Erik Weijers, a year ago

Six arguments against crypto - and how to refute them

Although governments and the media have recently been more positive about Bitcoin and crypto, a sizable share of the circulating opinions remain negative. This is mainly due to a lack of understanding of some fundamental concepts. We list a number of objections - with counterarguments. This might come in handy when you want to defend your crypto investment at family parties.

1. Crypto is a bubble/ too volatile

The prices of crypto move a lot (are volatile) and therefore it is a bad investment, or so goes the argument. But volatility is simply the price we pay for a high average return. Imagine that there was a stock that would rise 100% per year at a steady pace, so without volatility. Who would not want to own such a stock! And so everyone would pile in. Then the price explodes, people take profits, the price drops... hello volatility. Volatility in itself is not a risk. It does require a strong stomach though.

Is the crypto market a bubble? There are reasons to believe not. There is still roughly a hundred times more money in the global bond market than in crypto. So there is still gigantic room for growth. That said, the market may be overvalued at times.

2. Energy consumption is too high!

This is an arrow aimed at Bitcoin in particular. There is an often-quoted article from 2017 that predicted Bitcoin mining would use as much energy as global energy production by 2022. This prediction didn't come to pass, to say the least.

The high cost per transaction is also often mentioned in this energy debate. But dividing mining costs by the number of transactions on the Bitcoin blockchain is not the right way to look at it. We don't do it that way with gold transactions either.

It is better to view the cost of Bitcoin's hardware and energy consumption as network security costs, for example against attacks from malicious parties. Looked at this way, the security cost is currently less than 2% of the value of the network. And that percentage is decreasing every year.

3. Crypto is used for illegal activities

Crypto is used by drug dealers and other criminals! To be fair, Silk Road was not a good start in the eyes of the law enforcers. And it's true that ransomware is a problem. But according to Chainalysis, the percentage of crypto transactions used for criminal activities is 0.6%. Crypto does not lend itself well to crime in one important respect: thieves always have a lot of trouble laundering their loot because of the open nature of the blockchain.

Perhaps Chainalysis is estimating too low - but then again. Was the fact that the first cell phones were eagerly sought after by criminals also a reason to ban cell phones? Which brings us to the next argument.

4. Governments are going to ban it

There is, of course, a grain of truth in this concern. The question is: what exactly does banning mean? It has been highly exceptional that a government has banned the possession of Bitcoin or other cryptos. However, a country like China has banned mining and crypto transactions.

Western countries have not gone that far. Sending a Bitcoin transaction is sending a piece of code. Banning is constitutionally very difficult to defend for Western society. Because code is language, you could argue that crypto transactions fall under freedom of speech.

It is becoming increasingly clear that Western governments have gone down the path of regulation, which seems to remove a possible ban as an option. That was already very unlikely: as a government you don't want to scare away an industry that provides so much potential – both in terms of talented people as in tax revenue.

5. Crypto has no intrinsic value

Bitcoin was the first cryptocurrency and therefore the first to receive this accusation: it has no intrinsic value. 'What the hell is it? How can programming code have value?'

This is a tricky one because it forces us to look at what money is. Throughout history, forms of money have emerged that have properties such as stability, scarcity, divisibility and fungibility. If you take a closer look at Bitcoin, you'll see that it has those properties as well - only not in the physical domain but in the domain of information.

The novelty of the medium probably makes it hard for people to grasp. For example, you will hear the argument: unlike gold, Bitcoin cannot be used for industrial applications. Whereas that industrial use is not at all what gives gold value. It is the aforementioned monetary properties that determine whether something can be money. Industrial use is only bad for the stock-to-flow (scarcity) of a good. Take oil. One of the reasons oil is not suitable as money is that it has a lot of industrial uses. Therefore, it cannot grow a large stock that cannot be influenced by producers (the stock-to-flow of oil is low).

6. Crypto poses a systemic risk

This objection comes mainly from financial authorities. The violent fluctuations of the crypto market could perhaps spill over to traditional markets. Stablecoin USDT (Tether) has long borne the brunt. A bank run on a stablecoin like Tether could lead to a price fall for that coin, which would shake the crypto market. The same is true for other stablecoins. It is certainly true that there is a risk here.

This argument is countered by considering that accepting market movements and risk might be a feature, not a bug. The traditional system tries to hedge this risk by making governments (read: taxpayers) pay for irresponsible risks taken by investment banks, for example. Crypto says: nope, we do it differently. We all run the risk of (price) swings or the occasional hack in DeFi. That makes the systems stronger. And when the prices are mooning again, us users and retail investors can all enjoy profits - and not just Wall Street.

By the way: the crypto market has experienced crashes of 50%+ several times. DeFi just keeps on chugging along and no one is begging to be saved by the Central Bank. People take their losses and laugh about it - or continue to stubbornly dollar-cost-averaging and hodling.

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What is mining?

Mar 15, 2023

Cryptocurrency mining is the process of verifying transactions on a blockchain network and adding them to the public ledger. The process involves solving complex mathematical algorithms using high-powered computers to generate new blocks of transactions. The reward for successfully mining a block is a predetermined amount of cryptocurrency.

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