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Introduction

In April of 2021, an article appeared in Advisor Perspectives, an interactive publisher for Registered Investment Advisors and other financial professionals, titled “Bitcoin Is An Ecological And Monetary Disaster And It Happens To Be Worth Zero.”   Are these assertions true?  Bitcoin (BTC) remains a mystery, especially for many financial professionals.  An education vacuum exists and it’s easy to draw assumptions on this topic.  What follows will be a dissection of this article including quoted text and my response.

Already a Failure

Article Content: BTC will never be used as a currency.  “Bitcoin’s volatility has ensured that it never gains traction as a currency. Any successful currency needs to remain largely stable in value against a typical basket of goods and services in its local jurisdiction.”

My Response: It is true that BTC expresses volatility relative to traditional currencies like the US Dollar (USD).  For BTC speculators, that may be a good thing.  If your commercial transactions are only denominated in BTC, that is a bad thing.  Then again, there’s nothing preventing the commercial transaction from being denominated in your preferred currency and making the BTC conversion accordingly.  If your commercial ecosystem is relegated to the traditional currency world, and you do not execute the aforementioned conversion, volatility is your enemy.  Once the crypto ecosystem grows and is commercially integrated, you care less about other currency valuations relative to crypto.  Later in this article, I address the currency issue.

Is Impractical

Article Content: BTC is impractical.  “A Bitcoin payment takes as much time and energy as 33,000 credit card swipes – which again renders it unusable.”

My Response: The best way to address this critique is to highlight the Lightning Network (LN), an overlay to BTC.  Without delving into particulars, LN transaction speed is well into the six figures per second.  With respect to energy usage, I’ll provide more detail later.

Is For Fraudsters

Article Content:  BTC is primarily for fraudulent transactions.  “Bitcoin is well known as a facilitator of money laundering transactions. David Green of Real Vision recently concluded that up to 40% of all Bitcoin transactions (used to settle the purchase of goods and services) are fraudulent. Meanwhile, it is difficult to keep count of the number of cryptocurrency accounts that get hacked and depleted, or the number of crypto exchange founders who disappear along with billions of dollars worth of bitcoins.”

My Response:  While BTC may be a path for money laundering, guess what?  National currencies also provide that path as well.  If you’re going to label BTC as the domain of fraudsters, then we must do the same for the others.

I can’t speak to the percentage of transactions that are fraudulent with respect to purchase of goods and services.  My sense is that if they were as high as 40%, we would not see the growth of the crypto ecosystem.

With respect to the hacking of cryptocurrency accounts, this is not a shortcoming of the protocol, but rather crypto exchange security.  Yes, these hacks are in crypto’s history, though they’re probably less likely today.  All this being said, individuals can assume custody of their own assets and mitigate the risk.  There’s a saying in cryptoland, “Not your keys.  Not your coins.” That applies here.

There Aren’t Enough Coins

Article Content: There is an insufficient number of BTC. “Because of its currently fixed supply (there can only be 21 million Bitcoins in the world), there simply are not enough Bitcoins for consumers to conduct their affairs with this flawed invention in lieu of traditional money.”

My Response: It is true that the supply of BTC is ultimately fixed at 21 million BTC.  That maximum will not arrive in our lifetimes.  Additionally, each BTC is divisible into 100 million subunits called Satoshis.  Within the aforementioned Lightning Network (LN) the smallest unit is 1/1000 of a Satoshi.  Doing the math, that projects to a total monetary capacity of 2.1 x 10¹⁸ units.  How much money exists in the world today? According to gobankingrates.com, the total money in existence is on the order $90.4 trillion, considering narrow (M0, M1) and broad (M2, M3) money definitions. That is roughly 9 x 10¹³. 

There’s no rule suggesting BTC must subsume all world money.  It could comfortably coexist with currencies.  Moreover, economies adjust to money supplies. 

Weakest of All Currencies

Article Content: Since BTC has no governmental backing, it has to be the weakest currency in the world.  “A currency is a medium of exchange for goods and services within the boundaries of a sovereign which has, A. sole power to emit that currency, B. the power to collect tax revenues denominated in that currency, C. sole rights to the use of force within its boundaries (often to collect due taxes). Every country in the world is understandably protective of its monetary ecosystem, and no country will allow the Bitcoin bros’ invention to usurp their own money within their boundaries.”

“If Bitcoin were to ever gain wide acceptability and get used as a functional currency within – say, the United States, the government has made it clear that it would crack down on the practice and install regulations which would in essence render Bitcoin impractical to use, and worthless.”

“Faced with this inevitable prospect, crypto bros now claim that Bitcoin is a store of value. This new assertion is also false as Bitcoin is destined to be relegated to the garbage bin of history as the first, most toxic, and ultimately worthless of cryptocurrencies.”

My Response:  Whew!  There’s much to unpack here.  This is an opportune moment to place definition around the term “currency.”  I define currency as flag money or the money of a sovereign nation.  The article is correct in asserting that nations are understandably protective of money within their national boundaries. Fortunately for Bitcoin, it does not rely on the whim of those controlling currencies and is not encumbered by national boundaries — it is truly international.  Moreover, it is controlled algorithmically. 

Because nations assert their authority over their currency, we have the recent example where the foreign reserves of one nation, Russia, were invalidated by the nation issuing debt, the United States of America. If a nation or an investor cannot rely on the covenant established during the issuance and purchase of debt, it raises numerous questions about the viability of the debt issuer’s currency.  Bitcoin could not be restricted in a similar manner since (A) it is not someone else’s debt and (B) the owner of Bitcoin can have absolute possession. 

Bitcoin will not be used as a functional currency and that is not its intent. It makes no attempt to replicate any currency and, in many respects, is a superior store of value. 

Technical Flaws and Challenges - Dubious Origins

Article Content:  The article lists several technical flaws dubbing it the first, and worst, of cryptocurrencies.  “90% of Bitcoins are mined (or hashed) in China, Iran, and Russia – three countries that are not concerned with the financial wellbeing of western consumers. Over 50% of the bitcoin nodes (which must register all transactions for the ledger to be universally accepted) are based in China, where most BTC is mined. If China wanted to, it could literally destroy Bitcoin as an entity.”

“Furthermore, China currently controls over 50% of Bitcoin mining, which means that it could do a 51% hack – which in turn would allow them to re-order blockchain transactions, double-spend the same coins and basically erase the value of Bitcoin.”

My Response:  Explaining the difficulty of executing the hack is beyond the scope of this article.  A successful 51% attack, while possible, lacks incentive.  Hackers gaining control of the Bitcoin blockchain through this method would destroy its value since it would be revealed to blockchain participants.  Thus, whatever they acquired would have no value.  This hack would be an act of self-immolation.  It’s far more profitable to mine BTC and acquire the transaction fees associated with each block. 

The Chinese government took care of the other concern regarding concentration of mining when they banned it in country. Most, if not all that mining moved to the United States.

Technical Flaws and Challenges - No Safety

Article Content:  Bitcoin can simply disappear.  “There are many ways to see all your Bitcoin disappear into the ether whence it came. One can lose one’s crypto wallet or merely forget the password. Either way, Bitcoin disappears. The exchanges over which Bitcoin are stored and traded often get hacked and the Bitcoin is stolen, with no mechanism for retrieval or redress.”

My Response:  These safety concerns are valid particularly when there is self-custody of assets.  Like anything else where we protect value, there are systematic approaches to securing cryptocurrency assets.  Earlier, I addressed the issue of exchange hacking. 

Technical Flaws and Challenges – Concentration Risk

Article Content:  There are too many BTC in the hands of just a few.  “95% of all Bitcoin is held by the top 2% of holders⁸ – which makes it very difficult if not impossible for whales to exit their holdings without dramatic drops in the price of Bitcoin.”

“Considering this, Bitcoin whales and evangelists are desperate for new, and larger buyers of their ill-conceived invention, and keep soliciting large corporates to allocate part of their holdings to Bitcoin. Without an ongoing, and greater stream of fools piling into Bitcoin, the crypto is sure to crash, and reach its fair value of nil.”

My Response: I cannot speak to the wallet concentration of BTC though I suspect that’s a fluid metric.  One such metric is the percentage of wallets with no to limited transactions, which gives rise to the term HODL, or those avowed long-term holders of the asset. 

Regarding “fools piling into Bitcoin” that universe has evidently extended to large corporate entities, financial institutions, and all flavors of retail investors.  Pending further regulation, institutional investors will not be far behind.

Technical Flaws and Challenges – Value Maintained Due to Fraud

Article Content:  BTC’s value is propped up by fraudulent transactions.  “If you wish to buy Bitcoin, you must register with a cryptocurrency exchange platform like Coinbase, which in turn conducts extensive KYC (know your customer) due diligence to ensure acceptable provenance of funds.  Bitcoin buyers who do not wish to be subjected to this intrusive level of diligence (I’ll leave it to the reader to think of reasons why that may be) must wire funds to unregulated offshore exchanges that do not have banking relationships in the US – and use their dollars to buy ‘tethers’ which are emitted by a central agency which purports to issue one tether per dollar taken in.”

“However, many more tethers have been emitted than there are dollars backing tethers.”

“Over 50% of all Bitcoin transactions are settled in tethers currently. If all holders of tether were to convert the latter into dollars, the system would be sure to collapse. Given its foundation is on such evidently shaky and fraudulent grounds, we do not expect Bitcoin to maintain much value over time.”

My Response:

One can acquire BTC in a variety of methods:

• Use a fiat to crypto “onramp” like Coinbase to deposit US Dollars (USD) and purchase BTC.
• Get paid in BTC for goods or services.
• Mine BTC.

Tether is a “stablecoin” created to maintain parity with the USD.  The intent is to have a crypto asset without volatility.  Tether also provides a vehicle to store USD equivalents in an exchange that does not provide the “offramp” to convert crypto to USD.  Tether’s creation in some respects is antithetical to BTC’s lack of centralization.  Ostensibly, there’s a one-to-one deposit relationship between Tether and USD, but we have no way to verify this.  We must rely on Tether’s operators.  This trust model is not based on math and code, which is the basis of BTC and other cryptos. 

If there was a run on USD by cashing out Tether, it would collapse the BTC market, at least that’s the argument.  This ignores the various ways in which BTC is acquired or exchanged.  Also, Tether is not the only stablecoin.

An Ecological Disaster

Article Content:  Bitcoin should not be mined since it’s inherently a polluter.  “A recent study by MIT shows that Bitcoin mining generates 22 to 23 megatons of carbon dioxide,⁹ slotting the operations between the nations of Jordan and Sri Lanka in terms of greenhouse-gas pollution…. Any ESG focused fund or investor will avoid Bitcoin like the unfolding ecological disaster that it is.”

My Response: BTC mining has been a catalyst in the evolution of “green” energy production.  In addition, BTC miners can establish operations near oil and gas fields and use natural gas that is otherwise burned.  The US energy grid often experiences excess power that is not utilized.  BTC mining can use this electricity to stabilize the grid.  The article’s analysis excludes critique of energy used by the financial system and precious metals mining — a large omission of emission!

Path to Totalitarian Control

Article Content: BTC’s creation has paved the way for totalitarian control by governments.  “Bitcoin’s most ardent supporters see it as an instrument of financial freedom… More worryingly, governments around the world have announced that they will emit their own cryptocurrencies…. The ‘freedom loving’ ‘rebels’ who are frustrated by this loss of financial privacy had better remember the crypto evangelists who paved the government’s path to complete oversight on our wallets, savings, and expenditures.”

My Response: World governments are moving towards their own issuance of cryptocurrencies due to the very success of BTC and other cryptos.  BTC was never intended to guarantee privacy.  In fact, if one is interested in ultimate financial privacy, one would use the method most common in criminal (blue and white collar) transactions — cash. BTC is pseudonymous, which does not imply anonymity. 

The issue of government-issued cryptos is easily the subject of another article.  A byproduct of these government-issued cryptos will be the elimination of cash. The economic, social, financial, and political implications are profound.

Summary

Registered Investment Advisors and other financial professionals have an opportunity to discover another financial asset for their client portfolios. This discovery can only occur through education.  As in any other endeavor, you can do it yourself or engage someone that can objectively describe the subject matter.

It’s difficult to predict BTC’s ultimate exchange value relative to national currencies like the USD.  BTC is a new frontier in representing a unique form of digital value.  We should consider that this digital representation of value requires effort (electricity) to bring it into existence.  Our national currencies can come into existence with a mere keystroke. How do you feel about exchanging your value for that of a keystroke?