Bitcoin’s death knell has rung out many times by now, and its naysayers are still in force. A reader perusing the many articles attacking or mocking Bitcoin point out the tremendous problems Bitcoin has a currency, as a store of value, and as a useful financial tool. It would be reckless to deny that Bitcoin has problems – reputation, ease-of-use, and wallet security, to name a few – but it is just as easy to understand these things not as fatal flaws, but a necessary stage of Bitcoin’s development.

Tim Worstall’s recent piece in Forbes, To Be Than Money Bitcoin Must Be Better Than Money; It Ain’t, attacks the upstart currency and protocol a number of ways. He says:

• It’s not a store of value.
• It’s not a means of facilitating exchange.
• It doesn’t allow central banks to run expansionary or deflationary policy when needed.
• Its method of financing itself (block rewards and miners fees) is unsustainable.

Bitcoin is not a store of value, yet

On the point that Bitcoin is not a store of value, Worstall notes that Bitcoin has gone from cents to a thousand dollars to a few hundred in a few years. He’s right, of course. Bitcoin is not currently a store of value. It is speculative and will need to remain speculative until its price is high enough that the total value of all the bitcoins is high enough to allow it to be a reliable, trusted store of value. In the long-term, because of gold-like characteristics Bitcoin has, it will not only be a solid store of value. Even more, because central banks all over the world have a 2 percent inflation target, whatever currency you have in your pocket, your government is trying to devalue every year you hold it. Also remember that that 2 percent is compound – so every year you lose more of the value of that money than you lost the year before.

Bitcoin on the other hand is designed to act like gold. It has a hard cap of 21,000,000 coins, a number that cannot be changed. Once all those coins are produced (around 2040), then there will be no more coins. Over time, the price of Bitcoin will tend to rise, which means that all those who hold Bitcoin will tend to see the value of their savings increase, instead of being penalized as they currently are.

Now, there are some who will say that pumping a deflationary currency is reckless – all the central banks are terrified of it. They have reason be. Most of the worst excess of governments today are committed using borrowed money – and they are in debt to the tune of many trillions of dollars. One way to make it easier to pay back all that money is by cutting the value of the money they owe at the same time that they make get more tax revenues from their citizens due to inflation. There are many advantages of deflation for the regular person that rarely get talked about, but it’s something that is well worth researching and considering.

Bitcoin is not a great way to facilitate exchange, yet

Worstall’s main point about this is to complain about the variability in the amount of time it takes for miners to find a block and confirm a transaction. Until transactions have been confirmed, which means that it’s been written into the blockchain (essentially the open ledger for all Bitcoin transactions), then there is the remote possibility that someone else could hijack the transaction and steal that money.

Bitcoin is designed to produce a block, or a page in the open ledger, every ten minutes or so. That’s only an average, though, and it can take much longer, or shorter, to produce a block. This could make it very inconvenient for, say, a coffee shop to accept Bitcoin since they would have to make the customer wait until they see at least one, and some say as many as six, confirmations before they hand over that cup of coffee. In practice, though, there is very little risk to accepting even 0 confirmation transactions for small purchases like a cup of coffee. And larger purchases, like a house or car, people would have no problem waiting until they had gotten the recommended number of confirmations, probably having a cup of coffee while they wait.

Further, this is a problem that is likely to go away in the not-too-distant future. Businesses using a payment processor like Bitpay are already free of this risk. And person-to-person transactions are likely to become much easier in the future with innovations on top of the blockchain or by using alternative coins for faster processing.

Bitcoin doesn’t allow central banks to run expansionary or deflationary policy when needed

Um. Ok. I actually see this as a plus.

It also presumes that Bitcoin’s ultimate use will be as the world currency, supplanting national currencies. This is unlikely. Countries will keep their national currencies and Bitcoin will become the nearly frictionless grease of the world economy while simultaneously giving back to people the ability to control their own finances without the need for banks or money transmitters.

But because Bitcoin is itself deflationary, and because banks and other financial institutions will become much less powerful in a Bitcoin world, governments will be held to a much higher standard of financial accountability. No more funding wars or banker bail-outs. Governments will have to deliberate carefully about what they want to do with their limited funds for the betterment of the citizenry. Wouldn’t that be nice?

Miners’ Fees aren’t enough to support the system, yet

I had some difficulty figuring out exactly the point Worstall was making here, since he was quoting a FT Alphaville article that was conflating whether Bitcoin could achieve a higher market cap through a hard-cap on the number of coins and the scalability of the number of transactions the system could handle.

As for higher market cap, it’s our belief that Bitcoin’s first killer app is not some 2.0 innovation, but is precisely because it is speculative. It has already made millionaires (even at these lower prices), and it is going to make more. The trigger for the higher price may be some innovation, but we don’t think so. We think the trigger is going to be systemic failure in the banking system that will make 2008 pale in comparison. If it’s not a 2.0 innovation or a market failure, then Bitcoin will simply grow by word of mouth and with each transaction until it becomes indispensable. Any way you cut it, though, we see Bitcoin’s growth as unstoppable.

And it’s also true that miner’s fees, miner consolidation, miner energy costs and a variety of other legitimate questions can be raised about Bitcoin’s backend. Of course, if Bitcoin does become a world reserve currency, the level of transaction will hit a point where they can remain low and sill incentivize miners. Even more, as time goes on, since finding a block and getting the reward is less solving a difficult math problem, as it’s often characterized, and more scratching off a lottery ticket, every device we own that has unused processing power may contribute take part in decentralized mining and earn everyone a few extra satoshis a day. The main point, though, is that as number of coins to be mined decreases, and as the total market cap of bitcoin increases, even minimal payments for individual transactions will yield significant rewards for miners.

Conclusion

At the end of the day, we have to admit that there are a lot of flaws to Bitcoin, but think that none of those flaws outweigh the significant advantages Bitcoin has to solving the problems we have seen develop in legacy banking system and its bought-and-paid for government. Bitcoin was not born out of a vacuum; it was created because of those excesses and in a world where those problems have been unaddressed (note that not a single significant banker has gone to jail for the abuses that caused world-wide suffering in 2009), Bitcoin is looking a whole lot more attractive as an alternative currency, and an alternative way to live.