If the creators of Bitcoin wanted it to act like a currency, they sure made a lot of weird decisions. Bitcoin doesn’t function well as a currency, for reasons that are inherent to its design. It’s an investment people are speculating on…and even then, it’s more gambling than it is a stable investment.
A currency should have reasonably stable value, rather than swinging wildly. But that’s what Bitcoin does. Over just a few days, it’s not uncommon for Bitcoin to go up or down 25%. As Bitcoin skyrockets in value, this has become even more of a concern.
For example: According to Coindesk, Bitcoin went from under $12770 to $16583 in a less than 24 hour span between December 6 to December 7.
It’s easy to find more examples. In the four day span of November 8 to 12, Bitcoin sunk from $7458 to $5857. In the three day span of December 3 to 6, Bitcoin increased from $11180 to $12168. These are huge swings in value that make it impossible to predict the value of what you’ll be exchanging or receiving for a good or service—and incredibly difficult for merchants to price those goods. In fact, it’s one reason Valve stopped accepting Bitcoin on Steam on December 6, 2017.
In comparison, the US Consumer Price Index (CPI), a measure of inflation, has averaged less than 2.5% inflation a year over the past decade.
Even as an investment vehicle, Bitcoin is terrible. Robert Shiller, an economics professor at Yale who won a Nobel prize for his work on bubbles, said Bitcoin is “the best example right now” of a bubble. Compared to other investments, Bitcoin looks more like a get-rich-quick scheme than a long-term, stable investment. Stable index funds have historically returned about 7% every year on average and are a good place to park your money—not an unpredictable, wildly unstable asset like Bitcoin.
Bitcoin transaction fees are also huge, and like Bitcoin itself, they can vary. To get your transaction processed in a reasonable amount of time, you have to pay more, basically putting up a larger reward to get Bitcoin miners to incorporate your payment into the blockchain.
According to Valve, the average fee paid to purchase something recently topped out at $20. This also varies wildly. On December 7, bitcoinfees.info said that the current fee was over $13 per transaction.
That’s a huge cut of every single transaction, and it means Bitcoin would be a terrible currency for everyday purchases. Would you use a debit card if you had to pay $13 for every single transaction, even if it’s just a $3 cup of coffee?
As there are fewer and fewer Bitcoins to be mined, transaction fees will increase to pay miners for the computing power they need to spend to keep the system going. So transaction fees are designed to get higher and higher over time.
Bitcoin transactions aren’t just expensive: they also take a long time. This isn’t an accident, but, again, is part of the design of Bitcoin.
Receiving six network confirmations, the generally accepted standard for confirming a Bitcoin transaction, can take up to an hour—or potentially longer, as there are no guarantees.
Commerce would grind to a half if people had to wait an hour after initiating a payment for confirmation before they could receive goods or services. After all, people often complain about having to wait a few seconds for chip-based credit cards to process in the line at the grocery store.
Despite all the Bitcoin hype and increase in value, you can’t actually spend Bitcoin in many places. And some of the few merchants that did accept Bitcoin, like Valve’s Steam service, are removing support for Bitcoin. All that hype is only making Bitcoin less usable as a currency.
It’s tough to find a list of where you can actually spend Bitcoin in the real world. Spend Bitcoins claims to list over 100,000 merchants that accept Bitcoin, but I can’t find anything at all near me. Bitcoin Restaurants list only 85 restaurants in the USA that claim to accept Bitcoin (shown in the map above), out of an approximately 620,907 restaurants total that exist in the USA.
The odds that you’ll be able to spend Bitcoin to actually buy something you’d want to buy are very low. The volatility, high fees, and long transaction times all but assure most merchants will stay away. Most people aren’t getting into Bitcoin to spend it at merchants—they’re getting in to make more US dollars.
Bitcoin transactions are a huge power suck. Currently, every single Bitcoin transaction costs more power than the average US home uses in an entire week. Think about that for a second.
Bitcoin’s proof-of-work system, which requires miners to spend a lot of computational resources to verify transactions, is only getting more difficult over time. The network is designed to produce one valid block every 10 minutes or so. The more computational power is thrown at it, the more it will require. That means Bitcoin’s electricity usage will only keep increasing, putting a huge strain on the world’s energy usage.
As Digiconomist puts it, we know that Visa processed 82.3 billion transactions in 2016. That used enough power to power 50,000 US households for the year. The Bitcoin network didn’t process anywhere near that number of that transactions, but used enough power to power over 2.9 million US households. So the Bitcoin network used 59 times as much power as the Visa network to perform a small fraction of the transactions.
Eric Holthaus at Grist ran the numbers and predicted how much energy Bitcoin would need at its current growth rate:
“By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.”
With energy costs like these, Bitcoin just isn’t capable of being a currency in widespread use. The world doesn’t have the electricity for it.
Bitcoin is like the wild west right now. This attracts some people to it, but it means it’s a big target for hackers and scammers. It’s a poor fit for people who want financial stability.
In 2014, the world’s largest Bitcoin exchange, Mt. Gox, had its Bitcoin stolen by hackers. 850,000 Bitcoin was lost. In 2014, that was $450 million in value—now, it’s worth over 8 billion dollars. Legal action is ongoing, but Mt. Gox’s customers haven’t seen a single cent of their money yet.
Incidentally, Mt. Gox began as a trading site for Magic: The Gathering cards. It stood for “Magic The Gathering Online eXchange”. Why not trust billions of dollars to a financial institution that began as a place to move trading cards around? What could possibly go wrong?
This is just the kind of nonsense that’s prevented by regulation in the financial sector, ensuring financial institutions have proper security and aren’t defrauding their customers. You have nowhere to turn if you run into trouble, as you would with a bank or other regulated financial institution. As a result, there are lots of scams, pyramid schemes, and other types of fraud centered around Bitcoin and other cryptocurrencies.
Ars Technica has run down some of the most notable Bitcoin hacks and frauds over recent years, from massive hacks and Ponzi schemes to Bitcoin wallet services that have mysteriously vanished with all their customers’ Bitcoin after being “hacked”. The SEC just took some action, shutting down an initial coin offering (ICO) scam, but regulators are just dipping their toes in the water. This is not how a safe, stable currency works. It’s not even how a safe, stable investment works.
Here’s the bottom line: if you invest in Bitcoin, there’s a good chance you could lose all your money. You could lose it in a scam, without any of the protections offered by established institutions, regulations, and laws. Or your Bitcoin could be stolen by hackers attacking websites that don’t have sufficient security. A fly-by-night website could get “hacked” under mysterious circumstances where the owners probably stole all the Bitcoin and ran.
Or, if you’re lucky, you’ll just lose half your money when the value of Bitcoin plummets without warning. Perhaps these things will change one day. But if you’re thinking about getting involved with Bitcoin right now…don’t.