Please tell ordinary people who don’t understand Bitcoin, these are all misunderstandings about Bitcoin.
Written by: Ria Bhutoria, Fidelity Digital Asset Research Director Compiler: Perry Wang
Around Bitcoin is still a lot of criticism and misunderstanding, let us look back at this and respond. The following are the most common criticisms. We have talked about it many times, but considering the recent increase in interest in Bitcoin, we would like to share the latest response. especially:
- Bitcoin price is too volatile, it can not serve as a store of value.
- Bitcoin can not be a means of payment.
- Bitcoin is a waste of resources.
- Bits are used for illegal activities credits.
- Bitcoin without any support.
- Bitcoin will be replaced by a competitor.
Criticism #1: Bitcoin price is too volatile to be used as a store of value
Response: the volatility of Bitcoin is a trade-off in exchange for the assets of a completely elastic supply and can not intervene in the market. However, with the introduction and development of Bitcoin derivatives and investment products, the volatility of Bitcoin may continue to fall, just like any other investment product in the history of the same.
As we said in the previous research report, from insignificant awareness and becoming a new asset in the global store of value, Bitcoin’s development trajectory is unlikely to be linear. At present, the value of Bitcoin is a new store, is undergoing financialization, and is consolidating its position as a store of value. Compared with other value assets (such as gold), Bitcoin holders are relatively narrow.
With the increase in cash and derivatives market liquidity, and the development of the product allows investors to express interest in bitcoin in different ways, Bitcoin daily volatility should decline over time, thereby expanding the market participants Hold the crowd, increase participation and heterogeneity. As the number of bitcoin holders grows larger and the ability of new participants to move the market decreases, the price of bitcoin should stabilize accordingly.
However, despite the volatility of Bitcoin should continue to decline compared to the current, in the following paragraphs, we conducted situational analysis of the volatility of Bitcoin.
One perspective to analyze Bitcoin’s volatility is to compare it with gold in the 1970s . As Matt Hougan, head of research at Bitwise Investments , emphasized, when the United States abandoned the gold standard, investors were not clear about the role of gold. This has caused gold prices to experience annual and even daily fluctuations similar to those of Bitcoin today. For example, in 1973, the price of gold in over 10% of the trading day there was more than 3% of Price. However, just as a letter to investors legendary Wall Street hedge fund manager Paul Tudor Jones (Paul Tudor Jones) in May 2020 was widely read in said:
As far as gold is concerned, it was an excellent buying opportunity because the price of gold has since increased more than three times from its previous high.
Paul Tudor Jones, Founder and Chief Investment Officer of Tudor Investment, a hedge fund management company
Another way to understand a bit credits volatility is that it is no elastic property supply results. The increase in demand cannot lead to an increase in the supply of bitcoins or an increase in the speed of bitcoin issuance (due to the difficulty adjustment, it is ensured that a block is generated every ten minutes on average). It is worth noting that this supply is no flexibility also allows Bitcoin becomes scarce and valuable. Therefore, Bitcoin investors accept volatility as the cost or premium to obtain the appreciation of the store of value asset, and they believe that there is a significant, untapped, accessible market for this store of value asset.
Bitcoin’s volatility can also be explained as Bitcoin has a market that is resistant to intervention-no central bank or government can intervene to support or support the market and artificially subdue volatility. Volatility is a bit currency exchange market without distortion trade-off. Real price discovery is accompanied by volatility and may be preferable to artificial stability, because the latter may collapse without intervention if it causes a distorted market.
We operate a highly distorted market where, increasingly depends on its upward trajectory: the power of the monetary policy stance has been stretched, forced to suppress a growing number of contrarian, investors are ultimately depends on how the collective belief of persistence .
Mohamed A. El-Erian, former CEO and co-chief investment officer of Pacific Investment Management Corporation (PIMCO)
Criticism #2: Bitcoin cannot be a means of payment
Response: bit credits carefully weighed limited capacity and expensive, to provide the core properties, for example to the center and invariance. Given its high settlement guarantee, Bitcoin optimize its limited settlement capacity to deal with these in the traditional rail service has not been a good deal.
Many people still believe that the core use case of Bitcoin is a means of payment for daily low-value transactions. Critics believe that Bitcoin has failed in this use case because it does not (and cannot) provide transactions on the same payment track as Visa, Mastercard or PayPal. And some people think the contrary, data from Chainalysis the highlights, since 2017, the flow through the online payment mechanism, effective turnover of more than $ 500 million per quarter, designated a lower bound for the Bitcoin as a means of payment value.
As a means of payment, Bitcoin can be compared to the prior art (such as international payments) perform better under certain circumstances, but Visa, Apple Pay, Google Pay, PayPal and payment of legal tender in most everyday running well, and excellent performance For cryptocurrency.
John Pfeffer, partner of Pfeffer Capital, former partner of private equity investment firm KKR
Accepting Bitcoin to achieve decentralization with limited throughput and implement appropriate checks and balances, the next question worth asking is: What transaction is worth writing to the bottom layer of Bitcoin? Moreover, which transactions require Bitcoin’s global, immutable settlement? We can say that Bitcoin limited capacity of the most valuable use is not recorded in the point of sale transaction data associated with the daily payment, such as the example of a cup of coffee daily pay, but to get the most benefit from high assurance Bitcoin, the traditional financial transactions inadequate rail service.
For example, the use of traditional financial tracks is inefficient and/or costly.
This includes, but is not limited to the global settlement of international companies, and even settlement between central banks and governments. One such example is BitPesa , which helps clients (small and medium-sized enterprises and multinational companies) conduct two-way and internal transactions between African currencies through Bitcoin. BitPesa use Bitcoin is the first commercial settlement to reduce the one doing business in the forefront of market cost and friction businesses.
Under certain circumstances, Bitcoin is also possible to provide superior payment option, since remittances slow, high cost, especially from or remitted capital controls or countries with high inflation struggle. According to World Bank data, in the first quarter of 2020, the average cost of global remittances of US$200 was 6.8%.
Further, although the limited capacity of the chain, but clearing solution to the second layer bit credits (e.g. lightning network, bitcoin banks or other) may be charged to meet the demand for low bit-currency transactions (although not on the same chain to ensure settlement ).
Tax treatment is another factor that complicates the use of Bitcoin and is difficult to use as a means of payment in countries such as the United States. For example, the US Internal Revenue Service (IRS) classifies Bitcoin as ” property .” In terms of payment, this means that bitcoin users must calculate their own gains or losses whenever they pay or shop with bitcoin, which reduces the attractiveness and seamlessness of bitcoin as a payment tool.
Criticism #3: Bitcoin is a waste of resources
Response: a large part of the power of mining bits credits from renewable energy sources, or those that lack of use, at any time wasted energy. In addition, the energy consumed by the Bitcoin network is an effective and important use of resources.
There are multiple versions of the estimate of the proportion of bitcoins mined by renewable energy. For example, alternative Financial Center Cambridge (the CCAF) a third report estimated global benchmark asset encryption, miners 76% renewable energy as part of their energy mix, especially hydropower. According to CCAF estimates, renewable energy accounts for 39% of the total Bitcoin mining energy consumption. CoinShares estimates that as of December 2019, the penetration rate of renewable energy in the energy mix of Bitcoin mining is 73% . The estimates of the two institutions both indicate that a large number of mining operations are powered by renewable energy sources (such as hydropower, wind energy, and solar energy).
Some recent information also indicates that the proportion of mining related to renewable energy will continue to grow. For example, the En+ Group established a joint venture to utilize renewable energy assets that have a low carbon footprint in Bitcoin mining. CCAF also estimates that even if coal is completely used as the energy source for power generation, the total carbon dioxide emissions generated by Bitcoin mining will not exceed 58 million tons, accounting for only 0.17% of the total global carbon dioxide emissions.
Also recently set up a number of idle use of natural gas Bitcoin mining operations of enterprises, the use of energy may not be used for other purposes, while reducing carbon and methane emissions in the process. Use stranded gas byproducts Bitcoin mining company, also has the potential to produce more than they sell natural gas at market prices more than fifteen times more than the income. They can also set up a Bitcoin mining business to comply with regulations that limit the amount of idle natural gas that can be burned or emitted, avoid regulatory fines or shut down operations to prevent natural gas accumulation.
Stranded gas is extremely limited use of natural gas, it is likely to be wasted. Oil or gas wells that do not have the pipeline infrastructure required to transport natural gas will be considered idle. If there is no pipeline capacity for transportation, or the price is too low to cover the transportation cost, idle natural gas cannot be used and will be ignited (manually ignited to avoid explosion risk) or discharged (released into the air). The first two oil fields in the United States ignited or emitted about 500 billion cubic feet of natural gas in 2019, and their impact on the atmosphere is equivalent to the carbon emissions directly emitted by seven coal-fueled factories. In December 2019, Crusoe Energy Systems announced plans to establish 70 Bitcoin mining units this year to prevent the daily ignition of 10 million cubic feet of natural gas. Equinor, an oil multinational listed company, also disclosed a plan to use idle natural gas for Bitcoin mining, which would otherwise ignite and cause carbon emissions.
My favorite way of thinking about this is as follows. Imagine a map of the world, but using local electricity costs as the variable that determines peaks and valleys. Adding Bitcoin to it, like a glass of water on a 3D map of the same: it precipitates at the bottom, making it erase the gap with the ground.
Nic Carter, partner of Castle Island Ventures, founder of Coin Metrics, formerly Fidelity’s first cryptocurrency analyst
However, it is undeniable that Bitcoin mining does consume energy. Therefore, the question becomes, is it worth using energy to protect the Bitcoin network and process transactions? Of course, the answer will vary from person to person. Some people realize: Bitcoin as the first and only can be scarce, decentralized, anti-boycott review and collection of digital assets, can provide an irreversible transaction, so that its importance is worth this investment. Bitcoin’s most valuable features—its perfect scarcity, immutability (irreversibility of transactions), and security (attack resistance)—are directly related to the resources used for mining in the real world. If there are no expensive mining and maintenance, Bitcoin will not be able to fulfill its role as a safe global value transfer and storage systems.
In the long game, the most important goal of energy may be used to ensure the integrity of the currency and the construction of such a network Bitcoin network.
Parker Lewis, Head of Business Development, Unchained Capital
Criticism #4: Bitcoin is used for illegal activities
Response: Bitcoin is as neutral as cash or the Internet. Its attributes are valuable to good people and may be valuable to bad people. However, from the perspective of the proportion of all transactions, the correlation between Bitcoin transactions and illegal activities is very low.
Bitcoin been criticized for similar criminal activities criticizing cash used for illegal activities or criticize the presence of dark networks and the Internet in the illegal market. Bitcoin (such as cash or the Internet) is neutral. Bitcoin provides new features and has a net positive impact on society; however, Bitcoin’s decentralization and anti-censorship features may also be exploited by bad actors.
It is important not to consider the use of Bitcoin for illegal activities in the vacuum zone. According to analyst firm Elliptic block chain data, Bitcoin in illegal activities (such as Dark City, ransomware, fraudulent activity) in use has been declining, associated with illegal trading activities account for less than the total Bitcoin transactions in recent years, 1% .
The transparent nature of Bitcoin allows us to accurately estimate the proportion of Bitcoin used in illegal activities, while the role of cash and the financial system in criminal activities cannot be accurately estimated, so people are more It is easy to pour this kind of dirty water on Bitcoin, while ignoring the role of cash and the financial system in criminal activities. For example, according to the United Nations Office on Drugs and Crime and the statistics Chainalysis in the dark had a dollar for every online purchase Bitcoin, corresponding to at least $ 800 in cash through money laundering.
Although virtual currency is used for illegal transactions, this amount is small compared with the amount of illegal activities through traditional financial services.
Jennifer Fowler, former assistant to the Deputy Director of Terrorism Financing and Financial Crimes, U.S. Treasury
Criticism #5: Bitcoin is not supported in any way
Response: Bitcoin is not backed by cash flow, industrial utility, or statutes. It is to support a consensus exists between the code and the main stakeholders.
In ” What is an asset class? “(? What is an Asset Class , Anyway) seminal paper (published in 1997 in the” Journal of Portfolio Management “), the Robert • Greer (Robert Greer) defines three” super asset classes “- Capital assets, consumable/convertible (C/T) assets and store of value (SOV) assets.
Greer will be included in the value of gold super store category in which the assets “can not be consumed, it can not generate revenue, but they are valuable.” However, considering that gold is used in jewelry and technology industries (such as the electronics industry and dentistry), it also has the characteristics of C/T super assets. However, gold jewelry is regarded as an alternative value storage tool. As a ” private reserve currency “, only a small part is used for industrial applications (only 7% of it was used in the electronics and dental industries in 2019).
Robert Greer also listed fiat currency as a store of value asset. Controversial currency status law depends solely on the value of the credit and the government is fully confident in its government. However, in many cases, confidence in the government’s ability and the central bank’s reasonable management of fiat currencies will be seriously misaligned (see Venezuela and Lebanon for recent examples). The monetary and fiscal policies of many central banks and governments are almost bankrupt, using this as leverage to cause serious losses in the purchasing power of their fiat currencies.
According to Greer’s definition, Bitcoin is most suitable for the value store superclass. Bitcoin is not backed by cash flow, nor is it backed by industrial use or statutes. It is characterized by the code as a backup, the code is to be implemented by the social contract between the major stakeholders. These stakeholder groups are in a balanced state, and no group has superpowers:
Users select transactions on the network and for the transaction of the final payment
Miners choose to bear transaction processing costs and provide finality
Nodes choose to run Bitcoin software to verify transactions
Developers choose to maintain Bitcoin software
Bitcoin interests of stakeholders explicitly choose to use bitcoin block chain and support network, the unique attributes of Bitcoin – Bitcoin perfect scarcity, transaction irreversibility, and resist the collection and review. Each new stakeholders – in other words, Bitcoin network effects make it more reliable, and further strengthen its properties attract more stakeholders to hold the assets and so on.
The Bitcoin code provides the rules, but stakeholders enforce the rules and reach an agreement on the rules, resulting in the currently existing secure, open, global value storage and transfer system.
Criticism #6: Bitcoin will be replaced by competitors
Response: Although Bitcoin open source software may be bifurcated, their communities and network effects will not. Bitcoin makes trade-offs for core attributes that the market considers valuable.
Many digital assets have emerged, claiming to improve Bitcoin’s flaws. To date, however, there is not a similar effect can be achieved the network bit token. Bitcoin has qualities that make it worthwhile, and as mentioned many times in this article, it makes clear trade-offs to provide these qualities. Although competitors attempt to improve the limitations of Bitcoin (for example, its limited transaction throughput, or greater volatility), but at the cost all at the expense of the Bitcoin valuable core attributes (for example, completely scarcity, go Centralization, immutability).
This explains why, according to market capitalization, investors and the number of users, miners and verify people, as well as retail and institutional infrastructure and product considerations, Bitcoin continue to occupy the king of encryption currency dominance. As shown below, a plurality of bit currency market orders of magnitude higher than competitors (PoW other digital assets) of the total market value.
Although Bitcoin software is open source, it may be bifurcated, but the network effects and communities (stakeholders, miners, validation, developers, service providers) will not. The trade-offs these stakeholders understand and accept Bitcoin will not be easily copied.
in conclusion
Although the article did not fully cover the detailed criticism of Bitcoin, but we believe that the answer outlined here adjusted, may solve other common misconceptions.
Bitcoin is a unique digital assets, while an increasingly digital world need to dig deeper than the surface level to understand their core properties and trade-offs. Bitcoin promotes bystanders to question preconceived, so-called correct, and widely accepted concepts and begin to understand the entire value proposition of Bitcoin.
