The one question I’ve been asked more than any other over the past few months is what do I think of Bitcoin and other cryptocurrencies. Specifically, are they the future of money? The answer is no.
There are a host of reasons why cryptocurrencies like Bitcoin will probably not supersede government fiat money. Lack of security, hackability of accounts and price volatility are foremost. Perhaps these are solvable. However there are three reasons why Bitcoin definitively cannot and will not ever be considered mainstream money.
1. The environment impact of Bitcoin (and similar blockchain based cryptocurrencies) is atrocious because the electricity requirement for Bitcoin mining is enormous. Sooner or later (and this has already begun), municipalities, governments and regulated utilities will prohibit and/or tax cryptocurrency mining due to its environmental impact. Further, private individuals will be shamed from using such currencies as the environment impact becomes more widely known.
2. There is unlimited supply of cryptocurrencies. To be clear, the supply of any single currency, such as Bitcoin, is not unlimited. In fact, for Bitcoin the ultimate supply is capped (in and of itself another problem since the quantity of money should more or less grow with the economy). But there are literally thousands of such currencies that exist today and untold more that can exist tomorrow. With the underlying technologies public knowledge, there are no barriers to entry to prevent new cryptocurrencies from being created, and no limit to the supply of money.
3. The foundation of cryptocurrencies and blockchain technology is that they are decentralized. That is, accounting and transaction records exist not on a single computer (i.e. of a government or a bank) but on many private computers. The purpose, of course, is to keep transactions private and out of the view of government agencies. How long do you think governments would allow this to continue if more and more financial transactions became untraceable, unregulatable and untaxable? Not very long, methinks. Simply put, the governments of the world will not allow cryptocurrencies to become mainstream money.
If not mainstream money, what will cryptocurrencies like Bitcoin be useful for in the future? Same uses as today. Black market activity and speculation. Nothing more, nothing less.
Hello, Andrew! I love your posts and I always share them with my friends, but I think you might be needing some more research in cryptocurrencies. From what I can tell, your points can be countered as:
1) There are already coins that solve this using Proof of Stake or Delegated Proof of Stake, these coins don’t need mining and won’t consume the resources you speak of. One of such coins is Nano.
2) Yes, there is a unlimited supply of cryptos, but if one or some of these coins become mainstream, new coins would have to be really disruptive to start being used instead of being just updates to the common coins. Free market regulation! People wouldn’t just start accepting EconomicsFAQ tokens just because they are new.
3) Yes, they are decentralized, but on blockchain cryptos, such as Bitcoin, you can download the entire blockchain and analyze it, it’s not so big. Other’s employ other tactics to anonymize the network and make sure every coin looks like all other coins, making money “unpersonal”, preventing tracking and “not accepting coins by John Smith”. This isn’t necessarily an issue, in fact i think it’s a feature! What you pointed out about the government not allowing it is in fact a problem, but I think they would need to resort to force to stop what’s coming.
Anyway, cheers. Thanks for the VERY good reading, as always.
Gabriel,
Thanks for commenting and for reading my posts. You are indeed correct that I do not have expert knowledge of cryptocurrencies. Give me some time and I will try to respond to your three points properly.
For right now, a quick comment on your third point. I entirely agree that anonymity is a “feature” of cryptos. That is precisely why governments can’t allow them to flourish. Second, keep in mind that everything governments do is essentially “by force” (coercion). That’s sort of the definition of a government. However, if you mean to say that governments will have to resort to physical force then I don’t necessarily agree with you. For example, in the 1930s the US government made it illegal for individuals to hold gold. No physical force was necessary. Also, government only needs to stop large institutions (banks, payment processors, retailers) from accepting/transacting crytos as payment or deposit. If a currency is not widely accepted, it is by definition not “money.” In other words, my post was not saying that crytos have no role in an economy, just they are not the future of (mainstream) money (and non-mainstream money is not money).
-Andrew
Gabriel,
Finally getting back to you on your first 2 points after a spring break holiday. I will certainly concede to #1 that non-mining cryptos like Nano don’t have the environmental issue (thanks for bringing that to my attention). But a fixed supply of money (which Bitcoin also has since it has a cap), which I briefly mentioned in my article, brings with it a significant issue. How does a fixed supply of (inelastic) money work with a (presumably) growing worldwide economy? By definition, either the velocity of money has to continually increase (I am skeptical this is possible) and/or prices have to continually decline. I do not share the fear of deflation that all economists exhibit, but I am also highly skeptical that continuous price deflation is optimal either. Said differently, in a true free market world, the supply of money should grow and shrink with demand (technically with profitable investment opportunities). This doesn’t seem possible with cryptos, at least any of the prominent ones that exist now.
With regards to point #2, I am not certain. The first question is why/how does one currency win (become widely accepted) at the expense of all the others? Second, why wouldn’t one expect further disruption? Okay, perhaps my objection is not as “definitive” as I make it out to be, but I don’t see the path to one (or few) dominant AND defensible cryptocurrencies.