To be the world’s reserve currency, something must become the preferred de-facto store of wealth for most people and organisations. Love it or hate it, Bitcoin is on a blistering trajectory, in 13 years it has snowballed to hundreds of billions of dollars in value and it's being adopted twice as fast as the internet was.

Bitcoin is best understood as a social innovation, not a technological one. Much like the internet, it is a network, it has no proprietary knowledge, or controlling owner. Let’s examine the arguments against Bitcoin becoming a reserve-currency and see if any of them hold up.

Criticisms of Bitcoin

Pure speculation, no intrinsic value

High returns were needed to incentivize adoption in Bitcoin’s early years. However, unlike ponzi scams, the crazy high returns on investment and volatility are hard-coded to fade away as the rate of new coin creation is halved every four years.

People like to say that Bitcoin has no intrinsic value because it isn’t “real”. But conventional 'fiat' money isn’t real either, it's just backed by a national government. Bitcoin is backed by an army of independent miners around the world and its value comes from (a) an incredible level of trust and reliability (b) its limited supply and (c) its historical significance and network of supporters. Saying Bitcoin has no value is like saying the internet has no value, it's worth what people use it for.

Environmental cost

Bitcoin uses a lot of electricity in its mining due to its Proof of Work consensus system. The Proof of Work system delegates responsibility and rewards network participants based on their energy contribution via mining. The alternative method known as Proof of Stake, is potentially far worse for humanity. In Proof of Stake, responsibility and rewards are delegated based on participants share of ownership. This heavily skews power in favor of early investors and adopters. A Proof of Stake world could very easily result in a new kind of feudalism where unfair advantages are permanently enjoyed by founders and their offspring.

It seems the only way to have digital money truly decentralised and fair is to use energy-contribution as a proxy for buy-in. People who believe money should be neutral and beyond the manipulation of elites accept the tradeoff.

Scarcity and deflation discourages spending

As someone with a deep knowledge of financial history, economics and technology, I was initially skeptical of Bitcoin because of deflation. But Bitcoin's role is to become hard-money not all money. There are actually two types of money, hard-money created by using a scarce resource and soft-money created by issuing debt. Every hundred and fifty years or so, money goes through a cycle from hard-money to notes exchangeable for hard-money, to fractionally-exchangeable notes, to free-floating notes.

Initially, in order to build trust, hard-money is needed, something like Gold that is valuable, scarce and hard to create. Later, in order to finance growth, debt-money or soft-money is needed. Debt is essentially borrowing from the future. Debt is extremely useful but the creation of debt fuels an expansion of soft-money that always eventually exceeds what the future can realistically repay. This results in a series of debt crises, each one resolved by diluting the ratio of soft-money to the hard money underpinning the currency, in other words, devaluing the currency (aka inflation). Eventually debt gets so high and borrowing becomes so systemic that trust is lost and the currency becomes worthless. And then it starts again with a flight to hard-money.

Bitcoin is hard-money, its scarcity and deflation won’t discourage spending any more than gold reserves did.

Performance scaling

As suggested above, Bitcoin is hard-money. Digital gold. It doesn’t need to be an ultra efficient transacting tool as long as it stays scarce and tamper-proof. Even-so, the Lightning Network built on top of Bitcoin is working wonderfully well as a means of scaling performance.

Empowers crime

It is in the nature of criminals to operate at the edge of the law and to use tools and techniques that law enforcement haven’t caught up to yet. Law enforcement will catch up just like they did with e-commerce knockoffs, data-privacy and online software/media piracy. What this argument really suggests is that Bitcoin has real utility, because otherwise criminals wouldn’t use it!

It threatens governments and they will ban it

Bitcoin is the first asset ever that can’t be taken or destroyed by violence. Blockchains threaten governments because they put financial power back in people's hands. Governments have already tried to ban Bitcoin many times but to no effect. Bitcoin's creation was motivated by government manipulation of money, as stated in the first ever mined block. The world needs a separation of money and state in order for making money to be about creating value again and not about influence and power.

Too volatile - nobody is actually using it as a currency

The adoption of a new technology depends on the superiority of the new product and the level of frustration with the old solution. In developed countries, financial industries are well-developed and we do not experience frustration with our everyday finances. In developing countries this is not the case. Adoption of Bitcoin is explosive in countries with poor financial infrastructure and unstable currencies like India, Russia, Nigeria, and Brazil. Just like point of sale technology in Asia leapfrogged the West, digital currencies in developing countries are now leapfrogging too.

Technical difficulty of using it

There is a natural tradeoff between security and ease of use. As the most secure asset ever, it’s understandable that Bitcoin is hard for beginners. This difficulty will fade as software improves, this has happened many times before. For example, the internet and computers today are much easier to use than in the past. Also, it’s likely that intermediaries will handle your security for most people (e.g. Binance and Coinbase), just like traditional banks make finance easy and safe.

Can be cloned

As mentioned earlier, Bitcoin is a social innovation more than a technical one. The value comes from its incredible founding story, historical significance, network of miners, developers, investors and entrepreneurs that choose to support and use it. Just like a nation-state derives it’s power from its citizens, the Bitcoin network derives it’s value from it’s users. Without users, cloning Bitcoin creates as much of a threat as copying the Mona Lisa makes you Leonardo Da Vinci.

Conclusion

This isn't our first experience with internet-driven disruption. It’s easy to see the potential of a physical tool but much harder to see the potential of virtual tools. We've seen the digital disruption of news, mail, telephones, books, shopping, television, and even dating, it's practically inevitable that digital money is next.

Cover photo credit: Mitchell Stuart