common arguments against Bitcoin and assess their proponents.

There are huge number of myths and misconceptions around crypto, which we address the common criticisms of Bitcoin in our TLDR section. Here we are going to focus on five main critical themes that warrant discussion: 

  1. The impact on the environment
  2. The absence of a use case 
  3. Speculative nature 
  4. Is it really scarce? 
  5. Anonymity & use by criminals 

By the end of this feature, you should have a more balanced view of cryptocurrencies and an appreciation of the broader context in which they exist. Whether you're a believer or not, this broader context is crucial to understanding crypto's proposition and the technology's future. 

Bitcoin's Impact On the Environment 

First up is crypto and its environmental impact. This is a common argument that suggest  the energy required to sustain cryptocurrencies such as Bitcoin isn't justified and is an unnecessary contribution to global warming. 

Cryptocurrencies need a way to achieve agreement (consensus) on the ledger that represents balances of digital money and to validate new transactions that cannot be gamed or corrupted. Bitcoin uses a consensus method called Proof of Work, which is achieved by mining.

Mining is analogous to the physical process, but instead of digging for gold, Bitcoin miners search for the answer to an arbitrary mathematical puzzle - the Proof of Work - in return for a fixed reward of Bitcoin. The reward is currently set t 6.5BTC paid every 10 minutes for new blocks of transactions to be added to an every-growing blockchain. The reward halves every four years.

The mining process both incentivises a network to maintain the Bitcoin ledger and discourages spam or false entries.

The mining process is energy intensive as it is primarily performed by powerful computers explicitly designed for the task - and nothing else. These computers are often located together in big warehouses known as farms. 

Crypto farms use a significant amount of energy to both run so-called mining rigs and keep them cool. As the value of cryptocurrencies, such as Bitcoin, increase, the incentives to mine become higher making the required Proof of Work greater, increasing the energy requirement in a seemingly endless loop. 

A recent Cambridge study claims that Bitcoin consumes around 121.36 terawatt-hours (TWh) a year which is more than some nations. The study estimates Argentina's consumption at 121 (TWh) and the Netherlands at 108.8 (TWh).

This is associated with significant C02 externalities but isn't as simple as it first seems. Look a little deeper, and you'll find that 39% of Bitcoin mining is powered by renewable energy, primarily hydroelectric energy, while 73% of farms use renewables in some form. 

The vital aspect of this is that crypto mining is part of a wider energy ecosystem in figuring out how to become more sustainable. In the free market economy, crypto is offering value to those who mine it and therefore, it is being mined.

Many other industries can be deemed unnecessary considering their environmental impact, so this issue is certainly not unique to crypto. 

Furthermore, many projects within crypto seek to move to a more energy-efficient mining model, such as Ethereum and proof-of-stake. For a deeper dive into this topic, check out our article Is Bitcoin Mining Bad For The Environment?

Absence of a Use Case 

The next common argument against cryptocurrencies is the absence of a use case. This, again, is a common argument made by detractors that see little to no value in crypto projects such as Bitcoin or Ethereum. 

Essentially, the argument is that cryptocurrencies such as Bitcoin aren't being used money because they are too volatile and that their value is purely speculative. 

This goes even further, with some arguing that if a valuable use case for cryptocurrency or blockchain technology was possible, it would have been found by now and so disregard the industry.  

There is a lot to unpack here, which relates to misconceptions of what money is and does. In brief money should function as:

  1. A store of value
  2. A medium of exchange
  3. A unit of account

Given Bitcoin has achieved a market cap of $1 trillion faster than any other asset in history, there is a good argument for ticking the store of value box, though Nassim Nicholas Taleb suggests otherwise in his Bitcoin Black Paper which presents his own arguments against Bitcoin and the absence of a use case.

Bitcoin, or any other cryptocurrency, are yet to be widely used as a medium of scale, but it's important to remember that crypto and blockchain technology is still in its very early stages of development. The internet took four years to reach its first 50 million users. 

Since the advent of Bitcoin and blockchain technology, many projects have been developed that specifically focus on the scale problem with what are called layer 2 applications - building on top of blockchains like Bitcoin and Ethereum. 

This ranges from decentralised finance (DEFI) to tokenising the ownership rights to digital and physical items (so called NFTs). 

The scope of crypto projects is enormous, but yes, scale is still a problem and Bitcoin isn't being widely used a medium of exchange and you are unlikely to see your local supermarket pricing things in BTC (establishing it as a unit of account).

If you refer to our knowledge base, you’ll see a detailed explanation of how Bitcoin has sacrificed scale to achieve a secure and decentralised form of money but until the scaling issue is addressed broader use as a medium of exchange - buying stuff - will be slow in coming.

Enter Layer 2, which is essentially scalable infrastructure built on top of Layer 1 protocols such as the Bitcoin blockchain, allowing wider applications to be built and more impactful use cases to be implemented. 

In Bitcoin's case, this layer 2 is called the Lightning Network. For Ethereum, their next stage of development aimed at delivering scale is called ETH 2.0 and is set to be rolled out over the next couple of years. 

For more details on this, check out our article on Layer 2 & The Lightning Network.

Speculative Nature

Following this argument brings us to Bitcoin's speculative nature. Many see Bitcoin as a Ponzi scheme that can't deliver any actual value beyond speculation over its price. So far, Bitcoin's journey has been volatile, and as its price and the hype around it has grown, the primary communication has been around price speculation. 

People have made vast sums of money very quickly just by being early adopters and holding their coins. Similarly, people have lost lots of money very quickly by buying at the wrong time and seeing the volatility of BTC eat away at their capital. These stories have tended to grab headlines and so have often been people's first introduction to the world of crypto. 

Whilst more people being interested in the industry is undoubtedly a good thing, this may not necessarily be the best introduction as it fails to introduce the underlying technology. Blockchain is a revolutionary new way of achieving trust in the digital age and is fundamental to crypto's value proposition. 

Relating to crypto purely in terms of price understandably leads people to view the industry purely in terms of speculation and if you believe there is no use case, you simply need someone willing to pay than you for Bitcoin - known as the greater fool argument. When price falls, as it inevitably does, the cries of 'Ponzi' get louder.

The criticism that Bitcoin is purely speculative is therefore nested in the argument about use case. Yes, a lot of people are just buying it for speculative reasons, but if it was a poor store of value or just a Ponzi Scheme would it have survived 12 years and numerous down-cylces?

The argument fails to appreciate the broader scope of crypto. Fundamentally, it's a new technology that is disrupting entire industries, not just a way to trade internet money. 

Crypto didn’t invent greed and FOMO, it just happens that the technology behind it emerged at a point where the traditional financial system was broken. So though there is undoubtedly a lot of unhealthy speculation around crypto, it is a symptom of a disease which is rooted elsewhere.

Forking & Scarcity

As argued above Bitcoin’s main use case is as a digital store of value. Its ingenious design means it is the first ever asset to achieve unforgeable digital scarcity. Some however, argue that  its scarcity is undermined by its open source nature which allows forks - spinoffs, very similar in nature.. 

A fork can be defined as followed: A change in the design of a blockchain creating two paths which nodes and miners need to choose, like meeting a fork in a road and deciding which route to take. 

Due to the open-source nature of crypto projects, teams can often fall into disputes about a project's future and diverge into two different paths. Thus forks have occurred across the crypto industry, including in Bitcoin. This has led to tribalism and scepticism at the technology's ability to deliver scarcity as if another Bitcoin can be created - with a much looser supply policy -, how can there be true scarcity? 

This argument is limited by the fact that forks don't actually replicate projects. By their very definition, forks differentiate from the project they are forking from. Bitcoin has survived a hard fork to reach new All-Time Highs, and so this aspect of crypto hasn't deterred belief or adoption. 

The value of Bitcoin Cash as a proportion of Bitcoin from which it forked in 2017

Bitcoin Cash is the most prominent Bitcoin fork, but represents just 1% of its value, which is steadily declining proportionally. This suggests that BCH neither detracts from Bitcoin’s use case, nor provides a viable alternative. 

Conversely, forks can help us understand one of crypto's biggest strengths - open source development. Due to the decentralised nature of crypto, there are rarely central authorities in complete control of development. This is a truly level and competitive playing field.

Instead, a crypto project's development is in the hands of the community. This has led to a flourishing ecosystem of crypto projects that bring skilled individuals together into teams trying to solve new and exciting problems. 

Anonymity & Criminal Use

The final common argument we will address here is that crypto is a tool for criminals due to anonymity. 

This is probably one of the most pervasive misunderstandings around crypto due to some high profile cases such as the Silk Road. While cryptocurrencies have been used for the illegal trade of goods online, these transactions are more public (or less anonymous) than cash and can therefore be tracked. 

The percentage of crypto transactions associated with crime according to the 2020 Chainalysis Report on Crypto Crime

Bitcoin transactions are record in a public blockchain and accessible to anyone with an internet connection. This has led to big business blockchain analysis industries developing that have aided law enforcement in tracking criminals. For more on this, check out our article How to Understand Crypto Visibility. 

Overall, criminal use of cryptocurrency is estimated to be less than 1% of all transactions conducted through crypto. Cryptocurrencies provide something more akin to pseudonymity than anonymity as, unlike fiat currencies, transactions are publicly accessible. 

Banks have been fined over $331bn since 2008 with no convictions relating to the financial crisis despite the global impact still being felt so this argument seems to be driven by a lack of understanding about both how crypto and traditional finance work.

Crypto & the Long Term

Though these are the top five common arguments against crypto. it doesn't follow that they are all compelling. The criticisms of scarcity and use for criminality simply reflect a misunderstanding of how both crypto and traditional financial systems work.

Bitcoin didn't create speculative greed, it is a symptom not a cause. The fortunes being made do inevitably lead to irrational investment decisions, but that shouldn't detract from the underlying value of the technology.

Perhaps the most difficult argument to counter is the environmental impact of the mining process. It is absolutely fundamental to its function and the energy demands will scale as perceived value increases.

Miners will naturally seek the most cost-effective energy sources which should lead to greater focus on cheaper, sustainable energy sources but until solar, wind and hydro generate 100% of the energy required to sustain the Bitcoin network it will consume fossil fuels and generate a very significant carbon footprint. The question simply becomes whether it is justified, which requires an honest comparison with existing monetary systems  - and the vast machinery that supports them - and the potential future benefits of a permissionless and borderless money powered by cheap renewable energy.

Crypto is a young industry and certainly not without its fault. The industry’s surrounding community is growing, and more and more crypto projects are being developed to have a real-world impact. 

Being sceptical is healthy and encouraged. One of the biggest crypto mantras is DYOR - do your own research - so you should take a long hard look at the arguments against crypto as well as those that support it. 

Just remember that most modern technologies were considered fads or dismissed by incumbents, from motor cars to digital cameras, but change comes gradually then suddenly. 

Will crypto disrupt traditional financial systems, or will the arguments summarised here undermine its wider adoption? That’s for you to decide.

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