Why Bitcoin Will Fail for SHTF
A single Bitcoin today sells more than an ounce of gold — but is it a good currency for SHTF? A lot of people are hoarding Bitcoin these days because they think it is a way to guard themselves against the demise of the US dollar.
To many people, Bitcoin represents a way to fight back against the banking cartel. They don’t think the government can regulate it. It sounds like a currency by and for the people. However, as someone who works in the technology field I see some some technological reasons to think that holding Bitcoin as a long term defensive asset is a bad idea. Some of the perceived advantages are not as strong as the layperson may believe.
- Bitcoin is not anonymous
The very basis of how Bitcoin works is the blockchain, meaning that every Bitcoin transaction ever made is recorded in a public ledger. While the blockchain may be hard to read, theoretically anyone with a sophisticated enough computing power and some detective work can trace a particular transaction to its origin by looking at all of the addresses on the ledger. It’s unlike cash in which no record is kept once it’s been moved.
- The government can find indirect ways of regulating Bitcoin
The government can find ways to regulate the use of Bitcoin by implement rules making it difficult to use. Already, the IRS classifies Bitcoin as an asset and not a currency, meaning that you have to pay capital gains taxes if your Bitcoin appreciates in value and you sell it for a profit. This means that in the lens of the financial world, Bitcoin has more in common with a stock certificate than a US dollar. The Bitcoin nodes and exchanges are also a vulnerable to regulation. To convert dollars into Bitcoin and back you need to use an exchange. If they got serious about controlling Bitcoin, the regulators could impose taxes or fees on the use of exchanges, or go after the people running the nodes that process the Bitcoin ledger. Recently the engineers running the Bitcoin project implemented an update to the blockchain called SegWit, which was implemented through the exchanges. This is a testament to the fact that there are bottlenecks in the Bitcoin ecosystem that can be controlled by a regulatory authority.
- The mining nodes in the infrastructure is a vulnerability
Miners are needed to process the transactions. This can come under attack, or without enough infrastructure could run very slow. Right now it could take up to hours for a Bitcoin transaction to make its way through the ledger. This is a huge impediment when using Bitcoin for commerce.
- Technological breakthrough
Moore’s Law is currently broke for the moment, meaning that over the past several years chip manufacturers have been having a harder time making processors more powerful at the tepid pace that they have been for the last 20 years. But let’s say Moore’s Law catches up - if we have a hardware technology breakthrough - what could that mean for cryptocurrencies like bitcoin? Would a quantum computer be able to break the encryption and crack the digital signatures by brute force? If that occurs then anyone’s Bitcoin account could be at risk of getting hacked.
- Old fashioned manipulation
The limited supply of Bitcoins may solve the inflationary problems of money printing, but it’s vulnerable to manipulation through supply and demand - just like a stock price. - Market cap is only $42B, but some publicly traded companies have a market cap much higher. Apple has a market cap of $800B. Someone with enough money can control the price of Bitcoin much like a high frequency trader can control the short term price of a stock.
Bitcoin is a virtual asset, but it’s a commodity just like any other kind of financial asset. You can make money from speculation in it, but it’s worth as a store of value in an economic or societal disaster is questionable. Peppers who are buying Bitcoin may be misguided. I know stocks better, so I’d rather use my speculative money in the stock market. For ecological disasters, I think it’s better to hold physical assets such as gold, silver, or even commodity goods that can be traded because those will have a use if the Internet goes down.
Superinflation might be the best reason to hold Bitcoin. However, I believe the market has already priced this in because of the rapidly rising price action it's seen over the last several years. It looks like a parabolic stock chart, and many of Bitcoin's proponents speak of it like an investment that can never fail. Sounds like bubble talk to me.
While I think cryptocurrencies are unreliable long term holdings as an economic, political, or natural disaster hedges, there could be other uses for them. I like some of the ideas driving Ethereum, because is has it has a purpose in running distributed applications and contracts. But that’s for another video.
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