If you’ve been following the news, you’d know that there’s been a cryptocurrency crash, caused partly by the incident of Elon Musk declaring that Tesla will no longer accept Bitcoin as payments and that led to a devaluation, people started selling and “Buy the dip” was trending and. Then again I heard, it bounced back after another tweet by Elon Musk, I don’t know what’s happening, this Bitcoin thing is simply too volatile. And to tell you why I am not a big fan of Bitcoin, let me set some context first, let me take you back to the beginning. I mean the beginning of human evolution itself so we can understand the meaning of value. Let’s look into the evolution of value itself and how the storage of wealth has evolved and how money became a thing.
But before that, let me just rewind the tape to last year, March 2020, when the first COVID-19 lockdown was announced and I had to stock up and lock up. Let us consider my food stocks to be a form of wealth storage to illustrate my points. Everyone agrees food has value. Especially, at a time when the world was in an apocalyptic scenario, we forget everything else, we begin to realise the value of basic things like food and clean drinking water.
And this food storage was also on different levels. If I cook a meal, at around 12 o’clock, two portions, then I’d have enough for that day. I could have lunch and dinner. But wait, I have a fridge. So I can cook 4 or 6 portions and eat that the next day and the day after, so I was good for 2 or 3 days. But I also had stocks of instant noodles and rice and wheat and other dry foods and I had enough for a few weeks. But when that got over, I also had money in my bank which I could use to buy more food supplies, so I was good for a few months actually. Point is, I had enough wealth in various forms to keep me alive for a few months.
Now let us compare my situation with that of early hunter-gatherer societies, which did not have the means of storage and the level of food security that you and I have today, they had to go hunting and gathering almost every day. But then as humans evolved and became smarter, we learned how to extend the shelf-life, so to speak of foods. We smoked and cured meat to make it last longer. We discovered techniques of pickling and preserving plant-based foods thousands of years before refrigeration was a thing. And later on, we started farming. Grains have a long shelf life and our food security situation really improved. Large granaries could ensure our survival for a few months and this could be considered as probably the first true means of storing wealth. Or was it? Because Let’s look beyond food here. Food wasn’t the only thing that had value. There were other things. What other things? Things! Literally things – tools and items. See back then, there was no concept of money, so things that had value were just things. A stock of grains had value for obvious reasons. Things made of stone like tools and utensils had value because they were useful items that you needed in everyday life. And the same thing for metal tools and utensils, but unlike stone, even shapeless pieces of metal had value because they could be melted and worked into useful items.
And things of value did not always have to be strictly utilitarian. They could even be decorative items and ornaments like I don’t know, feathers and seashells and dye of a certain colour. They were valuable because people ascribed value to them, but at the end of the day, these things were all actual physical things that you could hold in your hand. So yeah, you can see how things had value in a primitive society where the concept of money did not exist.
Now imagine in this society there is a sheep farmer who sells 10 sheep to a rice farmer. So the payment is a barter. 3 sacks of rice per sheep. Done deal! But, there is a problem. 30 sacks of rice are too much for the recipient. He doesn’t have a big family, it will take him years to go through all that rice and there is the risk that it will rot by then, there are storage problems, you need space for all that rice. So you see the problems and challenges with transactions in a pre-money era? So the rice farmer offers a solution. How about the sheep farmer accepting iron as payment, blocks of iron. I mean iron is an item of value, it has used, and it won’t rot like rice and occupies a lot less space.
Sounds like a better and more convenient way to store value. Not necessarily iron, could have been any other metal like bronze or copper, whatever, let’s just take iron as an example here. See, this is an example of a commodity-based transaction. Iron is a commodity. Commodities have value. But then the rice farmer says, “Hey, forget iron. I have a better idea. There is this new metal in the market and it’s amazing. It doesn’t rust, it doesn’t corrode, nothing happens to it, it will last forever. It is really easy to work with, it melts at a way lower temperature than iron, it can be hammered and formed into any convenient shape you want.”
“Wow!” says the sheep farmer, “Can I use it to make tools and implements?” “No, you can’t.” Replies the rice farmer, “It’s too weak for that. But you can hang on to it, store it and exchange it for iron whenever you need it. Oh, also, this metal is super-dense and it occupies a lot less space than iron for the same weight. Also, it is very rare and therefore more valuable than iron and I have to pay you a lot less in terms of weight, but that’s a good thing! You hold way lot more value for a lot less space”. “Really? What is this magic metal called?” “Gold.”
And this is the likely story of how gold acquired value and it is still to this day, thousands of years later a very popular and effective means of wealth storage and will continue to be so. Those who say gold has value only because we give it value, are wrong. Gold has inherent value. Gold is not directly utilitarian, you can argue that iron is way more useful than gold, but like in the story I just told about the two farmers, gold has properties that make it very well-suited as a store of wealth.
You can’t eat gold, you can’t make it into tools. But gold will stay. It won’t rot, it won’t rust, it won’t corrode, it occupies very little space, you can hang on to it till you feel like exchanging it for something actually useful. Gold is a good substitute for actual things of value, for actual items. Very convenient. Just think of someone in the old days trying to move their wealth from one town to another. They no longer have to move around animals or sacks of grain or heavy blocks of iron. They can just carry small bits of this magic yellow metal in a bag or even in their pocket. Easy to transport, and safer, because it’s easy to hide.
Gold is a very dense store of value, but this density was too much of a good thing. Because gold was so valuable, that to buy items of little value, the pieces of gold needed would be too impractically small. So throughout history, tokens known as coins, made of lesser metals have also been used to trade and soon governments started regulating the production and distribution of these coins. The concept of currency was born.
And then in the modern era, we took it a step further, we made it even more convenient. Now you don’t even have to carry metal tokens, you could carry something a lot more lightweight and convenient – paper tokens. A special hard-to-replicate piece of paper issued by a well-established government. That piece of paper is certified equivalent to a certain amount of gold. You are still transacting using gold, but instead of actual gold, you are using these paper tokens as a matter of convenience. This was known as representative currency. Now the system does have its drawbacks, money could be counterfeited and all, but it works well for the most part.
But then, it improved even more. Electronic banking and so-called plastic money, you could carry around a little card and transact insane sums of money. And then it improved even more with phone and internet banking where you need to carry–nothing. Other than what you already have on your person–a phone.
So this is the evolution of value transactions, of money. And it makes sense so far right, it all seems logical, and you notice that every step in the evolution has been an improvement, things have gotten better. Every step taken seems to be a logical step taken to make the system better.
Until I heard about his weird thing called “Fiat Currency.” Which means money is no longer backed by gold or anything of value. It means money has value just because the government says it has value. Used to be that when someone said “Oh government wants money? Why can’t they just print more money?” they would get laughed at. “Haha, you can’t just make money out of thin air.” But with fiat currency, that’s exactly what’s happening. Now I understand, there was some logic to delinking money with gold, like reduced volatility and price fluctuation, but… I don’t know man, I don’t buy it. Something just doesn’t feel right. You can not see the scope for mischief and corruption over here. The biggest problem with fiat currency is… that it’s not representational currency. And fiat became a thing only in the last less than a hundred years. Meaning humankind broke a chain of logical steps that have been followed for thousands of years.
But then, Bitcoin took this illogical step to the next level. Because again, like fiat it is based on nothing. Like a Seinfeld episode. Nothing. Literally, nothing. And this nothing is, even more, nothing than fiat currency, because it’s not even backed by a government. Bitcoin has value, just because people believe it has value. Literally millions of people believe that Bitcoin is the future of money. Is it really!? By the way, when I say Bitcoin, I also by extension mean all other cryptocurrencies, but for the sake of simplicity, let’s just focus on Bitcoin here. Also, it’s much easier to say Bitcoin, compared to cryptocurrency. That’s 5 syllables versus two.
Now some people might argue, “Oh, you think Bitcoin is nonsense because it is based on nothing. What do you think Fiat currency is?” As if somehow this is a valid justification for Bitcoin’s existence. Comparing Fiat to Bitcoin doesn’t mean Bitcoin makes sense. It just means both of them don’t make sense.
Now, as you might have already realised, I am a Bitcoin skeptic. And one of the strongest pro-Bitcoin arguments I hear is… that it’s easy to use, an argument that I clearly don’t buy. So the rationale here is that, see in normal money transactions, between two people let’s say. It’s never really between two people. There is always a third party involved. And that third party is your bank, the government, the central banks, basically the whole financial system that exists to certify this transaction validly. It’s like when two people get married, there’s a priest to validate the marriage.
But Bitcoin is like a one-night stand. Bitcoin claims to allow two people to have a direct transaction without the certifying authority involved. It’s like those farmers exchanging sheep and rice, there was no third party there. Like if I, living in India, want to pay someone in Australia, I do not have to go through a bank or money exchange or Paypal. I can just digitally hand over the Bitcoins to the Australian without a government or bank or some other authority being involved. Or so they claim, because doesn’t the transactions still rely on the Bitcoin blockchain network. Actually, there are places on earth where this makes sense, not all countries have a well-established banking and financial system. In places like this, Bitcoin makes sense because all you need is an internet connection and you’re good to go. There is this illusion of independence and decentralization, but it still depends on a network. And is this network really robust? Depends on how much faith you have in the technology.
And if ease of use is your only selling point, here’s how absurd it looks. I buy something from someone, but I don’t want to go through the trouble of going to an ATM and withdrawing cash and… I am like, here, just accept this rubber band I have in my pocket. I know, it’s not money, but it’s here. You can take it right now and consider it payment. Ease of use.
See, you have to understand, there are two aspects to this transaction:
- The method of me paying the person, which is reaching into my pocket for the rubber band and handing it to the person.
- The actual thing being used as payment – which is the rubber band. Which is worthless.
You have to bifurcate Bitcoin into two entities. The blockchain is the means or the method of transfer and Bitcoin is the thing being transferred. Blockchain is a useful technology and there are several use cases for it. If you are interested you can check the video I’ve linked in the description called: Blockchains, how they can be used by Simply Explained.
But you know, just because it is a useful technology, doesn’t make it a currency. This is very wonderfully explained in this article by Mr. Jeffrey A Tucker: What Gave Bitcoin Its Value? He writes: “The value is not embedded in the currency unit but rather in the brilliant and innovative payment system on which bitcoin lives. If it were possible for the blockchain to be somehow separated from bitcoin (and, really, this is not possible), the value of the currency would instantly fall to zero.”
Wow. This alone convinced me what an impermanent thing Bitcoin is. If ease of use is such a big selling point, do you realise that if tomorrow a technology superior to Cryptocurrency appears, that makes it way easier to transfer digital currency, Bitcoin would drop like a rock.
Those who say that Bitcoin has value because of the technology behind, have to understand. Yes, blockchain technology has merits, but we can build a separate blockchain network to store information about saying car odometers readings like in that use case video I have linked. But the particular blockchain network that sustains Bitcoin – what purpose is it serving, other than helping Bitcoin exist? Other than this one function, this network is useless. So no, I don’t think the technology holds any value for me in this case. Oh also one more thing about ease of use, Bitcoin can supposedly allow only 7 transactions per second, as opposed to the Visa card network which can support 24,000 transactions per second.
There is also that thing I mentioned at the beginning, the problem with volatility. It’s too volatile, there’s just too much fluctuation. I mean, imagine today, I sell something for $100, but I accept payment in Bitcoin currency, $100 worth of Bitcoin. I think I have $100 worth of, but tomorrow Elon Musk tweets some shit and now that is worth only $70. It’s too volatile.
Also, did you know that Satoshi Nakamoto, the person who allegedly invented Bitcoin? Does not exist. It’s just a fake name. Not suspicious at all!
There are also claims that Bitcoin is really bad for the environment, a Bitcoin transaction allegedly uses like 4000 times the energy of a typical fiat transaction. This is debatable because the traditional money network also uses a lot of energy and they say Bitcoin mining uses renewable energy sources, but I don’t know.
Speaking of Bitcoin mining, there’s so much wrong with that as well. You might have heard that mining or generating new Bitcoins involves “solving math problems.” When I first heard about this, I thought it was an actual math problem. That these miners actually solve problems given to them by labs or universities that need the services of mathematicians. That’s what I assumed. It had to be useful work, right? The unfortunate truth is, it’s a lot more useless than that.
Apparently, the so-called math problem is that they have to guess a random number using brute force, as proof of work. And in case you don’t realise what a useless endeavour this is because you don’t know what brute force or proof of work is, allow me to explain.
Proof of work is simply a barrier to entry, you have to go through SOME trouble to gain access to gain entry into a system. This will ensure that only serious and genuinely interested parties who are willing to go through all that trouble will gain entry.
Now, brute force… Say you steal a briefcase that has a combination lock. No lock and key, just a 3 digit combination lock. You can open it, you just have to try numbers 0 to 999. Just trial and error, and you are ready to do this 1000 times hoping to find that number. And it’s doable, you should be able to open the briefcase in 1 hour? But if it’s 4 digits, things get a little bit difficult.
Now, in the context of computers and electronics… you might create a PIN code, let’s say a 4 digit ATM pin for something. Hackers can find the pin, just by randomly trying all 4 digit numbers from 0 to 9999 – 10,000 guesses. And they use computers to do this. This is why a stronger password is alphanumeric because now the computer also has to guess alphabets as. With pure numbers, there can only be 10 possibilities for a character, but if you add English alphabets, there are now 10+26 = 36 possibilities and a 4 digit code will now take not 10,000 but 36^4, that is more than 1.6 million guesses. And if you add special characters and make it case-sensitive, it becomes even more difficult for the machine to guess this.
And that is what Bitcoin mining does – just guess a random number. Granted it’s a little more complicated than that, that number is linked to verification and validation of transactions, but what bothers me is, the process of spending all that computing resources and power and time and energy and electricity just to find a random number, this step has been engineered into the system, all this energy-intensive unproductive work. They say Bitcoin mining in the world today is using as much energy as the entire country of New Zealand! Where is Greta Thunberg when you need her?
Surely, they can come up with a better idea. They might be because, cryptos are playing around with the concept of “proof of stake” – where, long story short, you actually pay money to generate new Bitcoins and there are some issues with this model as well, but for now and for the immediate future, we are stuck with this absurd mining thing.
Also, people inaccurately compare Bitcoin to shares, like its shares and ‘Stonks’. Now to be fair, Bitcoin was not meant to be bought like shares. It is just a currency, a thing that was meant to facilitate transactions, it was not meant to be an investment or wealth multiplier. And yet people are buying Bitcoin in the hopes that the next person down the line will buy it for a higher price than they paid for it and where does this end? Bitcoins are not stocks or shares. Shares have used. A share is literally, a share. A stake in a company – that is an entity that, if successful, is actively generating value, generating income thru the sale of goods and services. Shares are linked to a money-making enterprise. But what is Bitcoin doing? It’s not a farm that gives fruit. It’s not a factory that produces cars that you can sell. Bitcoin just lies around and it acquires value just because of belief. And those who hope to get rich through Bitcoin are just setting themselves up for major disappointment.
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