Daniel Halliday
Jul 24, 2018 · Last update 3 mo. ago.

Is bitcoin a speculative bubble?

Bitcoin is a ‘crytocurrency’, a digital monetary alternative designed for use as an exchange medium with a high level of security whose value is guaranteed by strong cryptographic algorithms and not by any third party or nation state. The decentralised control of this digital currency is seen as favourable to some despite not fully taking off as a popular currency. Can cryptocurrencies work to the extent that they could be viable as a currency? Or are they all just a speculative bubble? bis.org/publ/arpdf/ar2018e5.pdf
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Bitcoin and blockchain’s decentralised database technology will lead to an environmental disaster
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It may well be, but it still has uses and blockchain technology will be revolutionary
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Cryptocurrencies are a concept that cannot be compared to how we use currencies today
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Bitcoin has no intrinsic value, doesn’t work as a currency and will inevitably crash as an asset
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Bitcoin and blockchain’s decentralised database technology will lead to an environmental disaster

Many have warned of what a big environmental disaster blockchain technology could represent, with an already monumental energy consumption, and the accelerating rate of growth that this technology requires. As so much computing power is needed across many servers to verify a decentralised blockchain database, the power consumption of Bitcoin mining alone is thought to currently be greater than that of some countries entirely. This would mean that Bitcoin alone is already indirectly responsible for several million tonnes of carbon emissions, and with the popularity and implementation of this technology growing; this problem will only get worse.

Blockchain's power consumption is difficult to measure, as the industry is spread across the world and is fairly secretive, dealing with encrypted information. Alex de Vries, an analyst and blockchain specialist, tried to establish a detailed estimate, averaging blockchain's consumption to an annual amount of 32TWh as of December 2017, which is the estimated consumption for the whole of Denmark (2014). However these estimates are based on assumptions that all parties working with cryptocurrencies are using energy efficient technology, and due to the fact that many miners may use less advanced solutions, the actual consumption is likely much higher.

In addition there is the issue of needing an ever-increasing amount of energy to generate Bitcoins. Through the process of “mining” Bitcoins a set amount of energy or computing power is needed to generate a block in the blockchain the currency is based on, but as there are a finite number of blocks in the blockchain so blocks are set to become increasingly difficult to mine every 2016 blocks. In other words blockchain miners have an exponentially worsening return on their investment, while there will be a constant increase in the energy required to generate blocks and therefore bitcoins, as more computer power will be needed as the process of mining Bitcoins continues. In this way Bitcoin is just another Silicon Valley snake oil.

The ultimate price of bitcoin and cryptocurrencies will be worse than an economic crash, they will be a major contributor to climate change, and accelerating a problem we currently have no solution for. A realistic estimate of energy consumption linked to blockchain technologies needs to be established, so a maximum threshold can be set or at least a more accurate picture can be fed into models and more accurate pictures can be portrayed when trying to establish solutions to this problem. Unless innovation can solve the problem of our dependency on fossil fuels, or blockchain technologies can themselves be innovated further, we run the risk of accelerating toward environmental problems such as climate change even faster.

arstechnica.com/tech-policy/2018/05/new-study-quantifies-bitcoins-ludicrous-energy-consumption techbullion.com/the-blockchain-technology-and-its-impact-on-global-warming technologyreview.com/s/610783/bitcoin-would-be-a-calamity-not-an-economy blockonomi.com/bitcoin-mining arstechnica.com/tech-policy/2018/05/new-study-quantifies-bitcoins-ludicrous-energy-consumption

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Daniel Halliday
Apr 20
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DH edited this paragraph
In addition there is the issue of needing an ever-increasing amount of energy to generate Bitcoins. Through the process of “mining” Bitcoins a set amount of energy or computing power is needed to generate a block in the blockchain the currency is based on, but as there are a finite number of blocks in the blockchain so blocks are set to become increasingly difficult to mine every 2016 blocks. In other words blockchain miners have an exponentially worsening return on their investment, while there will be a constant increase in the energy required to generate blocks and therefore bitcoins, as more computer power will be needed as the process of mining Bitcoins continues. In this way Bitcoin is just another Silicon Valley snake oil.

It may well be, but it still has uses and blockchain technology will be revolutionary

Blockchain will have applications regardless of bitcoin’s success. Even if blockchain currencies do not overtake fiat currency, blockchain’s model of secure decentralised storage of data will revolutionise secure database technology. It is set to revolutionise how contracts, banks, and artistic royalties function and is likely to diversify in time, possibly revolutionising politics, legal and financial systems beyond recognition in the long run also.

The Internet has marked a period of change for the arts and especially for the music industry. An average of 86% of artist's proceeds from their music are thought to be lost in unpaid online royalties alone. Distributed ledge technology could prove to be revolutionary in addressing this problem, as it could not only allow instant royalty establishment through smart contracts, but could also underpin a system of cryptographic watermarks, where royalties are perfectly allotted to the appropriate artist’s streamed content.

Likewise, ticket re-sales could be positively benefitted, with tickets for live events being easier to link to one individual and exchange securely on a blockchain based database, meaning an end to fake tickets and extortionate reselling practices. The second hand event ticket market, or touting/scalping, for music and sports events is a big issue, with forgeries and malpractice being common issues. Blockchain could help address these issues buy keeping ticket information on a secure ledger so that one reselling company can be in control of both primary ticket sales and any reselling. Keeping control of who brought and owns what ticket could help with event security also, a growing issue considering large events have become the targets for terrorist actions in recent years.

Smart contracts, contracts based on blockchain, where trust is written into the technologies distributed ledger, are more likely to be revolutionary before the possibility of widespread utilisation of cryptocurrency. Such solutions will allow parties to make secure agreements and transactions that are self-secured and decentralised, without requiring an authority to guarantee the contract or agreement, saving money, time and bureaucracy. Smart contracts are undeniably faster, cheaper and more secure than the traditional means of forming legal documents that involve middlemen to secure trust, and are set to be used in everything from healthcare to real estate industries, from legal to financial systems. Blockchain will likely have many more applications and be more revolutionary than cryptocurrencies.

bbntimes.com/en/companies/blockchain-will-revolutionise-global-trade-and-transport inc42.com/resources/blockchain-impact-legal-ecosystem nasdaq.com/article/how-blockchain-technology-can-transform-royalty-payments-cm786646 blockgeeks.com/guides/smart-contracts eventmanagerblog.com/blockchain-ticketing campussafetymagazine.com/emergency/7-steps-to-improving-stadium-and-large-event-security

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Daniel Halliday
Apr 20
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DH edited this paragraph
The Internet has marked a period of change for the arts and especially for the music industry. An average of 86% of artist's proceeds from their music are thought to be lost in unpaid online royalties alone. Distributed ledge technology could prove to be revolutionary in addressing this problem, as it could not only allow instant royalty establishment through smart contracts, but could also underpin a system of cryptographic watermarks, where royalties are perfectly allotted to the appropriate artist’s streamed content.

Cryptocurrencies are a concept that cannot be compared to how we use currencies today

There is an inherent flaw in arguing that bitcoin is a speculative bubble, and does not have intrinsic value, without accepting that fiat money, as in national currencies, are also subject to this same criticism. If it wasn’t speculative and was backed by a physical asset, it would be impossible to keep it decentralised, which is the most exciting prospect with bitcoin or other cryptocurrencies. Such currencies are a new concept that defy definition by previous limitations imposed on currencies, their use may change as the technology and society does, but they are more than just a speculative asset.

Furthermore even with fiat currencies, there are no prices that are not somewhat speculative, with currency speculation being able to devalue or inflate a currency to a point at which a country’s stock market and overall economy can start to follow suit. This has been linked to financial crises, with fiat money being inflationary, fostering speculative bubbles itself and luring individuals, banks and states into traps of excessive debt. The speculative nature of fiat currency is most apparent in times of financial or political crisis, as when the currencies value or the authority underwriting it becomes questionable, people return to investing in or using precious metals, in this way gold really is the ultimate means of payment.

However crytocurrencies, despite being speculative and volatile (something that even applies to gold), are a unique digital asset and are formed from entries into the most secure database technology, so the comparison to fiat currency is not even a useful. Even security software is not as secure as blockchain systems, but bitcoin is built on a foundation of decentralised security, so provides a service that is fairer, more transparent and more secure than fiat currency. But cryptocurrencies are also new technology, they may require development as their usage increases, as with all technology, bitcoin requires adopting and incorporating to fully realise these benefits and function fully as a real currency.

As countries such as Sweden and China try to move towards being cashless societies and world tourism becomes ever popular, cryptocurrencies will offer more flexible monetary solutions and inevitably become more popular also. As country's currencies move away from paper and transition to the online world it is likely that transitions to cryptocurrencies will follow, becoming increasingly common either due to investment or trying to utilise the decentralised nature of the currencies to avoid international banking charges. But it's clear as a fundamentally different concept crytocurrencies may need this progress to occur first in order for societies to catch up with what the technology has to offer.

cryptocoinmastery.com/sweden-first-cashless-society-chose-bitcoin news.ycombinator.com/item?id=15315813 investorguide.com/article/11846/understanding-the-risks-of-currency-speculation-igu fee.org/articles/the-never-ending-fiasco-of-fiat-money

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Daniel Halliday
Apr 15
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DH edited this paragraph
https://cryptocoinmastery.com/sweden-first-cashless-society-chose-bitcoin/ https://news.ycombinator.com/item?id=15315813 http://www.investorguide.com/article/11846/understanding-the-risks-of-currency-speculation-igu/ https://fee.org/articles/the-never-ending-fiasco-of-fiat-money/

Bitcoin has no intrinsic value, doesn’t work as a currency and will inevitably crash as an asset

To be used as money successfully cryptocurrencies including bitcoin need to function as a medium by which value can be exchanged. For monetary systems to operate it is imperative that money holds some steady degree of value over time, so that loans and repayments over time can be arranged. Bitcoin is too volatile to function in this way, with no intrinsic value, and therefore is functioning as a speculative asset, not as a viable currency. For this reason despite bitcoin being over a decade old its use is pretty much limited to the world of currency speculation and the dark web.

Speculative bubbles refer to a financial crisis in which speculation of an asset’s value far exceeds its intrinsic value. This situation can be first noted in 17th and 18th centuries, initially with the sale of certain fashionable tulip bulbs in Holland, prices per bulb going beyond the average yearly Dutch salary before crashing spectacularly. Similarly the British South Sea company, who were granted a monopoly over trade in South America by the British Crown despite Britain’s involvement in a War with the Spanish at the time, who were in control of South America during the 18th century. Regardless of this contradiction, stocks in the company were traded at increasing prices despite no British trade having occurred in South America, leading to a speculative bubble.

There are also more modern examples of a speculative bubbles bursting, damaging the economy and all investors involved. The late 1990’s dot-com bubble was speculative bubble linked to large scale overestimating of the value of early online companies, which was thought to have been a major contributor to the 2001 stock market crash. It all stemmed from unrealistic expectations of what internet companies could achieve and ended costing investors $5 trillion, when the bubble burst. Unrealistic expectations are painfully similar in the case of crytocurrencies, due to the lack of value in this asset it seems that cryptocurrencies are just the next big speculative investment bubble.

In this same way Bitcoin has also been likened to Ponzi schemes, in that its value is intrinsically linked to more people being swept up in the hype and investing also. Just like a regular Ponzi scheme those already invested in the scheme profit at an ever-smaller amount the more people are involved, but ultimately its a scheme of diminishing returns that truly only benefits the schemes creator. In this way crytocurrencies may just be history's most elaborate Ponzi scheme, aided by complex computer algorithms, but just like any other Ponzi scheme they will only function as long as enough people buy into the fiction that bitcoin holds any real value.

thebubblebubble.com/south-sea-bubble moneycrashers.com/dot-com-bubble-burst/https://www.moneycrashers.com/dot-com-bubble-burst cnbc.com/2017/12/04/bitcoin-is-a-dangerous-speculative-bubble-yale-expert-says.html thehill.com/opinion/finance/364306-bitcoin-is-a-ponzi-scheme-and-it-will-collapse-like-one

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Daniel Halliday
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DH edited this paragraph
http://www.thebubblebubble.com/south-sea-bubble/ https://www.moneycrashers.com/dot-com-bubble-burst/https://www.moneycrashers.com/dot-com-bubble-burst/ https://www.cnbc.com/2017/12/04/bitcoin-is-a-dangerous-speculative-bubble-yale-expert-says.html https://thehill.com/opinion/finance/364306-bitcoin-is-a-ponzi-scheme-and-it-will-collapse-like-one
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