Bitcoin is boomer web3

Sunday, September 19 2021

Bitcoin isn’t a currency or an asset. It has no inherent worth outside of being a great combination of several great ideas.

Bitcoin isn’t a currency

Firstly, as a currency. There are very few transactions per minute, transactions are expensive, and bitcoin’s deflationary nature disincentivises use. Next year we’ll produce just as many or more cars and computers as this year, but there will be fewer bitcoin per car, computer. Bitcoin will have a higher relative value, so what’s the point of buying a car, or computer today? Better to hold on to it, and wait a little bit longer. But when we do trade it, transaction cost two to three dollars apiece, with the potential to spike to tens of dollars, a thought only palatable to Americans that have never had a culture of free ATM transactions. Transactions take at least ten minutes to validate, giving a very slow transaction throughput limit of about five transactions per second. Visa handles thousands per second. As a result, bitcoin has to rely on additional protocols to transmit transactions faster.

Bitcoin is clearly not built to handle the volume and velocity that a currency experiences, but if people have incentives to not trade bitcoin, who will pay the validators, when there is no more bitcoin to mine? Validating fees are already very low, will parties with large bitcoin stakes have to form organisations solely to validate, to ensure no single party has a dominating share of the validation? This has consequential costs.

What goods are truly denoted in bitcoin? That is to say, Teslas used to be denoted in bitcoin, but a Tesla was really tied to a USD price, and the amount of bitcoin required to buy a Tesla fluctuated with the exchange rate of BTC to USD. I’m not convinced that changing physical goods or services to be truly denoted in another currency is possible without the enforcement and monopoly on power of a nation state.

Bitcoin isn’t an asset

And as an asset? It is not an investment, it has no productive value, like a share. The price of bitcoin can only rise if more people desire it, and each time you transact in bitcoin you are burning value in computational power. It does not become art or fashion, like a fifth gold, although the ideas behind bitcoin are beautiful, and it requires constant maintenance to store, through the energy required to validate and keep validating transactions, so that no one party has a dominating stake. Most importantly, it is a zero sum game. Once all bitcoins are mined, buying bitcoin with USD will generate nothing.

This reasoning runs to a single conclusion: bitcoin has no inherent value. Of course there are other negative aspects of bitcoin, such as the environmental impact and its energy consumption rivalling Switzerland, ties to suspicious projects such as Tether, the danger of apolitical money that cannot be stimulated in a depression, its facilitation of ransomware and cyber theft, and how 0.5% is owned by one company. But these are arguments for bitcoin’s market and societal worth so don’t form the crux of the argument.

Back to reality

None of what I said above has any meaning to bitcoin’s market value. Bitcoin has a huge market value and to quote Keynes, ‘the market can stay irrational longer than you can remain solvent’. This post is also not a critique of blockchains, or web3, it is mostly economic reasoning on the inherent worth of bitcoin, and economists are infamously wrong on market value. I view other web3 projects, or coins that have other uses such as Ethereum as entirely different beasts and I am strongly in favour of them.

I would love to be convinced otherwise on this, the main questions I still have include:

  1. Does bitcoin need to be actively traded forever, is the risk of a 51% attack material?
  2. Does the law of iterated expectations apply to bitcoin?
  3. Does bitcoin follow the economics of a commodity?

But for now, I’ll stay bullish on web3, blockchain and NFTs and bearish on bitcoin.

Further reading

  1. Bitcoin whitepaper
  2. A from-scratch tour of Bitcoin in Python by Andrej Karpathy
  3. Yanis Varoufakis on the dangerous idea of apolitical money
  4. Visualisations of the bitcoin mempool size and transactions costs
  5. Bitcoin, Currencies, and Fragility by Nassim Taleb
  6. Law of iterated expectations