In a comprehensive blog post, Fidelity extolled the virtues of Bitcoin while dispelling common Bitcoin “FUD” (fear, uncertainty, and doubt).
Fidelity focuses on the following criticisms:
Bitcoin is too volatile to be a store of value.
Bitcoin has failed as a means of payment.
Bitcoin is wasteful.
Bitcoin is used for illicit activity.
Bitcoin is not backed by anything.
Bitcoin will be replaced by a competitor.
In October 2018, Fidelity, become involved with the bitcoin ecosystem and published a bitcoin ecosystem analysis. According to Fidelity’s estimation, most opponents of bitcoin ignore the trade-offs bitcoin intentionally creates, mixing them up with vulnerabilities.
Today, as a part of a series of articles, we will be summarizing each criticism mentioned by Fidelity.
Criticism #1: “Bitcoin is too volatile to be a store of value.”
The volatility bitcoin is a trade-off that produces an ideal inelasticity of supply and a decentralized economy.
However, bitcoin’s volatility will begin to decline, as it has traditionally, with greater acceptance of bitcoin worldwide and the production of derivatives and investment products.
As stated in Fidelity’s study, it is impossible that the journey of a new asset would be linear.
Bitcoin is an evolving store of value at this point, facing financialization and is in the process of cementing its position as a value store. Bitcoin is narrowly owned compared to other stores of value reserves (e.g. gold).
With increasing spot and derivative market liquidity and the production of products that enable investors to express interest in bitcoin in numerous forms, the regular volatility could decrease over time, resulting in greater ownership, involvement, and heterogeneity of market participants.
The price of bitcoin could stabilize in parallel with net new participants having fewer potential to shift the sector when bitcoin investment grows more common.
Comparing it to gold in the 1970s is one way of bringing the scarcity in bitcoin into context. The position of gold was uncertain to investors, including Matt Hougan of Bitwise Portfolios, until the U.S. discarded the gold standard.
Criticism #2: “Bitcoin has failed as a means of payment.”
To deliver core properties such as decentralization and immutability, Bitcoin allows intentional trade-offs, such as restricted and costly power. Bitcoin optimizes its ability for resolving transactions that are not well covered by conventional methods, due to its immutability.
Some believe that the main use of bitcoin is as a form of payment for low-value daily transactions. Believing this, opponents say that bitcoin has struggled because it does not and will not generate the same transaction performance as Visa, MasterCard, or PayPal payment options.
Contrary to what many may believe, transaction volume for bitcoin has reached $500 million a quarter since 2017 via online payment processors, providing a strong example of transaction volume.
However, while bitcoin can be a medium of exchange, it is not the central or only feature of bitcoin.
There are some specific use cases, such as overseas payments, in which bitcoin works better than incumbent technology. For other day-to-day payments, Visa, Apple Pay, Google Pay, PayPal and fiat currency function good and better than cryptocurrencies.
Being compact, fungible, and divisible, and Bitcoin has many properties that render it a viable payment mechanism. It also has drawbacks in that it is unpredictable and has restricted throughput. These are intended features that are embraced by Bitcoin.
Volatility, as discussed above, is the trade-off that renders bitcoin scarce. The volatility of decentralization is a direct consequence of inexpensive and fast transaction confirmation.
Bitcoin makes it possible for users with common computers to operate validation nodes by setting a restriction on capacity (which restricts the amount of data held on the ledger).
It is important to validate nodes since they verify the work carried out by mining nodes and present checks and balances on miners responsible for generating blocks and handling transactions, ensuring that no one community of stakeholders can control Bitcoin.
Criticism 3: “Bitcoin is wasteful.”
A large portion of bitcoin mining is driven by green or sustainable resources that would be wasted otherwise. The electricity consumed by bitcoin is a known useful application of energy compared to wasteful applications.
Within the bitcoin mining sector driven by renewable energy, there are various figures. For example, the Cambridge Center for Alternative Finance (CCAF) 3rd Global Cryptoasset Benchmarking report reports that 76 percent of miners use renewable energy, with a focus on hydroelectric energy.
All figures regarding sustainable bitcoin mining indicate a large percentage of operations are operated by renewables (e.g., hydropower, wind, solar). The overall share of renewable energy use by bitcoin miners is 39%. The latest metrics indicate that the share of green mining remains increasing.
For instance, En+Group is a joint venture that is recently focusing on the low carbon footprint renewable energy assets of Bitcoin mining. Furthermore, CCAF reports that the cumulative production of CO2 from bitcoin mining will not surpass 58 million tons, or 0.17% of world carbon pollution, despite the significant amount of bitcion mining that still uses coal.
In recent years, mining operations have been developed to power bitcoin mining with stranded gas, exploiting resources not consumed for other uses, and reducing pollution of carbon and methane.
More recently, mining operations have been developed to power stranded gas mining, which leverages resources that can not be consumed for other uses and in the process lowers carbon and methane emissions.
Companies who use stranded gas to mine bitcoin will have the ability to produce more than fifteen times more revenue than if they were allowed to sell the gas at market prices.
They can also set up bitcoin mining operations to comply with regulations that restrict the amount of stranded gas that can be flared or vented to prevent regulatory penalties or shut down operations to avoid natural gas usage.
It is undeniable that bitcoin mining uses a significant amount of energy. The question then arises: is it a valuable use of resources to protect the Bitcoin network and process transactions? The response would definitely vary depending on who asks the question.
The most critical aspects of Bitcoin – its scarcity, its immutability (transactions are irreversible), and its protection (attack resistance) – indicate a level of uniqueness among all existing world assets.