Let's Just Call It BitCon
Further Observations by a Newbie in Cryptoland
by XtendedWhere
It's been over a year since I conducted my personal Bitcoin experiment, which I described in the 2600 Spring 2018 issue (35:1).
To recap, in 2016 I had a passing familiarity with Bitcoin before I attended a presentation by someone who described how it had brought them large financial gains. Intrigued, I wanted to learn more, so I made a plan to gain firsthand experience by:
- Buying some Bitcoin.
- Using it to purchase something in the real world (a pizza? coffee?).
- Hopefully selling some at a profit, since I'd seen Bitcoin's price steadily climbing.
I decided that I could risk losing $5,000 in the experiment and, in the space of roughly three months (October to December 2017), I navigated the Bitcoin maze, learned a lot, made some mistakes, and discovered Bitcoin's true nature just in time to escape before the price collapsed. In the end, I managed to nearly double my money (well, before short term capital gains taxes took their chunk anyway). But my profits were solely due to lucky timing.
So what did I learn? See the original article for details, but essentially this: none of the claims about Bitcoin are true - as implemented, it is not anonymous, not fast, not secure, not a currency, not a medium of exchange, not a store of value, not a good investment, and despite how I made out, not even a good gamble.
A Reader Objects
My article inspired a letter of response from David (2600 Autumn 2018 issue (35:3, page 34).
I appreciate David's interest and his thoughtful comments, and will attempt to briefly summarize his points, then reply. He stated that my article "misses the point of Bitcoin" because Bitcoin is "intended to be a currency like the U.S. dollar," and that the creator of Bitcoin, Satoshi Nakamoto, "was guided by libertarian philosophy that is opposed to central banks." David continued by admitting that "Bitcoin does have problems," and then focused on its volatility, lack of adoption, and fixed supply.
Disclaimer: I don't have a horse in the crypto race. I'm not an economist or academic with theories to defend, and I have no holdings or short-sale positions in any cryptocurrency. I'm a technologist and hacker seeking to separate the real from the bogus, to understand technologies to the best of my abilities, and see them used to build a better future for everyone, hopefully creating a world that is more free, fair, and open. I'm sick of crooks, con artists, and bullies continuing to use threats, intimidation,and deceit to try and take what is not theirs, and I would love to see their efforts made much less successful through a safe and secure medium of exchange.
Additional disclaimer: I'm not a libertarian and had to look up the details of that philosophy. Although I generally agree with their ideals of freedom, self-determination, and skepticism of centralized power, I'm old enough and cynical enough to know that all "isms" are fantasies, and never fully translate from theory into action. Capitalism, socialism, communism, etc. each contain useful views of human behaviors and how to handle them. But we all live in the "real world" which has its own inviolable rules. (Texas may be gung-ho for capitalism, but when Hurricane Harvey delivered 40 to 50 inches of rain and a $125 billion dollar damage bill, a 90 billion dollar dose of quasi-socialism in the form of Federal disaster money did not meet much philosophical resistance from the capitalist cowboys.) (Editor's Note: That money was originally taken from Texas resident's in the form of federal taxes, so they were just getting their own money back.)
In considering David's comments, I agree that Nakamoto envisioned Bitcoin as a libertarian-esque system, intended as both a currency and a medium of exchange, free from centralized control. However, Bitcoin's implementation in the real world falls far short of those lofty intentions, and they unavoidably prevent it from fulfilling its libertarian aspirations. In fact, in the real world, Bitcoin turned into a libertarian nightmare.
Some Words and Numbers
Wikipedia describes "currency" as "money in any form [used] as a medium of exchange," and a "medium of exchange" as "a widely accepted token which can be exchanged for goods and services."
During my experiment, I found that there were essentially no vendors in the greater Los Angeles area who accepted Bitcoin for everyday transactions of goods or services. Why? Merchants and customers have learned that Bitcoin makes a terrible medium of exchange due to the high fees that must be charged to pay for the truly outrageous amount of computing power (and thus electrical energy) required to process each Bitcoin transaction.
How outrageous is the power consumption?
According to Digiconomist's "Bitcoin Energy Consumption Index," (digiconomist.net/bitcoin-energy-consumption) as of December 2018, the calculations required for each Bitcoin transaction (not per coin mined, but per transaction no matter how small) consume 489 kilowatt-hours of electrical energy.
That is enough to run a typical U.S. household for 16 days, or to drive a four-passenger 2013 Nissan LEAF electric vehicle 1400 miles from Los Angeles, California to Dallas, Texas! (As the venerable Ladyada pointed out in the 2600 Spring 2019 issue (36:1, page 52), "where more energy is being used to mine Bitcoins than all the solar power generated." This massive energy consumption makes Bitcoin a global environmental crime, but that is a different discussion.)
Even if the Bitcoin transactions are performed by the fastest, most efficient computers running in a remote land having cheap electricity, abundant natural cooling, and low-cost labor, the energy used still has an economic value which can be put to use in other ways, so it has to be paid for by the user as a transaction fee. To state the obvious, cash transactions use essentially no energy and have no fees at all.
So how does Bitcoin's high transaction cost prevent it from ever becoming a viable currency or medium of exchange? Let's walk through a thought experiment that compares two different market places: one cash, one Bitcoin.
Farmers' Market One - Cash Version
Picture a farmers' market run on the ideals of libertarianism with freedom and minimal government intervention. Each vendor sets their prices in response to market demands, and they don't even have to collect or pay sales taxes.
You are a customer attending the market with a pocket full of fiat currency, and with a big french fry feed planned. You find a booth with some fine looking potatoes and purchase $100 worth. You hand over a $100 bill, take your bags of spuds, and the transaction is complete.
Now the potato farmer goes to another booth, gives them your $100 bill, and in exchange receives a bunch of freshly roasted coffee. Then the bean roaster goes to another booth and buys $100 of homemade kombucha. Throughout the day, that single $100 bill travels unendingly across the marketplace, its value never decreasing or being consumed by the transactions. It can catalyze an unlimited amount of commerce until the paper itself wears out. (Even then, a representative of the bill's issuer will readily exchange the worn bill for a new one - free of charge, with its full $100 value still intact.)
In the long term, forces such as inflation, competition, weather, change of seasons, and even the great libertarian fear of market manipulation by a corrupt central bank may alter the quantity of goods that $100 might purchase. But in the medium term, the $100 value holds steady. The paper fiat currency proves to be a nearly ideal medium of exchange - allowing for a vast amount of widely differing goods to be freely traded with no loss of value.
Farmers' Market Two - Bitcoin Version
Now, picture going to an identical farmers' market, but one using Bitcoin as the exclusive medium of exchange. At the potato booth, you digitally transfer $100 worth of your Bitcoin holdings to the farmer. You wait, and when the transaction finally clears, imagine your surprise when you only receive $90 worth of spuds!
It turns out that the farmer had to pay a hefty fee in order for the Bitcoin transaction to be conducted and confirmed. (Either they paid the fee and charged you for it, or you paid it directly - it doesn't matter.) Bitcoin fees are priced by market competition, and the $10 figure in this example is based on what I actually paid during my 2017 Bitcoin experiment. Bitcoin fees have varied greatly over time, but are never trivial. Due to the massive amount of energy consumed by each transaction, Bitcoin's fundamental economics cannot compete with cash or even credit cards, where vendors willingly absorb the far smaller processing fees as a cost of doing business.
Back to the Bitcoin farmers' market.
The spud seller gives $90 to the coffee roaster and gets $80 in toasted beans, thanks to another $10 fee. The coffee roaster spends $70 to get $60 of kombucha, and so on. The ninth vendor receives $20 in Bitcoin, hands over $10 worth of goods, and is now out of luck, since when they try to spend that $10, it only covers the transaction fee and they receive no goods for the exchange. The tenth vendor makes no sale and has no currency remaining to transact with another vendor. End of game.
But what about the processors of Bitcoin transactions who received all those fees? Are they going out to their local farmers' market and spending $100 on goods? Not at all! They work in a competitive transaction processing marketplace, and the fees pay for their energy, their computing equipment, and their overhead. They have little profit left to spend.
So rather than Bitcoin enabling an infinite series of commercial transactions with an unlimited amount of goods trading hands as with cash, only ten trades occurred with just $450 worth of goods exchanged ($90 plus $80 plus $70...). During those ten exchanges, the entire $100 worth of Bitcoin was consumed by processing fees. (Even if the fees were somewhat lower, it would still play out the same.) Bitcoin sucks the life out of the exchange system and everything comes to a grinding halt.
In actual operation, Bitcoin is an anti-market, anti-libertarian method of transaction, and a massive failure as a currency and medium of exchange. Worse, in a Bitcoin-only economy, all value would eventually be eaten up by transaction fees! (That may take a very long time, but it is a notable drain on the system.)
So in response to David, yes, in conception, Bitcoin may seem like a libertarian dream, free from centralized control. But in reality, if a government agency charged a $10 fee on each farmers' market transaction, staunch libertarians would split open with rage! Thus Bitcoin represents a libertarian nightmare that inherently fails as a currency and medium of exchange. Put simply, Bitcoin can never succeed because each transaction costs too damn much!
So why do Bitcoin promoters overlook such outrageous fees? Because they are banking on making money in another way...
What is Bitcoin Really?
The results of my experiment, and the research and observations of many others show that Bitcoin is not a currency solution, nor a viable medium of exchange.
The research shows that it really is this:
Bitcoin is A Distributed Hybrid Ponzi-Pyramid Scam
Distributed: It operates without a central bank account to seize, server to shut down, or ringleader to arrest.
Hybrid: Having features from two or more things (in this case Ponzi schemes and pyramid scams).
Ponzi: A scam where "new money" is used to pay off "old money" in order to give th appearance of profits, earnings, or return on investment.
Pyramid: A scam where the "old money" must bring in "new money" at a higher price than they paid, in order to exit with a profit.
Scam: A scheme where a "scammer" attracts a "scamee" with the promise of undue or unearned financial gain, but where the scammer takes the scamee's money under the cover of a deception. Typically, the more complex the deception, the longer it may take the scamee to realize they've been scammed.
Historically, Pyramid and Ponzi schemes eventually collapse as their tricks become clear to too many people, and willing victims no longer step forward, and when the cost of maintaining the scam outgrows the profits it provides the scammers.
So let's call it what it is. Bitcoin is a con. A Bitcon.
For more tales from the world of "kleptocurrencies" and the new "steal industry," try searching for these terms: FTX, Mt. Gox, Falcon Coin, Bitconnect, Regalcoin, Hextra, Quadriga, Gerald Cotten, Gladius Network, Pure Bit... The stories range from sad to angering.
But What About Blockchain?
Many Bitcoin articles include words to the effect of "Even if Bitcoin does not succeed, the underlying blockchain technology may have great value..."
Blockchain, the secure recording of information through a distributed, decentralized, shared ledger system, underlies the operation of Bitcoin and other cryptocurrencies. It also holds promise for securing other transactional systems beyond currencies and mediums of exchange.
The viability for any application using blockchain will depend upon: 1.) the value of the events being recorded by the blockchain, and 2.) the amount of energy required to perform the computations for adding each entry into the system.
It appears that Bitcoin is not the most efficient possible blockchain system. In the zoo of "alt coins" inspired by Bitcoin, many have proposed schemes having lower energy consumption per transaction. Let's assume a highly secure blockchain system which has processing costs that are around one tenth that of Bitcoin, say $1 per transaction.
Now consider a few applications for this blockchain ledger system and see if its fees may or may not be tolerable:
Real Estate - High value transactions such as property purchases could be recorded and tracked on a blockchain ledger. A $1 fee would be a small price in relation to the typical costs involved in these sales, and the security provided by blockchain might reduce the cost of other fees such as title searches, loan insurance, and reduction of fraud.
Voting - Public elections might be recorded and counted using a blockchain ledger. Every vote could be tracked and verified by all interested parties. But what about the costs? Suppose an election has 100 million voters, and 30 issues per ballot. At $1 per item (assuming each vote must be recorded separately), a $3 billion dollar transaction bill for the election might make the older, less secure ballot systems look much more affordable. Would legislators accept the idea of paying $30 per voter, even if it meant more security and verifiability? Hard to say.
Medical Records - Tracking medical data, treatments, payments, and related events could be made more secure and reliable using blockchain. The already high costs of medical coverage might tolerate the fees, and the enhanced security might actually end up lowering costs to providers or insurers through increase accuracy and reduced opportunity for fraud.
In each of these examples, the blockchain technology provides a service that has value greater than the cost of the energy and expenses involved in providing that service. Ultimately, the amount of energy needed to perform each transaction will determine the markets that any blockchain systems can economically serve.
Conclusions
In the months since my Bitcoin experiment, I've continued to monitor the rumors and falsehoods driving the Bitcoin phenomena.
I've read frequent "journalistic" articles that never cast a critical look at Bitcoin and its scam nature, but simply parrot the lies and deceptions. As of this writing, each Bitcoin sells for half of what it did at the start of my experiment, yet Bitcoin boosters continue to claim that outrageous gains may lie just ahead. Certainly, false stories may entice the uninformed, especially in these times of economic uncertainty. Some may willingly suspend their disbelief and take extreme risks for promises of great wealth. Others may yet get rich off of Bitcoin, but only as long as there remain enough buyers ignorant of the "greater fool theory" to hand over their money.
If you still hold out hope for Bitcoin, please conduct your own experiment: go through the process of buying some Bitcoin, use it to purchase something you would normally buy in the real world, and discover how it really treats you and your money. But please don't risk more than you can comfortably afford to lose.
Making a viable electronic currency and medium of exchange for use in everyday transactions will require an energy efficient, secure, distributed system having an average cost per transaction that is less than a typical credit card transaction fee (currently the world's leading electronic payment method). Such a system would also have to be equal to or better than credit cards for convenience, speed, ease of use, global acceptance, security, price stability, privacy, and resistance to fraud and criminal exploits.
If a cryptocurrency system could achieve all that, then it might actually realize the ideal of a blockchain currency. That would please everyone from hardcore libertarians to potato buyers at farmers' markets.
Compared to the general public, we hackers must always strive to look more deeply, investigate more skeptically, think more clearly, and seek to understand technical topics and their implications more fully.
We must never allow ourselves to be dazzled by technical language that we do not understand, or be taken advantage of by people seeking to use our temporary ignorance for their personal gain. We must always try to look beyond the anecdotes, and work hard to separate the facts from the fantasies, fallacies, and frauds.
Ultimately, instead of trying to take value away from others through deception, we can apply our knowledge and creativity to generate new products and services that create value for everyone, including ourselves.
My wish remains the same - that someone, perhaps a reader of these pages, can invent and deploy a complete, economical cryptocurrency solution that serves the needs of the masses, thwarts crooks and bullies, and supports safe, secure, and decentralized commerce as a force for good in our world.
I'll be ready to experiment with it when that happens.