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Don’t expect to buy your morning coffee with bitcoin soon. Devotees and bag holders of Cryptocurrency around the globe have a big dream in mind that one day all of humanity will be free from the yoke of money issued and control by governments through central banks.

But the central bank for central banks has hit back and said to tell them they’re dreaming.

The report comes from a century old Swedish Banking Institution – The venerable Bank for International Settlements. They have just issued a research report concluding that cryptocurrencies as we know of today are all afflicted with inherent contradictions that make their widespread use as money impossible.

Today we will be going over each problem as set below with Bitcoin’s quest for mainstream, world wide domination, in taking over money as we know it.

  1. Cryptocurrencies Are Not Stable
  2. Transactions Cost’s Are Halting Scalability
  3. It Would Be An Environmental Disaster

First of all, one has to understand: What is money and why do we use it?

  1. Money as we know it today is a unit of account that allows us to compare the prices of different goods and services;
  2. money is used as a medium of exchange that allows us to buy and sell these without having to organise swaps; and, finally,
  3. Money is a store of value that allows us to save to buy things in the future.

For all three of the functions above stability is the key factor. Meaning for currency to work its own value can’t fluctuate wildly in the short term.

So what creates value? Simply, trust from the people using it. The failure of trust will result the breakdown of currencies, which history has shown can happen in third world nations where dirty politics, fraud and greed have crumbled nations.

So what’s the problem? Let’s begin looking at some of the other main variations of problems holding cryptocurrency back.

Cryptocurrencies Are Not Stable Enough To Store Value

So there’s no doubt that current cryptocurrencies fail spectacularly on the test of trust and stability.

bitcoin cannot replace money cryptocurrency
PHOTO: The BIS says cryptocurrency prices are volatile, even those marketed as stable and linked to the US dollar. (Supplied: BIS)

Cryptocurrencies Trust Model

Most cryptocurrencies generate trust in their system or coin simply by limiting the amount of currency available, in the case of Bitcoin to the tune 21 million. That’s it. Not a bitcoin more can physically be printed or minted, so supply vs demand dictates the price of bitcoin.

The problem is that when there is high demand, the limited supply means the market can not respond to the demand and inflates like a balloon.

In theory the limitation of supply is actually a good feature for the store of value function like gold for example as your savings theoretically cannot be eaten away by increasing the supply.

However, it’s not so good for the stability required for day to day use as it makes a users life very hard when it comes to price comparisons or making transactions especially with these wild fluctuations in price.

Are you paying $4 for a coffee or $43? That’s the question.

It’s not uncommon for Bitcoin’s price to fluctuate $500 up or down in just Intraday trading, meaning it can backfire too easily for those trying to store value. 

This is the important role that central banks play for us in the economy behind the scenes that many pro-crypto advocates “dislike and is simply why our currency system today does not go to toast when trump announces a new set of tariffs on china. Money is stable, crypto is not.

Why? Just as there is no central bank to put downward pressure on the value of money, there’s also no institution there to absorb potential losses and prop up the value of cryptocurrencies in times of crisis.

Contradiction: Transactions Cost’s Are Halting Scalability

Cryptocurrencies are in a constant negative feedback loop which will mean a perpetual uphill battle in the quest for world’s global domination.

What I’m talking about is the very thing that gives money legitimacy, it’s widespread acceptance and use. In the quest for widespread use, the user’s participating in the new world economy of cryptocurrency transactions will cause the price of cryptocurrency transactions through the roof and to a literal standstill.

Money has value because it has users, we use it as money to buy cryptocurrency. Without users it would simply be a worthless token and that’s true whether it’s a piece of paper with a face on it or a digital token.

When demand for cryptocurrencies spikes, so do the cost of transactions. Simply put,  the mining facilities charge a premium to use their system as they need to verify the transaction blocks through the blockchains. Look at the past, Bitcoin’s transaction fee’s peaked at $57 last December.

Bitcoin transaction fees have grown with the popularity of the cryptocurrency.
PHOTO: Bitcoin transaction fees have grown with the popularity of the cryptocurrency. (Supplied: BIS)

But, why not then just grow and add to the network to handle these transactions and keep fee’s lower? This economically won’t be plausable, especially since miners are in it for profit not charity.

You see, If you increase the capacity of the network to drive down fees to close to 0, this will drive away these giant miners because there’s no incentive to continue to run the system if no fees are being paid and hence bring you back to square zero and give us high fee’s again.

Contradiction: Transactions Cost’s Are Halting Scalability

Ok the next problem is with the ledger itself. Although “un-hackable”, the problem is actually with the size, storage and transmission of the data that needs to be both stored and transmitted to verify the blockchains on the distributed ledger to handling millions of transactions a day that Visa and Mastercard do each day without a hitch.

If you don’t know blockchain, welcome to blockchain 101.

With each transaction, this will add a few hundred bytes to the public ledger that everyone has access to verify transactions and provide a “ledger” of who’s got what anonymously.

Stay with me here, over time this public ledger will grow substantially. For perspective, the bitcoin blockchain was growing at around 50GB per year and is currently at 170GB.

Solution? You would literally need banks of servers to store the data required to handle the volume of transactions that go through today’s major global payment networks like Visa.

Sure storage is not a big deal, just look at googles or amazon’s facilities.. not a problem.

However that’s not the main concern. Considering that this ledger must be shared each time a new transaction has to be added to the chain in order to keep up with the verifications of the incoming transactions you would quite literally need a supercomputer to handle this.

Finally, the kicker is with the increased associated communication volumes could bring the internet to a standstill, as millions of users exchanged files on the order of magnitude of a terabyte.

Contradiction: It Would Be An Environmental Disaster Keeping To Keep Up With The Demand.

Can Cryptocurrency, Blockchain or Bitcoin Ever Replace Money?

As you may have guessed, running this operation isn’t cheap with the electrical cost exceeding that of a small town at around $39,000 daily.  This unbelievable mining facility is so large that it employs 50 around the clock employees to monitor the rigs and ensure all is going well.  Good luck competing with your Intel I5 against this giant, which leads onto the next problem.

Not only is is super-expensive and taxing to the environment from all the power these facilities use up, but the scary part is this is not even scaled up to what you’d need to have verify these daily transactions that Visa & Mastercard do. Currently standing, these mining facilities can host computing power equivalent to that of millions of personal computers with the total electricity rivaling that of mid-sized economies such as Switzerland

Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster.

I mean just look at this facility by Bcause LLC – Virginia Beach, Virginia. The $100 million dollar mining facility in covering an amazing 84,000 square feet of space; placing it among the largest in the continent.

Can Cryptocurrency, Blockchain or Bitcoin Ever Replace Money?

Final Thoughts

There’s no doubt that as the value of cryptocurrencies will continue to rise, we can expect to see more of these monster mining operations unveiled in the near future, but for the ultimate goal of “taking over money as we know it” in my opinion and shared with the Bank for International Settlements report would make this impossible on a large scale.

Furthermore, I come to the crypto community, not to look at this report as me slamming the growth of the industry, which i’m not. I can see legitimate uses for blockchain security and technology, but in order for it to become so mainstream that it will displace Visa & Mastercard is well beyond a unlikely scenario.

We have issues, which at some stage i’m sure will be overcome. So if you’re looking to develop the next Bitcoin for mass use, you’re first going to need to figure out how to overcome these problems. I think it’s far more likely that something else will come out that’s derived from the current tech or the even more scenario that nothing will happen and that we will just continue using what we got.

If it ain’t broken why fix it.

Over to you, leave a comment below if you agree or disagree with any of the statements from the BIS or myself! Looking forward to reading them.

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2 2 Comments

  1. You really should have done a bit of a deeper dive before you wrote that…. your thesis is sooo 2014

    1. Thanks for your comment! However even if this was 6 years old the facts in my opinion right now will still stand. nothin has changed. What would you suggest?

      Thanks

      Sebastian

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