Criticisms of BitCoin

Here are my thoughts on why BitCoin is centralized, inequitable, unsustainable, not scalable, risky, not useful, and a poor value.

  • Too few miners, mostly in China, responsible for large proportion of mining capacity
  • Transaction fees could easily exceed credit card interchange fees due to increasing transaction volume and halving of BTC payout every 4 years—miners have to collect higher fees to justify computational expenses as BitCoin bounties logarithmically decline
  • No way to guarantee a transaction posts to the next block—one chooses a fee and then miners’ algorithms decide whether that transaction gets included on the next block, based on transaction volume and other transactors’ fee offerings—setting your fee too low could result in the transaction taking 20, 30, 40, etc. minutes to post or never getting posted at all, while setting your fee too high is a common problem resulting in consumer surplus going to the miners (e.g., you might select a fee higher than what would have been needed to get your transaction on the next block, because it is not possible to accurately predict the minimum required fee to cause a transaction to be posted to the nth future block)
  • Each block is one megabyte (1 MB) max in size and comes approximately 10 minutes (600 seconds) apart—roughly, this is where the “7 transactions per second” bottleneck figure comes from, and it means BitCoin is insufficient for consumer transactions
  • BitCoin’s leaders have recently been waging a propaganda war against users who want to increase the block size above 1 MB. Raising the block size allows for greater transaction capacity, but is unsustainable as BitCoin is presently implemented because each transaction becomes part of the permanent BitCoin record (“blockchain”) which must be stored by each and every miner, as well as users who want to independently verify the veracity of new transactions. The blockchain is 96 GB as of end-of-2016, and while transaction volume perhaps “should” exponentially increase (if you reject the “settlement layer” argument in favor of the “payment network” argument), the size of the blockchain cannot feasibly increase exponentially unless BitCoin is implemented differently.
  • BitCoin is a tremendous waste of computing resources and carbon emissions. As miners deploy progressively more computing power, BitCoins blocks become progressively harder to produce, with the leading mining consortiums performing many trillions of SHA256 hashing calculations per second. A whole industry is built around producing specialized computer chips to perform these meaningless calculations, which serve only to indemnify the legitimacy of BitCoin transactions. Miners’ largest cost is overwhelmingly not the chips, computers, or datacenters themselves, but electricity. Cheap electricity is the deciding factor for a profitable BitCoin mining operation. The environmental consequences are unnerving.
  • The idea that a transaction takes several minutes or longer to post to the blockchain means BitCoin is not suited for trustless sales of instantly delivered goods, whether they be digital goods or retail merchandise, due to the double-spending problem. For high-value transactions like a new car, BitCoin recipients are advised to wait about an hour after the transaction posts to the blockchain to eliminate risk of fraud. However, the idea BitCoin is “trustless” is ludicrous—the buyer must trust the seller will deliver the goods. Further, it is laughable to expect a buyer to wait around for 10 or more minutes after checking out at a retail store. While other payment methods have their own issues which may be even worse, BitCoin comes with its own set of unique problems.
  • While BitCoin is a novel attack against the financial oligopoly, it creates a new oligopoly of BitCoin millionaries who benefit tremendously from buying in early on when BitCoins were cheap, often simply because they were involved in the founding or early operation of BitCoin. This feudalistic, landrush phenomenon is entrenched by an upper limit of 21 million BitCoins with the vast majority being issued early on: 50% of BitCoins are issued in the first 4 years, 75% within the first 8 years, 87.5% within the first 12 years, 93.75% within the first 16 years, 96.875% within the first 20 years, etc. BitCoin proponents criticize the inflationary nature of fiat currencies, which penalizes savers while benefiting spenders. However, the profound, deflationary nature of BitCoin benefits savers and early adopters astronomically, which is no more equitable. As evidence, the founder of BitCoin is estimated to have a million BitCoins, currently worth nearly a billion USD.
  • As an aside, I liken the introduction of altcoins such as LiteCoin to the addiction of the ICANN and their cronies to the landrush period when introducing new gTLDs. While new gTLDs are profitable, they are largely pointless. Among cryptographic currencies, BitCoin is analogous to .com in gTLDs. Pizza.com is worth millions of dollars while Pizza.today might not even be worth $1000. One BitCoin, as of this writing, is worth $950, while one LiteCoin is worth $4.50.
  • To the average user, interacting directly with the BitCoin network would be like a programmer writing in machine code. However, using intermediaries to simply the process, such as the ill-fated Mt. Gox, can have disastrous consequences. Consequently, the average user is left with a poor menu of choices to gain entry to BitCoin.
  • BitCoin presents the same ugly criminal problems as cash. While certainly superior to the current state of Venezula’s currency, it lacks the ubiquity of the U.S. dollar. For Americans, it is probably only superior to cash for international transfers, criminal activities, and high-risk businesses. Like with cash, if you are storing the equivalent of thousands of dollars in BitCoin, someone could steal your BitCoin address (“private key”) by hacking your computer and you would have no recourse. You could, of course, store your private key on paper in a safe deposit box, or in a password-protected, encrypted computer file, but this could still be obtained by social engineering or other method, or inadvertently lost or destroyed, like with cash. If you have a substantial sum of BitCoin, you basically must rely on security through obscurity (e.g., don’t draw attention to your BitCoin stash) to avoid being the target of heists. The lack of governmental and institutional support behind BitCoin means that for most Americans, it is much more dangerous than U.S. dollars.
  • Like Amazon’s mistreatment of holders of Amazon gift cards, BitCoin is a boon for mail-order merchants like Newegg, because customers have no payment-level recourse. When you pay with cash at a brick-and-mortar establishment, you are at the mercy of the merchant’s good graces to be made whole if you receive faulty goods. However, using a debit card, credit card, or PayPal means you can appeal to the intermediary for redress, which is much simpler and more effective than complaining to BBBs, attorneys general, or the courts. While no one pays with cash for mail-order goods, in this respect, the analog is closed-loop gift cards like Amazon, Target, or Starbucks. You can’t do a chargeback on a Target gift card against Target, and, like with the 99.97% success rate of FISA warrant requests, this is not an indicator of the DOJ’s impeccable law enforcement nor Target’s impeccable service, but rather a fundamental conflict of interest. With BitCoin, we have a new, trendy payment method, which, like cash and closed-loop gift cards (as opposed to open-loop MasterCard, Visa, and American Express prepaid gift cards), offers no protection to the buyer. In this way, using a credit card can be likened to using a condom, and BitCoin advocates can be likened to supporters of dangerous sexual behaviors. While chargeback and PayPal dispute fraud is real, merchant fraud, errors, lemons, and goods damaged in shipment are real problems too. If you pay with BitCoin, you give up a lot of leverage.
  • BitCoin isn’t good as a payment network and doesn’t work as a settlement network either. Putting your Starbucks latte purchase on the blockchain, to be duplicated millions of times, is ridiculous. The idea that Starbucks would aggregate their sales through an intermediary who uses BitCoin as a settlement network is also ridiculous, because it would be far easier to spin off an alternative settlement network (“altcoin”) using BitCoin’s underlying technology, without BitCoin’s steep legacy encumbrances. BitCoin apologists are quick to blame the users for failing to adapt, or pointing out the numerous problems with existing payment methods and merchant processing. However, a more accurate characterization may be that BitCoin is a promising first step in cryptocurrency, but lacks scalability, and may have to be completely replaced.
  • Ironically, the proposed solutions to allow BitCoin to scale beyond 7 transactions per second involve not using BitCoin! The proposed Lightning Network uses “blockchain smart contracts” for “transacting and settling off-blockchain,” meaning that BitCoin’s trustlessness is nullified, because you must trust the other party you are doing business with off-blockchain, while settling on-blockchain at infrequent intervals. If this is the solution, why even use BitCoin to begin with? BitCoin is touted as “open source P2P money,” but in fact it is not peer-to-peer, but rather peer-to-all, which is completely non-scalable and unsustainable. On the other hand, BitTorrent is a peer-to-peer file-sharing protocol that predates BitCoin by 7 years and has successfully scaled to hundreds of millions of users. While file-sharing is obviously a very different problem, it is clear that a cryptocurrency could scale much better if transactions could be broadcast primarily on a peer-to-peer basis rather than to all nodes on the network. However, ensuring the legitimacy of cryptocurrency transactions without a public ledger nor a kludge like the Lightning Network may be an insurmountable problem.

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