Something’s been bothering me recently: I feel incredible aversion to Bitcoin, and when analogies with gold are made, it was difficult for me to verbalize what exactly is it that I find objectionable about Bitcoin. Today the final piece of the puzzle clicked, so I’ll explain.
Money is by definition an universal commodity, something that is universally accepted as a standard of value and universally accepted in any form of barter.
People who created Bitcoin think that value of money is derived from scarcity, so they designed it to be scarce. The problem is, they designed it to be too scarce, and so it’s completely useless as money, because money should by definition be a standard of value. If value of money changes over time, it’s useless as money, and that happens when money is either abundant (inflation) or scarce (deflation). This inherent scarcity makes Bitcoin a high-risk investment paper, and people can get rich with high-risk investment papers, but it’s not money. Interestingly, that’s the same reason why fiat currency is not money: it is too variable over time. Gold and silver have a track record of being a reliable measure of value over millennia. That is because the supply of gold and silver seems to scale quite reliably with demand; essentially, when it becomes scarce, it starts making sense to open another gold mine. If it isn’t scarce, it’s mined less. Bitcoin gets exponentially more expensive to mine. Gold doesn’t seem to be quite perfect as a measure of value, but it’s historically much better than anything else, and isn’t a speculative asset. Value stored in gold is frozen, coins buried in Roman times can be dug out and sold for exactly the amount of value that was in them in Roman times. Value stored in Bitcoin is fluctuating wildly.
This is my main objection to Bitcoin, but I only now managed to verbalize it properly; I assumed it implicitly before, but the idea wasn’t clear. There are also other objections, which I will also list.
Money must by definition be physical, on the lowest possible layer of abstraction. This is so because trade must not imply any technological intermediary layers. You cannot assume electricity, computers or global computer networks for trade. You can have all those layers as convenience, for instance you can have paper money that is a banknote payable in gold or silver on delivery, and you can trade banknotes instead of gold coins. You can also have a computerized bank account which shows numbers that replace the banknotes, and you can trade with bank transfers. That’s all fine, as long as you can revert to the actual money when the “pointers” and instruments of convenience fail. Basically, when a solar flare wipes out the technosphere, you still want to be able to buy and sell things. For convenience, of course you will use credit or debit cards or SWIFT transfers. However, for security in extraordinary circumstances you must be able to revert to the most basic physical form of money. This means that nothing abstract can be safely used as money.
Money must be anonymous. If your financial transactions can be monitored by the government, this will necessarily mean a totalitarian power of the state over an individual. No kind of “law and order” argument is more important than this; obedience to the law is secondary to the sovereign liberty of the individual. Everything else is slavery to the state. The ability of sovereign individuals to trade anonymously predates the existence of the state, and is more important than the existence of the state. Gold is anonymous. Fiat currency is much less so (banknotes have serial numbers), and Bitcoin is not anonymous at all. It’s the worst possible invasion of financial privacy imaginable, because once someone gets your wallet number, he can track every single transaction you made till the beginning of time. The Bitcoin ledger is a privacy disaster, comparable only to the current fiat banking system and the credit cards, which also track everything you do. The state which can track everything you do eventually controls everything you are allowed to do.
Financial transactions should be fast; seconds at the most, fast enough to pay at the department store without holding up the line. Bitcoin transactions are slow. To quote CoinCentral, “a Bitcoin transaction generally needs 6 confirmations from miners before it’s processed. The average time it takes to mine a block is 10 minutes, so you would expect a transaction to take around an hour on average. However, the recent popularity boom of Bitcoin has caused congestion on the network. The average time for one confirmation has recently ranged anywhere from 30 minutes to over 16 hours in extreme cases.”
Waiting for hours or days for a transaction to clear is not acceptable, which makes Bitcoin unsuitable as an instrument of payment for goods and services. It’s acceptable as a high-risk investment paper.
So, basically, the only criteria of money that Bitcoin manages to satisfy are scarcity and acceptability, where scarcity was misunderstood by the creators and was thus implemented in such a way that it disqualifies Bitcoin from monetary applicability.