Fidelity Digital Assets’ head of research, Ria Bhutoria, has issued a rebuttal to the six basic criticisms and misconceptions that come up when discussing Bitcoin.
In a Nov. 13 blog post, Bhutoria said that while the conversation is not new, given the rapidly growing interest in the main cryptocurrency by mainstream investors and retail-focused payment processors alike, it’s time for an update.
“Bitcoin is a unique digital asset for an increasingly digital world that requires digging deeper than the surface level to understand its core properties and trade-offs,” she wrote. “It pushes onlookers to question pre-conceived notions of what is right and widely accepted to begin to understand its full value proposition.
Criticism #1: Bitcoin is too volatile to be a store of value
Response: Bitcoin’s volatility is a trade-off it makes for perfect supply inelasticity and an intervention-free market. However, with greater adoption of bitcoin and the development of derivatives and investment products, bitcoin’s volatility may continue to decrease, as it has historically.
Calling Bitcoin “an emerging store of value,” Bhutoria compares it to gold in the 1970s.
Citing crypto index fund creator Bitwise Investments’ Matt Hougan, she said “the role of gold was unclear to investors when the U.S. abandoned the gold standard. This resulted in annual and even daily volatility that is similar to the volatility of bitcoin today. For example, in 1973, the price of gold changed by more than 3% in one out of 10 days.”
Bhutoria noted that billionaire trader Paul Tudor Jones—who recently recommended Bitcoin, saying it’s “in the first inning”—pointed out in May that in 1973, gold was “a tremendous buying opportunity as gold went on to more than quadruple past the prior highs.”
Criticism #2: Bitcoin has failed as a means of payment.
Response: Bitcoin makes deliberate trade-offs, such as limited and expensive capacity, to offer core properties such as decentralization and immutability. Given its high settlement assurances, Bitcoin optimizes its limited capacity for settling transactions that aren’t well served by traditional rails.
“Accepting Bitcoin’s limited throughput to achieve decentralization and implement appropriate checks and balances… [a]rguably, the most valuable use of Bitcoin’s limited capacity is not to record transaction data related to day to day payments at the point of sale, like the popular example of paying for a cup of coffee, but rather for situations that have the most to gain from Bitcoin’s high level of assurances and are underserved by traditional rails—e.g., that are inefficient and/or costly using traditional rails,” Bhutoria argued. “This includes, though is not limited to global settlement between international businesses and eventually even central banks and governments.”
She points to African digital foreign exchange and payment platform BitPesa. One such example is BitPesa, which helps clients ranging from small and medium sized businesses to multinationals trade in and out of African currencies via Bitcoin.
Noting the ridiculously high cost of sending remittances to developing countries, Bhutoria said “BitPesa was one of the first companies to leverage Bitcoin for commercial settlement to reduce the cost and friction of doing business in frontier markets.”
Criticism #3: Bitcoin is wasteful.
Response: A substantial portion of bitcoin mining is powered by renewable energy or energy that would otherwise be wasted. Additionally the energy the Bitcoin network does consume is a valid and important use of resources.
After going into many forms of renewable energy used to power bitcoin mining, from hydroelectric to flared or vented gas, Bhutoria said “it is undeniable that bitcoin mining does consume energy.”
But, she added, that does not mean it’s not a worthwhile use of energy. While admitting that “the answer will differ based on the person answering the question,” Bhutoria said, “[t]hose who appreciate the importance of the first and only provably scarce, decentralized, censorship and seizure resistant digital asset that offers irreversible settlement would argue that it is.”
Besides, Bitcoin’s value comes from its perfect scarcity, immutability, and security, and those are “tied directly to real-world resources used in mining,” said Bhitoria. “Bitcoin would not be able to fulfill its role as a secure, global value transfer and storage system without being costly to mine and maintain.”
Criticism #4: Bitcoin is used for illicit activity
Response: Bitcoin, like cash or the internet, is neutral and has properties that may be valuable to good actors and bad actors. However, as a share of total transactions, Bitcoin transactions connected to illicit activity are very low.
“Criticizing bitcoin for its use in criminal activity is akin to criticizing cash for its use in illicit activity or criticizing the internet for hosting the dark web and illegal marketplaces,” Bhutoria said. “Bitcoin (like cash or the internet) is neutral.”
She cited the United Nations Drugs and Crime Office and blockchain analysis firm Chainalysis’ findings that “for every dollar spent in bitcoin on the darknet, at least $800 was laundered via cash.”
Criticism #5: Bitcoin is not backed by anything.
Response: Bitcoin is not backed by cash flows, industrial utility, or decree. It is backed by code and the consensus that exists among its key stakeholders.
Calling Bitcoin a store of value, Bhutoria argues that is less like gold—which can be used in jewelry as well as having industrial applications—than it is fiat currency, which is backed by the “full faith and credit” of the government that issues it. Which is fine until it isn’t, such as in Venezuela and Lebanon at the moment.
Bitcoin’s four stakeholders—users, miners, node runners, and developers—”make the explicit choice to use and support the network, realizing Bitcoin’s unique attributes,” she said, pointing to perfect scarcity, transaction irreversibility, and seizure and censorship resistance.
With each new stakeholder, Bhutoria said, “Bitcoin’s network effect makes it more reliable and further hardens its properties, attracting more stakeholders to the asset, and so on.”
Criticism #6: Bitcoin will be replaced by a competitor.
Response: While Bitcoin’s open-source software may be forked, its community and network effects cannot. Bitcoin makes trade-offs for core properties that the market deems valuable.
Noting that Bitcoin’s market capitalization is many times greater than that of all of its competitors combined, Bhutoria argued that while “[m]any digital assets have emerged that claim to improve on Bitcoin’s deficiencies… none have been able to achieve Bitcoin’s network effects.”
Trying to improve on Bitcoin’s limitations, including limited transaction throughput and price volatility has always been “at the cost of the core properties that make Bitcoin valuable,” she said, referring again to perfect scarcity, decentralization, and immutability.
“This explains why Bitcoin continues to dominate in terms of market cap, investors and users, miners and validators, as well as retail and institutional infrastructure and products,” Bhutoria concluded.