Thoughts on Bitcoin

(Draft)

1 - Cryptocurrencies cannot fulfill the basic functions of money. But what is money anyway? Historically commodity-based money (so-called “hard money”) was based on backing by metals and was used extensively in the 18th and 19th centuries. Instead of vesting power in democratic controls, it instead vested power in non-elected international parties who could source, mine, and mint metals. Under a gold standard, inflation, growth, and the financial system were all less stable due to trade imbalances. This led to frequent recessions, larger swings in consumer prices, and perpetual banking crises. When these events occurred in one part of the world, the distress would be transmitted more quickly and completely to others and thus creating a politically unstable, unequal, and more violent world. We saw this in the Gilded Age of the 1870s to 1920s in which hard money created a world of massive wealth inequality, thus ultimately leading up to the speculative market manias that lead to the Great Depression. The United States ultimately devalued its currency with the policies of the New Deal which slowly decoupled the dollar’s dependence on gold and which led to an era of economic growth and prosperity. Conversely Europe largely did not engage in these corrective policies and this era saw the rise of populist strongmen and fascists who promised to correct the wealth inequality of the common man, and ultimately plunged the continent into the most violent period in human history. Well, long story short, it is a tool to trade goods and services that you cannot produce by yourself. But as economics grows, it has become much more complex.

For the money to be useable, it needs to have reliable and stable value compared to common goods and services, to achieve that the supply of the money needs to be controlled by a monetary authority that can expand or contract the supply according to market fluctuations. Anyone with basic macroeconomics knowledge understands that money itself has no value itself. And with tiny adjustments in money flow, governments can control the growth of economics through inflation and deflation. The only true and only value of money is based on trust, the trust of the people in the authorities that it represents. Without the presence of trust, money is just paper.

And the true reason behind inflation? Well, long story short again, because we lend and borrow money. That is the fundamental of modern economics, the reason behind the dynamic money supply. A 'just right' amount of inflation discourages hoarding and incentivizes investment into productive enterprises which grow the economy and produce prosperity. Like every other machine in today's world, they do not operate or in this case, stabilize themselves, and require active intervention. And you better wish those responsible for such complicated processes not only competence but also put their best interest align with the people. For that reason, money and politics are inseparable. The idea of currencies that have a fixed supply of deflationary coins like Bitcoin and are created by 'people' is just a big hoax. ('people' here are developers who create smart contracts)

"Well, we can't do anything about those cheaters, because it's all decentralized, see? But we can offer you these new in-game NFTs for only $69.69!!!".

Another reason against crypto is the market is highly volatile. For cryptocurrency to have any real utility, the volatility needs to cool off. If that were to happen, there would be little reason for the public to speculate on cryptocurrency prices, given that there would no longer be the potential for massive returns. The smart money exits, the liquidity disappears and the bubble collapses. This is the inevitable fate of all cryptocurrencies, and we see this reflected in the simple fact that the median return on all these thousands of flash-in-the-pan coins is zero. Every crypto coin is just on a random walk to zero by a different path.

"History doesn’t repeat itself but it often rhymes" - Mark Twain

I read this quote years ago and it does not make any sense. But it is true. From the tulip mania to the major fall in stock in 1929, to the collapse of housing prices in 2008, we can see the pattern: People are driven by greed, especially when there is new 'tech' in town. But I hate the fact that it is ordinary people who pay the prices.

2/ From the user's perspective pubic transactions If cryptocurrency was used as money Then it sucks at it. When the amount of money is fixed, it means things will get cheaper, not more expensive. Then people will want to hold their money as long as possible, which is terrible for the economy. Why? Because as the demand goes down, factories and producers are no longer profitable. Factories are closed, and jobs are lost. The funny thing is as things get scared, they get more expensive, producers have their incentive to produce again. And the whole cycle repeats itself. I don't know about you, but that is insane.

Furthermore, the info in every transaction is on the blockchain. Everyone who has your wallet address can see your transactions, a complete history. This makes transacting in crypto both completely undesirable and potentially dangerous in allowing stalking and the unintentional disclosure of private financials. This is an irremovable contradiction of the public ledger design that the blockchain requires for its very existence.

So what if they remove this 'transparency' problem? Well, then you just give every criminal, fraud what they wish for: A payment vehicle.

On top of that, this new 'currency' requires everyone to have a certain level of technology to maintain their private wallet. Well, 'a certain level' here includes information security, and operational security to keep your private key far from the average individual.

Let's say bitcoin or some random cryptocurrency become somewhat mainstream. Then what if new tech crypto comes out, better than the old one in every way, then who will be responsible for my transition?

If it was used as an investment The new gold

3/ From the technical standpoint Waste of computing power The first crypto project was called Bitcoin. It started trying to be a special type of money that did not have a central bank. It went badly because its technology and economics were poorly designed. Bitcoin was based on a technology called blockchain. It was like a spreadsheet that would update across multiple computers. But the catch to this technology was that people could only add new rows to the spreadsheet, they couldn’t delete rows. This initially seemed like it would be very useful, except in practice it was very slow to update the spreadsheet and people realized they wanted to delete things. They also didn’t want to use a spreadsheet that everyone in the world could see. The economics of bitcoin was also bad. When people use the money they want to buy things with it quickly and they want to know that the price of the thing they want to buy won’t change drastically. Bitcoin is bad at both of these things. Bitcoin was bad at being stable money because the technology was not designed to do that, because it didn’t want to have a central bank. This was unfixable because the entire project was based on bad ideas. Proof of work Public ledgers and decentralized problems (DSHR's Blog: The Order Flow) The crypto world eschewed trust in favor of transparency. But transparency doesn’t solve the problem of untrustworthiness in financial markets. There may be no trusted third parties in fully lit markets, but there is no protection from predators either. Now, the crypto world seems to be swinging back towards trust.

Furthermore, we can not afford an enormous waste of electricity (mostly in countries where the resources needed to make that electricity were cheapest and least regulated) and create more damage to a planet already in peril.