by David Gerard
The Bitcoin Wiki answers many common objections on a “Myths” page.28 The answers are of varying persuasiveness.
Decentralised! Secured by math!
Bitcoiners hold that immunity to central control is so overwhelmingly important that it’s completely worth all that electricity wasted on mining. And the maths is unbreakable!
In practice, mining naturally recentralises due to economies of scale, so a few large mining pools now control transaction processing – and even though the cryptography is mathematically robust, the rest of the system is approximate, with attacks being a matter of how much economic power you can bring to bear. Pools with a large percentage of the mining power can attack the system in various ways, and have been caught doing so in the past. (See Chapter 5: How Bitcoin mining centralised.)
And that’s before even considering bad user security, or exchanges written in dodgy PHP. Bitcoin’s cryptography is solid, but it’s a bit like putting a six inch thick steel vault door in a cardboard frame.
Anonymous!
Bitcoin was widely touted early on as anonymous – on the blockchain, nobody knows you’re a dog. Of course, with every confirmed transaction logged in the blockchain forever, it’s pseudonymous at best; as the case of Ross Ulbricht and the Silk Road showed (see Chapter 4), law enforcement will happily do the tedious legwork of tracing your transactions if you motivate them sufficiently.
There are ways to increase your anonymity, such as mixers – send coins to an address, they shuffle them with other people’s coins, and you get them back later minus a percentage. (Assuming the mixer isn’t a scam that just takes your coins.) There is also the trick of buying a chain of other cryptocurrencies in succession, to cloud your trail over multiple chains; though exchanges are increasingly wise to this one and tend to kick such traders off for obvious money laundering.
Instant! No fees!
Nakamoto’s original 2008 white paper notes that Bitcoin will naturally progress to a transaction fee-based economy to pay the miners. “No fees!” was still a perennial claim for many years, until mid-2015 when it became glaringly obvious that this simply didn’t hold any more.
Blocks in the blockchain were limited to 1 megabyte early on. But the blocks are now full – Bitcoin has reached capacity. This means a transaction may fail or be delayed for hours or days (if it isn’t just dropped), unless the user correctly guesses a large enough fee to get their transaction into the block. The Bitcoin community is unable to agree on how to fix this.
The fees and delays mean that Nakamoto’s 2009 dream of Bitcoin as a channel for micropayments becomes impossible (even as that dream contradicts the 2008 white paper).
No chargebacks!
Transactions are irreversible, and no human can intervene to fix mistakes. You might think this is obviously bad, but the white paper claims this as an advantage of the Bitcoin system. Bitcoin advocates fervently believe that the one thing merchants fear most is credit card chargebacks, and that “no chargebacks” is the best hook Bitcoin could have.
Bitcoin Wiki’s “Myths” page says: “Allowing chargebacks implies that it is possible for another entity to take your money from you. You can have either total ownership rights of your money, or fraud protection, but not both.”
In practice, consumers, businesses and banks overwhelmingly expect errors or thefts to be reversible. There is negligible demand for a system where human intervention to reverse an error is impossible. Even merchants, as much as they dislike chargebacks, turn out to prefer consumer confidence and payment methods people will actually use.
When mining rig manufacturer Butterfly Labs failed to deliver rigs on time, credit card and PayPal purchasers could do (and did) chargebacks; those who bought using bitcoins were out of luck.
(Butterfly Labs also bought satirical site buttcoin.org to replace a detailed takedown of one of their terrible mining offerings with an advertising page;29 the main product of this effort was the Federal Trade Commission saying “buttcoin.”30)
Be your own bank!
“Secured by math” means the cryptography is strong – but it says nothing about everything else you need to use bitcoins safely in practice. “Be your own bank” means you take on the job of providing all the security and technical knowledge that a regulated professional institution normally would.
The Bitcoin Wiki offers a page with step-by-step instructions on how to secure your personal Bitcoin wallet that would dismay even a typical IT professional, let alone a casual computer user.31 You will need a security specialist’s understanding of the possible modes of attack on a modern operating system, how to encrypt all data securely and yet accessibly, password strength, backup procedures, how to securely erase a disk, the quirks of whatever Bitcoin wallet software you’re using …
This is why the vast majority of users store their bitcoins on an exchange like it’s an unregulated and uninsured savings bank, even though the exchanges’ security and reliability record is dismal. (Keeping your money in a sock under someone else’s bed.)
Better than Visa, PayPal or Western Union!
There is no way on earth that Bitcoin could possibly scale to being a general utility. At 1 megabyte per block, the blockchain can only do a maximum of 7 transactions per second, worldwide total. Typical throughput in early 2017 was 2 to 4 TPS.
Compare with the systems Bitcoin claims it can replace: PayPal, which ran about 115 TPS by late 2014;32 Visa, whose 2015 capacity was 56,000 TPS;33 even Western Union alone averaged 29 TPS in 2013.34
Various off-chain workarounds have been proposed (sidechains, Lightning Network); advocates talk about these as if they already exist, rather than being stuck in development hell.
Advocates sometimes excuse the electricity wasted on mining by claiming that it’s nothing compared to the energy used by the conventional banking system; this is simply false, with Bitcoin mining taking thousands of times the energy per transaction.35
Remittances!
Bitcoin is put forward as the obvious replacement for Western Union for people working in rich countries to send money back to their families in poor ones – even for the present-day case where you need to convert to and from bitcoins at each end.
The bit where you transmit money between countries is not expensive at all – you pay Western Union to maintain services, cash on hand and so on for the “last mile” of the journey. With Bitcoin, the conversion fees at each end usually add up to more than the banking network would charge; the ten-minute transmission time (if it’s that fast) turns out not to make up for the delays in purchasing the coins for the sender or selling them for the receiver; the price volatility is extreme enough to affect the amount transmitted. The remittance case could only work if Bitcoin were already a generally accepted international currency.
Rebit.ph is making a serious attempt at Bitcoin-based remittances to the Philippines, but has foundered on the volatility of Bitcoin prices and difficulties in exchanging the bitcoins for pesos at the far end. They eventually had to set up a Bitcoin exchange just to have sufficient conventional currency on hand.36
Bank the unbanked!
There are over two billion people in the world who have no bank account or access to even basic financial services; “banking the unbanked” is much discussed in international development circles. Around 2013, Bitcoin advocates started claiming that Bitcoin could help with this problem. Unfortunately:
The actual problems that leave people unbanked are the bank being too far away, or bureaucratic barriers to setting up an account when you get there.
Unless they use an exchange (which would functionally be a bank), they’d need an expensive computer and a reliable Internet connection to hold and update 120 gigabytes of blockchain.
Bitcoin is way too volatile to be a reliable store of value.
How do they convert it into local money they can spend?
7 transactions per second worldwide total means Bitcoin couldn’t cope with just the b
anked, let alone the unbanked as well.
A centralised service similar to M-Pesa (a very popular Kenyan money transfer and finance service for mobile phones) might work, but M-Pesa exists, works and is trusted by its users – and goes a long way toward solving the problems with access to banking that Bitcoin claims to.
Advocates will nevertheless say “but what about the unbanked?” as if Bitcoin is an obvious slam-dunk answer to the problem and nothing else needs to be said. But no viable mechanism to achieve this has ever been put forward.
Economic equality!
Bitcoin offered “equality” in that anyone could mine it. But in practice, Bitcoin was substantially mined early on – early adopters have most of the coins. The design was such that early users would get vastly better rewards than later users for the same effort.
Cashing in these early coins involves pumping up the price and then selling to later adopters, particularly during the bubbles. Thus, Bitcoin was not a Ponzi or pyramid scheme, but a pump-and-dump. Anyone who bought in after the earliest days is functionally the sucker in the relationship.
“Why should I spend money to make these guys rich?” is such a common objection that the Bitcoin Wiki answered it: “Early adopters are rewarded for taking the higher risk with their time and money.” It is entirely unclear what the “risk” involved was, or how this would convince anyone who didn’t already agree.
In economics, the Gini coefficient is the standard measure of how inequitable a society is. This is tricky to determine for Bitcoin, as it’s not quite a “society” in the Gini sense, one person may have multiple addresses and many addresses have been used only once or a few times. (The commonly-cited figure of 0.88 is based on one small exchange in 2011.37) However, a Citigroup analysis from early 2014 notes: “47 individuals hold about 30 percent, another 900 hold a further 20 percent, the next 10,000 about 25% and another million about 20%”; and the distribution “looks much like the distribution of wealth in North Korea and makes China’s and even the US’ wealth distribution look like that of a workers’ paradise.”38
Dorit Ron and Adi Shamir found in a 2012 study that only 22% of then-existing bitcoins were in circulation at all, there were a total of 75 active users or businesses with any kind of volume, one (unidentified) user owned a quarter of all bitcoins in existence, and one large owner was trying to hide their pile by moving it around in thousands of smaller transactions.39
(Shamir is one of the most renowned cryptographers in the world and the “S” in “RSA encryption”; of course, Bitcoiners attempted to disparage his credentials and abilities.)
The usual excuse is to say that it’s still early days for Bitcoin. However, there are no forces that would correct the imbalance.
The supply is limited! The price can only go up!
Bitcoin is an imitation of the gold standard; the supply is strictly limited. Advocates tout this as an advantage as a currency. Hal Finney said in 2009:40
As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world. Then the total value of the currency should be equal to the total value of all the wealth in the world.
Bitcoin advocates then adopted this idle musing as something that would obviously happen.
The problem is that Bitcoin is deflationary. Let’s assume for a moment that Bitcoin economic theories work. As economic value traded in Bitcoins increases, the limited supply means the economic value per bitcoin goes up, which means that the price of things in bitcoins goes down. This means the dollar value of one bitcoin indeed goes up! However, it also means there’s absolutely no incentive to spend your bitcoins if they’ll always be worth more tomorrow. This means economic activity goes down, and if there are alternatives – other cryptocurrencies, or just using existing payment systems – Bitcoin loses users and interest.
In practice, the price of Bitcoin goes up when there is demand for it as a speculative commodity, drops when demand drops and is hugely volatile because trading is so thin. But it’s important to note that this idea wouldn’t work even in hypothetical Bitcoin economics.
But Bitcoin saved Venezuela!
Periodically, there will be a rash of news stories claiming that Bitcoin has become popular in some country suffering economic problems, such as Venezuela, India or Argentina – because the word “Bitcoin” makes a headline catchy, even if there’s nothing to the story. This transmutes into claims that Bitcoin will definitely take over the world, any day now. Or advocates will respond to scepticism “but Venezuela!”
These claims always fall apart on closer examination. Venezuela is a typical example: all the coverage traces back to a story in Libertarian magazine Reason, fiercely advocating Bitcoin as a way to avert the spectres of socialism and regulation.41 One of their interviewees had been arrested for stealing electricity to mine bitcoins, which the author describes as a “government crackdown” on “freedom” because “bitcoin mining is arguably the best possible use of electricity in Venezuela”.
A story in The Guardian in the wake of the Reason story appears to be where the rest of the press picked it up. It speaks of some Venezuelans relying on Bitcoin for “basic necessities,” and was based on interviews with a Bitcoin exchange owner, one of his employees and two of his customers.42 The author had previously written of Argentina and bitcoin.43
These two questionably-founded stories were echoed and elaborated upon by the rest of the press, including – among many others – the Washington Post claiming that Bitcoin mining is “big business” in Venezuela,44 the New York Times that Bitcoin has “gained prominence” because of Venezuela45 or BBC News repeating claims from a Bitcoin boosterism blog46 – all of this being factoids repeated in a media game of “telephone.”
The Venezuelan volume on LocalBitcoins (a site for arranging person-to-person Bitcoin trades) at the time was on the order of 200-300 BTC per week,47 which isn’t nothing, but is negligible in the context of a whole country, and has tracked fairly closely with LocalBitcoins usage in other countries.
When the economy collapses, Bitcoin will save you!
No, really: there are Bitcoin advocates who seriously look forward to economic collapse as an opportunity for Bitcoin – continued availability of high powered computing machinery, mining chip foundries, fast Internet and electricity presumably being absolutely assured in the grim meathook Mad Max petrolpunk future. (And we can use colloidal Litecoin for antibiotics.48)
Even lesser crises get them all excited. Nick Szabo wrote up how to fix the Greek financial crisis of 2015 with Bitcoin.49 Someone responded to the Cyprus financial crisis of 2013 (which did include the much-feared government haircut of bank account deposits over the insured €100,000) with a house music anthem about “the blockchain.”50
You can use Bitcoin to buy drugs on the Internet!
This one is completely true and accurate, but Bitcoin advocates don’t seem to like mentioning it for some reason.
Chapter 4: Early Bitcoin: the rise to the first bubble
The tulip bulb era
Asset bubbles follow a standard progression:
Stealth phase: The price of an asset is going up.
Awareness phase: Some investors become confident, enthused by the rise.
Mania phase: Popular buzz; media coverage. The public see these first investors and buy because others are buying, with the implicit assumption that there will always be Greater Fools to sell it on to. This is what makes a bubble: investing to sell to other investors. Someone will say that the old rules don’t apply any more.
Blowoff phase: The old rules turn out to still apply. The bubble runs out of Greater Fools; prices collapse.
The asset need not be a commodity, e.g., the Beanie Baby craze of the late 1990s, in which the asset was various instances of a manufactured product line controlled by a single company. (Though after that crash, at least you had a nice cuddly toy.) The key point is the “mania phase.”
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Charles Mackay’s superlative Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841, remains an excellent and accessible introduction to economic bubbles and the thinking behind them, starting with the Tulip Mania of 1637 and the South Sea Bubble of 1720.51 Bitcoin is a completely standard example.
“Stages in a bubble” by Jean-Paul Rodrigue, 2008.52
Bitcoin prices, January 2012 to January 2015. Totally no resemblance to the above. Data: coindesk.com
The first bitcoin was mined in January 2009, but for the first year the enthusiasts just exchanged them amongst themselves for fun. The first known conversion to conventional currency was by Martti Malmi, ardent anarcho-capitalist and Bitcoin core coder: “I sold 5,050 BTC for $5,02 on 2009-10-12.”53 The first exchange site was bitcoinmarket.com, which opened 6 February 2010. The famous first commercial transaction (two pizzas, cost $30 including tip, for 10,000 BTC54) was a few months later, on 22 May 2010.55
From there the price rose steadily to 1c in July 2010. Bitcoin version 0.3 was mentioned on 11 July by tech news site Slashdot, gaining it some notice in the technology world, and inspiring the founding of the Mt. Gox exchange. In November 2010, WikiLeaks released the US diplomatic cables dump; the site was cut off from Visa, Mastercard and PayPal shortly after at the behest of the US government, but could still receive donations in Bitcoin. The price of a bitcoin hit $1 by February 2011.