Written by: Ria Bhutoria, Research Director of Fidelity Digital Assets
Compiler: Perry Wang
There are still many criticisms and misunderstandings surrounding Bitcoin , let us review and respond here. 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:
- The price of Bitcoin is too volatile to be a store of value.
- Bitcoin cannot be a means of payment .
- Bitcoin is a waste of resources .
- Bitcoin is used for illegal activities .
- Bitcoin is not supported in any way .
- Bitcoin will be replaced by competitors .
Criticism #1: Bitcoin price is too volatile to be a store of value
Response: Bitcoin’s volatility is a trade-off, in exchange for a completely inelastic supply of assets and a market that cannot be intervened . However, with the adoption of Bitcoin and the development of derivatives and investment products, the volatility of Bitcoin may continue to decline , just like other investment products in history.
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, Bitcoin is an emerging store of value , 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 liquidity in the spot and derivatives markets and the development of products allowing investors to express their interest in Bitcoin in different ways, the daily volatility of Bitcoin should decline over time , thereby expanding 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, although Bitcoin’s volatility should continue to decline compared to the current period, in the following paragraphs, we conduct a contextual analysis of Bitcoin’s volatility.
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 experienced a rise and fall of more than 3% in more than 10% of trading days. However, as the legendary Wall Street hedge fund manager Paul Tudor Jones (Paul Tudor Jones) said in a widely read letter to investors in May 2020:
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 the volatility of Bitcoin is that it is the result of a completely inelastic supply of assets. 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 inelastic supply also makes Bitcoin 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. Bitcoin’s volatility is a trade-off in exchange for an undistorted market . 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.
The market in which we operate is highly distorted, and its upward trajectory depends more and more on: the force of the already stretched monetary policy stance to suppress more and more contrarian trends will ultimately depend on the persistence of investors’ collective beliefs .
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: Bitcoin carefully weighs limited and expensive capacity, etc., to provide core attributes such as decentralization and immutability. In view of its high settlement guarantee , Bitcoin has optimized its limited settlement capacity to process these transactions that have not been well served on the traditional track.
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. Contrary to what some people believe, the data from Chainalysis highlights that since 2017, the effective transaction volume flowing through online payment institutions has exceeded 500 million US dollars per quarter, which sets a lower bound for Bitcoin as a means of payment. value.
As a means of payment, Bitcoin can perform better than existing technologies (such as international payments) under certain circumstances , but Visa, Apple Pay, Google Pay, PayPal, and fiat currencies work well in most daily payments and perform well. 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? It can be said that the most valuable use of Bitcoin’s limited capacity is not to record transaction data related to daily payments at the point of sale, such as the example of daily payment for a cup of coffee, but to obtain the most benefits from the high guarantee of Bitcoin. Financial track underserved transactions.
For example, the use of traditional financial tracks is inefficient and/or costly.
This includes, but is not limited to, global settlement by 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 is one of the first companies to use Bitcoin for commercial settlement to reduce the cost and friction of conducting business in the frontier market.
Under certain circumstances, Bitcoin may also provide superior remittance options because of the slow speed and high cost of remittances, especially from or to countries that have capital controls or struggle with high inflation. According to World Bank data, in the first quarter of 2020, the average cost of global remittances of US$200 was 6.8%.
In addition, although on-chain capacity is limited, second-layer solutions that settle to Bitcoin (such as the Lightning Network, bitcoin banks, or others) may meet the demand for low-fee Bitcoin transactions (although there is no equivalent on-chain settlement guarantee ).
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 electricity for Bitcoin mining comes from renewable energy sources , or energy sources that are lacking in use and are wasted at any time. 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, the third global crypto asset benchmark report of the Cambridge Centre for Alternative Finance (CCAF) estimates that 76% of miners use renewable energy as part of their energy portfolio, 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 use renewable energy assets with 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.
Recently, a number of companies that use idle natural gas for Bitcoin mining operations have been established to use energy that may not be used for other purposes, while reducing carbon and methane emissions in the process. Companies that use idle natural gas by-products to mine Bitcoin also have the potential to generate more than fifteen times more revenue than they can sell natural gas at market prices. 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.
Idle natural gas is natural gas with extremely limited uses and 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 is like pouring a glass of water on a 3D map: it settles in a trough, smoothing 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 that Bitcoin, as the first and only digital asset that can be scarce, decentralized, censorship-resistant and resist seizure, can provide irreversible transactions, and therefore believe that its importance is worthy of such 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. Without expensive mining and maintenance, Bitcoin will not be able to fulfill its role as a secure global value transfer and storage system .
In the long-term game, the most important purpose of energy may be to ensure the integrity of the currency network and build such a 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.
Criticizing Bitcoin used for criminal activities is similar to criticizing cash for illegal activities or criticizing the existence of dark web and illegal markets on the Internet. 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 data from the blockchain analysis company Elliptic , the use of Bitcoin in illegal activities (such as dark markets, ransomware, fraudulent activities) has been on a downward trend , and transactions related to illegal activities have accounted for less than the total amount of 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 statistics from the United Nations Office on Drugs and Crime and Chainalysis, for every dollar spent on buying bitcoin on the dark web, at least $800 is laundered through cash.
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 supported by the consensus that 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 included gold in the super category of store of value , in which assets “cannot be consumed and cannot generate income. 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. The dispute over the status of legal currency is that its value is entirely tied to the complete confidence in the government and the government’s credit. 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 choose to conduct transactions on the network and pay for transaction finality
- Miners choose to bear transaction processing costs and provide finality
- Node chooses to run Bitcoin software to verify transactions
- Developers choose to maintain Bitcoin software
Bitcoin’s stakeholders clearly choose to use and support the Bitcoin blockchain network to realize the unique attributes of Bitcoin-the perfect scarcity of Bitcoin, the irreversibility of transactions, and the resistance to seizure and censorship. Every time a new stakeholder is added-in other words, the network effect of Bitcoin makes it more reliable, further strengthens its attributes, attracts more stakeholders to hold the asset, 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’s open source software may be forked, its community 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. However, so far, no one can achieve a network effect similar to Bitcoin . 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 try to improve Bitcoin’s limitations (for example, its limited transaction throughput, or greater volatility), the price is all at the expense of the core attributes that make Bitcoin valuable (for example, complete scarcity, deprivation) 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 in the figure below, the market value of Bitcoin is many orders of magnitude higher than the total market value of competitors (other PoW digital assets).
Although Bitcoin’s software is open source and may be forked, its network effects and communities (stakeholders, miners, validators, developers, service providers) will not. The trade-offs these stakeholders understand and accept Bitcoin will not be easily copied.
in conclusion
Although this article does not fully cover the detailed criticism of Bitcoin, we believe that the answers outlined here have been adjusted to possibly resolve other common misunderstandings .
Bitcoin is a unique digital asset , and an increasingly digital world needs to dig deeper than the surface to understand its core attributes 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.
