However, there is one topic – in fact, family of topics – for which I am unapologetically a skeptic through and through: Bitcoin and Blockchain.
As early as 2015, I wondered whether Bitcoin had a real purpose. I poked my stick at the radical Libertarians who hope Bitcoin will lead to the destruction of the global financial system.
I’ve opined on whether Bitcoin’s ‘hard fork’ fix for scalability issues would be fatal to the cryptocurrency, or a the least, whether the fix would be illegal.
I’ve compared Bitcoin to blood diamonds, pointing out that Bitcoin’s illegal uses are responsible for propping up its value.
I’ve also questioned IBM IBM -0.54%’s longshot bet on Blockchain, and more recently, I’ve listed several reasons to be skeptical about Blockchain.
Given this history of contrarian opinion, you might think I’m somehow prejudiced against Bitcoin and Blockchain.
You’d be wrong.
In fact, I’m a huge proponent of new, disruptive technologies and their applications – Blockchain and Bitcoin included.
As an industry analyst, however, my role is to provide insight into disruptive trends in the market. Given the peculiar characteristics of both Bitcoin and Blockchain, such insight must necessarily come from a skeptical position – not just by me, but from cooler heads generally.
In other words, we need more Bitcoin and Blockchain skeptics. Here are six reasons why.
The hype is out of control. In Bitcoin circles, fanatics tend to dominate discussions, drowning out more reasonable voices. Such voices, therefore, have largely packed up their bags and gone elsewhere.
The same thing is happening with Blockchain. There are so many ‘Blockchain is revolutionary’ or ‘Blockchain is changing the world’ articles that people get caught up in the fervor. “We worry about the hype,” say Marco Iansiti, and Karim R. Lakhani, professors at Harvard University. “It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.”
Solutions looking for problems. The typical technology innovation pattern is for many people or companies to have a difficult problem. One or more vendors note the problem and come up with novel solutions for it. Deals are made, and lo and behold, a market is born.
Not so with Blockchain. In this case, Blockchain aficionados looked at the technology, and started brainstorming possible use cases. Maybe there are business problems out there that Blockchain is best suited solve, and maybe not – but people are starting at the wrong end of the equation.
Complications from the Bitcoin bubble. Bitcoin is certainly in a speculative bubble, and bubbles always pop eventually. But there’s something intrinsically different about the Bitcoin bubble when compared to all bubbles previous, from the tulip mania to the dot-com craze.
The difference: Bitcoin/Blockchain is both the investment as well as the medium of exchange. When the tulip bubble popped, the gold and silver economy of the day survived without a scratch. And the dot-com bust didn’t affect how we spent our money or invested in stocks.
But when the Bitcoin bubble bursts, it’s quite possible that the entire transactional framework around Bitcoin will itself collapse. It’s certainly true that I may be overstating this risk – but risk there is nevertheless.
Decentralization of transactions will always be at odds with crime and compliance issues. Everybody realizes that it’s possible to steal Bitcoin and other cryptocurrencies, and it’s also widely known that Bitcoin is the payment of choice for ransomware perpetrators, Dark Web participants, and other ne’er-do-wells. Furthermore, cryptocurrency thefts and illegal transactions are all too easy and all too untraceable.
The bigger picture here, however, is that these challenges – as well as the challenges of regulating Bitcoin or any other Blockchain-based transactional system – are due to the technologies’ inherent decentralization.
In other words, we’d have to give up the primary reason to use Bitcoin or Blockchain in order to fix these problems.
The ‘Selfish Interests’ or ‘51%’ problem. Because of its essentially distributed nature, any Blockchain-based transactional system depends upon the cooperation of most of its participants. If 51% of them decide to screw over the remaining 49%, therefore, there’s nothing the minority can do about it.
Some people think this problem is even worse – perhaps allowing as few as one third of the participants to form a cabal of sorts that will eventually take control. “The [blockchain-based Bitcoin] protocol can be gamed by people with selfish interests,” explain Ittay Eyal, Post-doc at Cornell University and his professor at Cornell, Emin Gün Sirer. “And once the system veers away from the happy mode where everyone is honest, there is no force that opposes the growth of really large pools that command control of the currency.”
Electricity. It’s a well-known but oft-ignored fact of Bitcoin that mining Bitcoins takes electricity – a lot of electricity. Furthermore, any Blockchain technology that depends upon the same kind of proof of work mechanism behind Bitcoin mining will consume vast quantities of power as well.
While Bitcoin aficionados realize that electricity costs factor into the economics of mining, there is a bigger problem here. If even 10% of the nascent Blockchain business models out there clamoring for attention get off the ground, their electricity consumption will be enormous – and will continue to grow with no end in sight.
If Blockchain-based business models take hold, therefore, they will consume such vast quantities of power that the mere exhaust from their air conditioners will complete the melting of the ice caps.
A word of final advice: treat both Bitcoin and Blockchain as disruptive innovations with both enormous potential and commensurate risk. We all want to focus on the potential, but doing so without a sober look at the underlying risk is a fool’s errand.
