Bitcoin’s original value proposition was that it would be superior, as a medium of exchange, to cash, credit cards and bank transfers. On that basis, people would prefer holding bitcoins, or financial assets denominated in bitcoins, in place of existing currencies, especially the US dollar. If this were to happen, the value of the total stock of bitcoins would be equal to the value of US currency now in circulation, a bit over US$1 trillion. Since the stock of Bitcoins is limited to twenty-one million, each coin would be worth around $50,000. At a current price of $10,000, this would be a bet worth taking at odds of five to one.
Unfortunately for Bitcoin fans, the chances of this happening are a lot less than five to one.
Unfortunately for bitcoin fans, the chances of this happening are a lot less than that. In the time since bitcoin was launched in 2009, it has become evident that design flaws make it useless as a medium of exchange. A design feature called the block size limit means that bitcoin can only handle around seven transactions per second. Under current rules, those who want their transactions handled rapidly (mostly speculative traders) must pay a premium to have this happen.
As a result, anyone wanting to use bitcoin for buying and selling faces lengthy delays and, currently, a cost of around US$20 per transaction. Obviously, no one will pay such a charge for day-to-day transactions. The handful of merchants who announced a willingness to accept bitcoin in the early days have since dropped it.
For a while, bitcoin was favoured by users who wanted to transact anonymously, sometimes for legitimate reasons and sometimes illegally. But while bitcoin transactions are anonymous in the short run, they are anything but untraceable. The whole point of the bitcoin blockchain is that it is a complete ledger of all transactions. So, if someone else gains access to your bitcoins (for example, if a law enforcement agency compels you to hand over the keys), they have access to your entire transaction history.
Various means have been proposed for making cryptocurrencies untraceable. But all of them run up against the fact that the blockchain operates on the basis of contributions from a set of servers. If someone can get control of a majority of the servers, he or she controls the blockchain. Because the great majority of these servers are in China, the Chinese government is in a position to do this at any time it chooses. In fact, because mining is organised into relatively small “pools,” it would be sufficient to take control of four of them, something that could be done overnight.
Similarly, although various suggestions have been made for improving efficiency, there’s little to suggest that a decentralised blockchain can outperform a central intermediary like a bank or credit card company.
Since bitcoins are not useful as a medium of exchange, or desirable in themselves, their true value is zero.
Eulogy made by John Quiggin
