While blockchain technology has wide applications, bitcoin is just one of many digital assets using it. Its role could easily be supplanted by a more elegant solution. Indeed, we are already seeing that happen as its dominance among other digital coins has declined from over 90% of total market share to under 45% today.

Bitcoin is also extremely inefficient. A system based on stacked, chronological proof-of-work for its security protocol requires an ever-increasing amount of processing power, data storage, cooling systems and electricity to run. At over 145 gigabytes, the bitcoin blockchain is bloated and impractical to use. This is beginning to show up in costs, which are increasing dramatically. As costs rise, its transactional use has declined. When the dust has settled, bitcoin will be seen as nothing more than proof-of-concept for a useful technology.

Bitcoin is also not secure enough for mass-adoption and the anonymity it provides is a two-edged sword. Lose your data wallet or the piece of paper you wrote your private key on and your entire stash is lost forever. There is no way to recover it.

Finally, bitcoin also fails as a store of value – its daily volatility makes penny stocks look dull. Its recent parabolic rise is looks like some of the great manias in history. Recent entrants to the space are motivated by the prospects of capital gains rather than its usefulness as originally intended.

And so, bitcoin is likely in the midst of a classic speculative mania fed by an increasingly uninformed mass of people who are buying it not to transact, but to profit and ultimately sell it to the next fool – the greater fool. We all know what happens when we run out of fools.

For these reasons, we are quite certain that bitcoin is a modern-day Ponzi scheme and should be avoided at all costs.

Putting it in perspective

Viewed in isolation, bitcoin looks like a bubble…

But viewed relative to other markets or currencies, bitcoin is more of an afterthought.

The absurd, circular passage above is, of course, not our view, but it serves to demonstrate our point. Like gold, discussions about bitcoin and other digital assets typically end up as never-ending arguments.

These discussions do not only happen between separate people with opposing views. They take place inside our own heads, as our individual views swing back and forth with public sentiment and prices. As Michael Batnick captured so well in a recent blog post:

"The thing about bubbles, and for the record, I’m not brave or dumb enough to declare this one, is that they wear you down. They make you feel irresponsible for not getting involved. Today I found myself at this juncture. What if Bitcoin legitimately is the future of currency? What if this is how 30% of online transactions take place in ten years? Why wouldn’t I buy on this pullback? These are actual thoughts I had earlier today. And then I snapped out of it and started writing this blog post. We’re at the place where mocking and doubt has melted away and only fear of missing out is left. I no longer feel strongly that Bitcoin will cease to exist in three years, but I’m also not sure if it’s just a twenty-first century bubble either."

The Future of Bitcoin

Despite our concerns, we think bitcoin may have a future under a few use-cases, most notably as a censor-resistant store of value (i.e. digital gold) and for large cross-border remittances. We do not think it works for smaller day-to-day payments because of its volatility and the inherent inefficiency of proof-of-work based security protocols, but that is a topic for another day. It could work for black market (or so called “dark web”) transactions, but the protocol may need to be changed to integrate more privacy.