Persistent controversy over Bitcoin may make some advisors feel uncomfortable fielding questions from clients about it, even as various developments suggest that it may soon come into widespread use. Advisors may consider Bitcoin to be less than legitimate—understandably, given Warren Buffett’s dismissal of Bitcoin as “rat poison” and economist Robert Shiller’s predictions of its inevitable demise.
But these criticisms have faulty logic and lack an understanding of the technology being developed to remedy actual problems. And bleak prophecies are contradicted by prestigious academic research projecting that the use of and other cryptocurrencies will likely become mainstream within the next decade. There are strong indications that this may happen sooner, after technical, commercial and likely regulatory developments converge, broadening cryptocurrency use.
Bitcoin’s mainstreaming would create new opportunities for investors regarding well-funded start-ups and corporate ventures now developing and commercializing related products and services. And to the extent that Bitcoin gains popular traction, it could transform advisory services.
In the meantime, controversy persists. Many objections to Bitcoin are fueled by its wide value swings—something that advisors should caution clients about repeatedly. This advice should include chapter and verse on using and storing Bitcoin correctly to manage this exposure.
The Bank for International Settlements (BIS), the global institution used by different nations’ central banks, stoked existing controversy with a recent report on Bitcoin’s viability that was nothing less than a diatribe. Notably, as a way to avoid using banks, Bitcoin is inherently disruptive to the banking industry. Buffett shares BIS’s interests, as he’s a big investor in banks.
About half of the world’s population is now connected to the Internet, and about 250 million people join them annually. Cryptocurrencies—borderless, bank-free payment systems—are a natural result of this global interconnectedness. Traditionally, payments now achievable with Bitcoin were the sole province of banks, given their role as a central authority, with transactions going through them.
Shiller’s doomsaying reflects economists’ incurable obsession with banks. With circular reasoning, he maintains that Bitcoin will fail simply because it’s not currency as we know it. But this denies the whole point of Bitcoin. Instead of relying on the central authorities of governments to issue it and on bank to process transactions, Bitcoin enables decentralized, peer-to-peer transactions directly between any parties, avoiding bank fees.
Arguments in the BIS report are more substantive than Shiller’s and Buffett’s, but no more technically informed. The report, which was ballyhooed by an uncritical mass media, asserts that Bitcoin could never become a mainstream currency because of limited scalability. Specifically, the report argues, scalability is limited in part because “mining” bitcoin—the execution of computer algorithms necessary to enable transactions—uses crippling amounts of electricity. But actually, bitcoin mining consumes less electricity than the 3.5 million ATMs in the world.
BIS takes the position that bitcoin’s scalability poses an intractable problem—without even a nod to technologies emerging to accelerate transactions and lower costs. Prominent among them are the SegWit protocol upgrade, designed to make far more efficient use of the Bitcoin blockchain, and solutions from the Lightning Network that speed transactions.
BIS also argues that Bitcoin could eventually crash the Internet, but this sensationalistic claim is based on flawed estimates that greatly overstate Bitcoin’s bandwidth consumption.