It has been more than three years since I wrote a very extensive series on bitcoin (btc-usd), consisting of the following articles:
Reading: Bitcoin idea futures might not be
- bitcoin series #1: basics
- bitcoin series #2: usage
- bitcoin series #3: security
- bitcoin series #4 – the bitcoin arms race
- bitcoin series #5: altcoins and forks
- bitcoin series #6: other considerations
- Bitcoin Series #7: The Endgame
- Bitcoin Series Addendum: Market Structure
For most of that time, bitcoin went nowhere. however, with the 2020 coronavirus epidemic and the resulting extraordinary monetary and fiscal stimulus, a bitcoin speculative frenzy has broken out again. this speculative frenzy has gone so far that bitcoin’s market capitalization today is $860 billion.
In five months, bitcoin went from $9,740 to $46,400 as I write this. the latest 20% rally came on the heels of tesla (tsla) revealing that it had bought $1.5bn of the digital currency (“to maximize returns” as bitcoin pays no interest this is also speculative – it requires that others pay a higher price):
In January 2021, we updated our investment policy to give us more flexibility to further diversify and maximize the return on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain alternative reserve assets. thereafter, we invested a total of $1.5 billion in bitcoin under this policy. furthermore, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not settle upon receipt. we believe that our bitcoin holdings are highly liquid. however, digital assets may be subject to volatile market prices, which may be unfavorable at the time we want or need to liquidate them.
for many investors, the news that tesla was buying bitcoin (and possibly accepting it as payment) could have been seen as the ultimate validation of this digital currency. here we have the future of cars and energy, investing in the future of currency.
however, bitcoin is not likely to be the future of the currency. In my bitcoin series, I have long explained many of the details that make it a bad currency, including transaction costs, speed, and security, as well as regulatory risks.
since (but not because of) those articles, most of the bitcoin world had already stopped thinking of bitcoin as a currency, and slowly pushed it more towards an asset and a “store of value”. however, new entrants, who are unaware of bitcoin’s history, may not be as knowledgeable as veterans.
You see, money, currency, generally fulfills three functions:
- to act as a store of value. that is, you can accumulate cash today to spend it later, hoping its value won’t change much. bitcoin still has this dream attached to it, because it always goes higher. however, bitcoin is extremely volatile. this directly makes it a poor store of value, as it can very quickly lose value, not just gain it. Many will say that cash is also a poor store of value, but cash loses value slowly, mainly when real rates (interest rate minus inflation) are negative (like today). so cash is a good store of value even if it slowly loses value over a long time, while bitcoin can lose value very quickly and this can happen when you most need to sell it.
- to act as a unit of account. This means that the most varied goods and services can have a stable and visible price in terms of money. bitcoin is not a good unit of account, both because prices expressed in bitcoin are not very widespread and because, due to bitcoin’s volatility, these prices would always change very quickly simply due to bitcoin’s volatility (and not due to underlying price changes).
- to act as a medium of exchange. cash is a good medium of exchange because it is widely accepted. bitcoin is not, because it is not widely accepted.
If bitcoin really were the future (of money), then what we would see would be more and more widespread adoption and use in commerce. we already knew this wasn’t true in 2017. what’s literally amazing is that between 2017 and 2021 things haven’t changed much.
for example, bitpay, the largest commercial cryptocurrency processor:
- processed over $1 billion in transactions in 2017, most of which were bitcoin.
- processed over $1 billion in transactions in 2018 (source also applies as of 2017), the majority of which were bitcoin.
- processed more than $1 billion in transactions in 2019, the majority of which were bitcoin.
- processed more than $1 million dollars in transactions in 2020, most of which were bitcoin (in fact for 2020 it only reported transactions, and bitcoin was rising so fast that transactions even trended negative in the second half of 2020). these transactions are barely double what bitpay was doing in 2014 (47,000/month) and less than half what it was doing in early 2017.
source: bitpay georgia tech mba conference
You can see the problem here, for sure. commercial use is not huge. Of course, 2021 will see a spike, but only because bitcoin rose so much in value, not because of more widespread adoption.
Furthermore, in 2020 we saw bitcoin start to see more widespread availability due to apps like paypay or square (sq). this will certainly increase usage, but bitcoin’s intrinsic problems, namely its volatility, will still mean it won’t be a currency, just a liquid asset.
bitcoin is an asset
is not a high barrier to jump, be considered an asset. yes, bitcoin is an asset. The reason for this is simple:
- Anything of value, that you could sell to someone else, is an asset. this is so even if that value is quite difficult to define or if the asset is not liquid. and bitcoin has an easily defined value (the market price) and is liquid.
Things as intangible as patents or even trademarks can be assets. therefore, it is neither a surprise nor a great benefit that bitcoin is an asset.
Because there is little use for bitcoin as a currency, most of the remaining transactions in bitcoin are essentially speculative. I say “most” because bitcoin is used as a currency that is not easily captured, because it represents illicit activity. therefore, bitcoin is a highly speculative asset. a commercial cryptosardine if you will. albeit a very valuable one.
but why isn’t bitcoin the future?
There is a trend all over the world, whether you accept it or not. this trend is one of a fight against global warming/climate change. This is a trend that is attracting more and more attention from politicians and will now see a huge increase in the biden administration’s focus on the us. uu.
Already, due to extreme fiscal and monetary stimulus, we are also seeing extreme speculation in many other sectors, not just bitcoin. several of these sectors share a common history: the fight against global warming/co2/carbonization. think about it:
- electric vehicles. they are the future, but they are also a bubble. part of the bubble comes from the fact that the resulting auto industry will not be more profitable than the auto industry that leaves.
- solar energy and renewable energy in general. the same, the future but also a bubble. the bubble part comes from the fact that the energy supply is commodified and will therefore lead to low margins for producers of solar panels etc. (as is already the case).
- hydrogen. it might not even be the future, it seems less competitive than the direct use of electricity. but it’s still a bubble. however, hydrogen is also a commodity and as such will lead to low margins and extreme competition for the companies that supply it.
Now notice the following. All of these businesses have flourished because the market expects a more intense regulatory fight against CO2. this fight is also at the core of why bitcoin cannot be the future.
bitcoin is simply the most co2 intensive asset out there. its very existence is based on burning electricity in proportion to the value of bitcoin itself, because normally the block reward (new bitcoins) given to miners is the miner’s main compensation. and miners are in a kind of hashing power arbitrage race to get those new bitcoins, which makes the amount of computing power available to mine bitcoin a function of how much electricity each bitcoin is worth. there is a tradeoff to this in that newer, more efficient technologies are implemented that restore the total amount of electricity wasted, but then arbitrage increases the total electricity used again after some time.
electricity itself is produced at the cost of emitting co2. This is true even if the electricity comes from solar or hydropower, as manufacturing from those clean energy sources is itself CO2-intensive. and furthermore, in the absence of bitcoin demand, less electricity demand would be sent towards sources like natural gas or coal to begin with (electricity is fungible).
Broken down into what goes into a single bitcoin transaction, things get really interesting:
Over time, bitcoin will likely always become more regulated because it allows illicit transactions.
However, also over time, in a world trying to fight CO2 emissions, it would not be surprising to see extreme regulation or a ban on bitcoin simply for environmental reasons.
It is not possible for a currency or even a speculative asset to be the future, at least in the developed world, as long as it is as carbon and energy intensive (and has vastly cheaper and less energy intensive alternatives). even tesla will be affected by holding bitcoin and at some point will sell due to this reality.
It’s a matter of time until lawmakers, already motivated to act against bitcoin for illicit use and tax evasion, see this carbon reality and become motivated to act against it.
Bitcoin cannot be the future being so carbon intensive. And it can’t help but be carbon-intensive by its very nature: bitcoin transactions are validated using a “proof of work.” the more valuable bitcoin is, the more work it generates. work takes power. power generation creates a large carbon footprint.
Since electricity consumption is fungible, it cannot be said that bitcoin’s energy comes from renewable energy, as that would simply crowd out other electricity users. Furthermore, even the creation of renewable energy sources requires CO2 emissions.
in the end, you can’t believe in bitcoin for the lust of money (as a speculative asset, that’s all investors see) and be in favor of action against co2 levels and global warming. both things are incompatible.
one exception, however. people can easily have two conflicting thoughts at the same time, especially when they are interested (they are making money with bitcoin). however, regulators and legislators, if they have an incentive to fight global warming, will also have an incentive to regulate against bitcoin for environmental reasons.
one final note. remember. gold does not require continuous effort to continue to exist. bitcoin requires work to be done constantly for it to simply exist. a pure zero is possible, if this work stops for some reason. I am not a fan of gold, and gold has many disadvantages over bitcoin, but this basic reality should not be forgotten.