Quick summary:

What happens when the dust settled on Bitcoin ?

  • I believe current forms of cryptocurrencies including Bitcoin will be banned.
  • (Only) Following that, there will be many other Blockchains used to secure activity on the internet against hacking, and to reliably identify ‘things’ on the internet.
  • The government will offer a Blockchain as a ‘public good’ (a term in economics which has a specific meaning.)
  • Some are investigating less energy intensive Blockchain technology. If they crack that, it will change the conversation a lot. Until then, Bitcoin’s doomed.

Bitcoins in their current form are ‘A Burning Platform’

I recognise that this is a bold claim but I believe there are 2 primary reasons Bitcoins (and other cryptocurrencies) won’t be used, in their current form, in the future. I think Bitcoin’s doomed.

Weighing up the costs and benefits of using Bitcoin as a currency for a lot of transactions:

The costs we face in accepting Bitcoin as a currency.

  • It’s basically private companies printing Australian money:
    You can’t have 1500 companies around the world printing money. It makes a mockery of money. Governments use money to try and help us out. Bitcoin curtails the government’s ability to execute most components of both it’s fiscal and monetary policy and sooner or later, governments around the world are going to call a halt to it.
  • It will below up uninformed investors:
    As I’ve covered elsewhere, Bitcoin (and its substitutes, alternative cryptocurrencies) are currencies being which are mostly, at the moment, being used as speculative assets. It’s a weird type of confused investor who is buying them. Their main motivator is FOMO – the Fear Of Missing Out – which indicates they have a low propensity for risk – and, to manage it, they take on a very high risk asset (meaning, kind of by definition, they don’t understand it.) In short, people are buying something they don’t understand and will lose a lot of money. Sooner or later, financial regulators (who are set up precisely to prevent this sort of thing) will call a halt to that.
  • Bitcoin (as a use of Blockchain) uses a lot of electricity to validate transactions:
    Even at current levels, at which only a small proportion of all transactions made in the economy are in the currency, Bitcoin consumes as much electricity as New Zealand. That is a high financial, transactional and environmental cost. The costs are so high that Bitcoin miners are locating near hydroelectric power stations – and being thrown out of the area by local authorities for driving the price up. Sooner or later, environmental regulators (who are set up precisely to prevent this sort of thing) will call a halt to that.

It’s not hard to get rid of the problem of cryptocurrencies and avoid those costs

Again, I’ve touched on this before but the government feels pretty strongly about being able to manage things like tax and the money supply.

They can also legislate to get rid of it, the moment they find it sufficiently annoying. And the legislation goes in at a level above the technology so very simply deal with those problems when they become big enough. For example, America just banned the use of the Venezuelan Cryptocurrency by simply writing an executive order banning it.

They are also cracking down on people who think they can avoid tax by using the currency by, as I suggested, getting a list of all transactions – not hard for digital transactions.

To me, all of this cracking down suggests that governments are getting to the point they will call a halt to the whole thing.

The other side of the coin – the benefits of Bitcoin over and above other currencies.

Benefits of bitcoin include…

  • There are no benefits to Bitcoin over and above existing currencies :
     There are no benefits of using Bitcoin for legal users. It was great for a while for drug dealers because no one was (obviously) watching transactions.

This is a cut and paste directly from Investopedia. Let’s give them the benefit of the doubt and say this was written some time ago which is why it’s inaccurate.

  1. User Anonymity :
    Users of Bitcoin in are not anonymous. As I’ve said before, it’s a digital currency. Every transaction is logged. The US Treasury (tax department of the government) recently demanded all records of Bitcoin transactions from companies trading in the currency. If you think they don’t know about the transactions, you’re wrong.
  2. No third party interruptions:
    This feature is of no use to legal users. (Except if transaction fees were lower – see point 4 below.)
  3. Purchases are not taxed:
    Not true. If you don’t report income from the currency, you’re breaking the law. The ATO is cracking down this year.
  4. Very low transaction fees:
    Robinhood has recently started offering free Bitcoin transactions. Previously expenses were between 4 & 7 percent of each transaction which is a huge proportion. Conversely, for domestic transactions, my bank charges me nothing. My best option for international transactions is OFX or similar and the cost is a fraction of a percent. Generally, the fees banks charge for validating transactions are small. Transferring money even internationally is a tiny part of their fees. Also, like any profit pool, bank fees (in existing currencies) and international transaction costs (in existing currencies) are already subject to a great deal of Fintech competition which offers transactions at lower fees than banks using existing currencies.

So, Bitcoin has a number of costs and no benefits

Which is why it will be banned.

The Blockchain will be left after Bitcoin hype goes

Blockchain, on the other hand could be extremely useful. Blockchain is good for a couple of things. First, it’s useful for storing a fact in a reliable way. Second, its good for storing that information privately. So long as the ledger is issued by someone you trust, it’s hard to hack and it’s hard to alter.

Any matter which requires the exchange of reliable facts which need to be held privately, for very valuable transactions, will make sense to keep in a Blockchain. It will only make sense to use Blockchains for high value transactions because the cost of running the Blockchain (in terms of the energy it uses) will be so high.

Those types of transactions include the most important aspects of our lives. All the serious transactions, involve very clear identification to be in place before they can occur. Registering births, deaths, marriages, divorces, establishing a credit history, dealing with a medical history, voting, buying a house. All of that stuff requires some serious signoff, from serious people, taking the whole thing seriously. For example, when you’ve been born, and that’s confirmed by sworn statement from the mother plus the parents have shown 3 forms of ID EACH! That’s a good thing to stick in a Blockchain when it’s done because that sort of serious reliable, ID will be useful down the line.

It will make sense then, to incur the set up cost of a reliable Blockchain, in each country. Governments will provide it as a Public Good. A Public Good is a term in Economics which has a particular definition. It’s something from which peoples’ participation cannot be excluded and which is provided to society for the good of the community. Typical examples are national defence, street lighting and, personally, I think busking.

Other good stuff about Blockchains include ‘Smart contracts’: Over time, the fact that elements of a workflow processes can be coordinated using business rules held within a Blockchain will help with the efficiency of secure transactions. Issuing a passport is currently a pretty laborious process which involves a lot of forms and proving a number of things to do with your Identity. With a blockchain passport solution, you would simply need to ask for a passport, through a Blockchain which held and validated your birth certificate (as in the example above) – and provide an authenticated picture. With those things, a passport could legitimately be provided. Importantly, doing this using a Blockchain would be much cheaper for the government to administer.

Private companies will provide Blockchains too, as charged for services, where the cost of the transaction is so high, it justify with licenses for their private Blockchain issued by the government so they can be trusted. Kind of just like banks are issued licenses and underwritten by the government now.

From a private point of view, buying a house is a great example of something that requires a secure, reliable financial exchange and clear identity, managed through multiple parties as part of a defined workflow.

What happens if there is a change in Bitcoin’s ‘current form’?

The way Blockchains work now spends significant amounts of energy to validate transactions and add transactions to all blockchains across the network. It’s called ‘proof of work’ and it’s that which uses all the power. People know it’s too expensive to scale to millions of transactions and have cryptocurrencies, as they stand, represent a realistic alternative to other forms of currency.

Some are investigating alternative methods of having a distributed ledger which does the same thing as Blockchains now but do not expend the same number of computational resources. IBM and MIT as well as Ethereum, one of Bitcoin’s alternatives.

If they do crack the problem, and cryptocurrencies moved to a less energy intensive blockchain methodology, this would be a very different conversation. IBM believes Blockchains held in processors the size of a grain of sand could be used to securely identify everything on the Internet Of Things. I’m sure that will be true – if they can crack the energy usage problem.