Bitcoin is currently in the midst of a rally. Bitcoin has had a fantastic year by all reports, including a fall at the start of the coronavirus pandemic that saw it lose 25% in March. Since December, it’s more than doubled and many fans are once again targeting the $20,000 mark as the next break barrier.
In recent months, innovations have helped drive this year’s rally. A Bitcoin fund was launched by Fidelity Investments, bringing its star strength and heritage to the Bitcoin space. Many famous names from Wall Street have bought in. Square Inc. and MicroStrategy Inc., public corporations, also recently invested in the coin.
And the October announcement of PayPal to enable consumers to tap cryptocurrency was one of the most prominent events for fans.
In our “Persisting Bitcoin Criticisms” series, we examine Fidelity’s report on the viability of Bitcoin.
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, falsely labeling them as vulnerabilities.
Today, as a part of a series of articles, we will continue summarizing each criticism mentioned by Fidelity.
Criticism #4: Bitcoin is used for crime.
Bitcoin is impartial, like cash or the internet, and has assets that can be useful to both good actors and bad actors. Bitcoin purchases related to illegal activity, though, are quite limited as a share of overall transactions.
Bitcoin introduces new features that have a net beneficial effect on culture, however, it may also be abused by malicious actors that take advantage of the decentralized and censorship-resistant features of Bitcoin.
It is essential that the usage of Bitcoin in criminal activity in a vacuum is not considered. According to statistics from the blockchain research company, Elliptic, the usage of bitcoin in illegal activities (e.g., black markets, ransomware, criminal activity) has been on a downward trend and illicit activity-related transactions make up fewer than 1 percent of overall bitcoin transactions in recent years.
According to the United Nations Narcotics and Violence Office and Chainalysis, for example, for every dollar invested on the darknet in bitcoin, at least $800 was laundered via currency,
Criticizing bitcoin for its usage in drug activities is equivalent to criticizing money for its use in illegal activity or criticizing the hosting of the dark network and illegal trading on the internet. Bitcoin is neutral (like cash or the internet).
The discovery that with the aid of blockchain forensics, law enforcement can track and punish illegal behavior could also present an obstacle to bad actors’ usage of bitcoin. Bitcoin is pseudonymous, not secret, and blockchain analytics companies have established advanced techniques to track real world identities to illegal activity using Bitcoin.
In addition, when Bitcoin becomes more financialized, the emphasis and attention on Bitcoin by regulators and controlled entities that have the responsibility to track illegal transactions is only increasing. Regulation of Bitcoin seems to trend upwards as lawmakers seek to develop better ways to track Bitcoin payments.
Criticism #5: Bitcoin is not backed by anything.
Cash flows, commercial services, or decrees do not back Bitcoin. Instead, it is backed by the code and the consensus among its main stakeholders that exists.
Bitcoin is not funded by capital flows, nor is it supported by a decree or an economic utility. As such, it is assisted by the code brought to existence by the social compact that remains among its major stakeholders.
These classes of stakeholders operate in a combination with no one party having full control over Bitcoin:
- Users that conduct transactions
- Miners who want to pay transaction processing expenses, offering finality
- Nodes who want to run bitcoin software for transaction validation
- Developers who want to retain the program for Bitcoin
Stakeholders in Bitcoin use and maintain the network, recognizing the special qualities of Bitcoin: the scarcity of bitcoin, irreversibility of transfers, and tolerance to seizure and censorship.
The inclusion of each new stakeholder allows the network impact of Bitcoin more stable and further hardens its assets, adding further stakeholders to the asset, and so on.
The Bitcoin code provides the guidelines, but the enforcement and consensus by stakeholders on the rules gives rise to today’s stable, transparent and global value storage and transfer framework.
Criticism #6: A rival will overtake Bitcoin.
While the open-source software of Bitcoin can be forked, the benefits of its community and network can not. For key assets that the public finds important, Bitcoin allows trade-offs.
Many digital assets that claim to boost the shortcomings of Bitcoin have appeared. To date, though, none have been able to accomplish the network impact of Bitcoin. Bitcoin has attributes that make it attractive and it has clear trade-offs for each of these qualities.
While rivals have sought to strengthen the shortcomings of Bitcoin (e.g. its improved transaction efficiency or volatility), it has been at the detriment of the key properties that render Bitcoin attractive (e.g. perfect scarcity, decentralization, immutability).
This explains why Bitcoin tends to lead in terms of market caps, owners and consumers, miners and validators, and hardware and goods for retail and institutional purposes. As seen in the charts below the market cap of bitcoin is orders of magnitude greater than the rivals’ aggregate market cap (other digital proof-of-work assets).
In addition, unless a rival completely displaces the Bitcoin community, the many users of Bitcoin will continue to support the network no matter how impressive any rivals are.
Although the software of Bitcoin is open-source and can be forked and “improved,” the network effects and stakeholder culture (users, miners, validators, creators, service providers) that recognize and embrace the benefits of Bitcoin can not be reproduced so easily.