There has been a lot going on in the news about bitcoin lately, and I figured I would share my thoughts.
I first got into bitcoin about 2010 or 2011, BTC prices hadn’t even reached $0.25 yet. I did some work online and accepted bitcoin as payment. After learning about bitcoin, I decided to purchase more.
At the time, there wasn’t a whole lot you could use bitcoin for, not many vendors were accepting bitcoin, and it was pretty difficult to trade if you weren’t in the web of trust. I was in a bitcoin community and would buy/sell in an IRC chat room called ‘bitcoin-otc’. Apparently, my gpg key is still liste on their old site. In fact, if you look at their new system, the username ‘nick2day’ seems to have a user number of 23. I guess its fair to say I was an early adopter.
Within a year or so, BTC exploded to over $28 dollars a coin. It was at this time I started spending my BTC as I would cash on the internet. I found a few like minded vendors, and was able to purchase things like electronic cigarette gear, Media equipment etc. It was about this time that BTC was getting more attention, and I participated in an AMA on Reddit.
In 2011 I started to go through a divorce, and liquidated most of my bitcoins. I still have a few stashed away for a rainy day, but all in all, I’ve walked away from the community. I firmly believe that in recent years, the community is laying the groundwork to undo the value of BTC, and that the cryptocurrency has entered a bubble. One of the big reasons I believe this is due to the commoditization of bitcoin itself.
When BTC was within its first few years, a common belief the community held was that bitcoin only derives real value when its used as a currency. Thus, there was a big push to get vendors and businesses to accept bitcoin. I remember it being a huge victory when the EFF decided to start accepting bitcoin donations, or when vendors like overstock started allowing the use of bitcoin. However, with Bitcoin prices being volatile, and a growing segment of the community actively advocating for the use of bitcoin as an investment vehicle (similar to gold), more people are buying and holding as an investment strategy. This is the antithesis of what Bitcoin needs to maintain stability and value. The difference between bitcoin and an actual commodity, is that that actual commodities have value. Bitcoins have no inherent value outside of being a currency.
Another issue bitcoin faces is the fact that its not scalable. Every bitcoin transaction ever is saved on the blockchain. While the blockchain is an amazing piece of technology that ensures that there aren’t any fraudulent transactions, it is currently 174 Gigabytes in size. If you want to host the entire blockchain for the community, you not only have to have nearly 200G of extra drive space available, but you also have to have the bandwidth available for others to download the blockchain from you. Since the blockchain contains every transaction of bitcoin ever, it will only grow in size. It simply can’t scale.
The community attempts to correct this, and every so often a new ‘fork’ of bitcoin is announced. However, each time this occurs, a civil war erupts, fragmenting the community.
At the end of the day, Bitcoin can do nothing but collapse, there’s really nothing that can stop it.
This doesn’t mean cryptocurrencies are bad, or that they don’t have their place. When bitcoin does collapse, another cryptocurrency will rise up and take its place. However, if the new currency has the same scalability issues as the blockchain with bitcoin, it too will be doomed.
This is my advice:
- Treating a cryptocurrency that can’t scale as a commodity will fail.
- If you’re ‘investing’ in bitcoin, you should consider divestment, and maybe re-invest in a younger cryptocurrency, or a currency that doesn’t have the same scalability issues.
- Treat currencies as currencies, not as commodities.