Bear Cases for Bitcoin

A summary of arguments against Bitcoin.

High Energy Consumption

  • Bitcoin uses the more energy than a small country (e.g. Austria).
  • Bitcoin mining as an industry has higher renewables penetration than most other industries — largely thanks to a high percentage of hydro power.
  • Despite some media noise from crypto holders, I don’t think Bitcoin mining makes sense intermittent renewables like solar and wind. Full analysis here.
  • Ultimately, the question is whether all of this energy is worth it? This requires an assessment of whether Bitcoin is useful.

LearnCrypto covers the topic of energy well here and comes to the same above conclusions (but disagrees with me on renewables).

High transaction costs

  • Bitcoin Lightning allows for <0.1% transaction costs and near immediate transaction confirmation, so this criticism is no longer present.

Volatile Currency

  • Few things are priced in Bitcoin today.
  • My view is that, near term, it can make sense to price a) Bitcoin mining equipment, and b) crypto tax software in Bitcoin — because the value the user gets is somewhat proportional to the price of Bitcoin. If Bitcoin gained massive adoption, perhaps energy might be priced in Bitcoin (further specific discussion here).
  • It seems unlikely to me that the prices of groceries — denominated in Bitcoin — would stabilise. Bitcoin price seems more driven by technologists buying the asset (almost as a collectible, except Bitcoin is fungible), so it seems to move more with the value of technology than consumer staples.

Illicit Activities

  • The Chainalysis investigation of the bitcoin blockchain indicates that illicit activity is a small (~1%) use of Bitcoin.

You can download the Chainalysis Crypto Crime Report here.

Chainalysis Crypto Crime Report 2021

Taleb’s Bitcoin Black Paper

Nassim Taleb is a strong thinker. The fact he has turned against Bitcoin makes me reassess downwards my estimated value of Bitcoin. [Note: I have previously said the same about Stripe’s decision not to pursue crypto, although they recently put together a crypto group].

Taleb’s black paper is here (with added notes here). For a rebuttal, I recommend reading from Harold Burger. For another synopsis, I recommend LearnCrypto.

The core of Taleb’s argument is that — given Bitcoin produces no dividends for its owners, and is not a unit of account for buying goods/services — the only way Bitcoin could be valuable today is if it has a future expected value that grows at a rate that exceeds the sum of i) the discount rate, and ii) the chance it may fail. Since no asset will grow exponentially for an indefinite period of time, Taleb uses backwards induction to argue that today’s price of Bitcoin is zero. I recommend reading the paper and rebuttals to better understand.

In Conclusion:

  • Bitcoin has not stabilised in price and is not a unit of account (aside from niche examples). My expectation is that — at best — Bitcoin might become like gold (although today it is more volatile and more correlated with stock prices than gold). Notably, Bitcoin does not have jewellery and manufacturing uses like gold.
  • I see Bitcoin as behaving a bit like art, although Bitcoin is fungible. The price of Bitcoin relies on a demand from (largely technologists) who are buying and holding. If this demand goes away, Bitcoin price will fall.
  • Ultimately, I think Bitcoin will be replaced by some other digital asset. However, it may well see a period of continued growth, followed by slower price growth more similar to that we see with gold. I see Bitcoin as the meme of society’s further digitalisation and its price may well be sustained through a meaningful period.

Further Reading:

I recommend the analysis of the case against Bitcoin.

Disclosure: I’m long Bitcoin, although I think it’s always good to be reconsidering.




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