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Not Everything that Glitters is Gold: A Dissenting Opinion on Bitcoin

Whenever a new miracle technology is breathlessly praised, I pay attention and keep my cynicism handy. There have been a number of pro-Bitcoin articles on TechZim lately,  please allow me to share my dissenting opinion. Some of the financial advice (implicit or explicit) seemed downright dangerous. A couple of disclaimers I need to get out of the way first:

  • I am not a registered financial advisor. I am not your financial advisor.
  • the ideas I’m expressing are hardly original, but I hope to present them in a convincing way.
  • I think blockchain technology has a very bright future, I am dubious about Bitcoin as an early/experimental application of that technology.

The most alarming idea I encountered was the recommendation that people convert their savings to bitcoin. I consider this to be very poor advice because the value of Bitcoin is highly volatile, making it a poor store of value. While you will hear bitcoin boosters proclaim that bitcoin is very valuable now, there is no way of knowing what it’s value will be at some point in the future when you need to liquidate your wallet.

Since there is no official central bank with a monetary policy behind Bitcoin, the value is relies on the “free hand of the market”. The market in this case includes everyone from dealers of all kinds of goods on the dark web, makers of ransomware, as well as Russians and Chinese nationals who wish to expatriate their wealth without going through official channels. There are countless more legitimate users of Bitcoin, including Dell and individuals who prize privacy, but my suspicion is that presently, the main drivers for demand of Bitcoin (and therefore the value) are high-value gray transactions.

Additionally, illicit or not, the majority of users utilise Bitcoin for transacting – not as a store of value. As long as the buyer can purchase Bitcoin using dollars and the seller can sell those bitcoin for dollars – the actual value of Bitcoin is immaterial. When you swipe your card at a point of sale, do you care if the money is being transferred as USD, VISA-coins, Ethereum or dogecoins? If it were, you probably wouldn’t care to know what the exchange rate was at that particular moment.

If you intend to speculate on Bitcoin, that is fine – but it is no different to speculating on the stock market: for someone to ‘win’, someone else has to lose. Most countries have rules  to prevent pump-and-dump fraud schemes when trading shares but Bitcoin is the wild west: a certain class of people (or bots) have emerged with the sole purpose of boosting Bitcoin prices. No matter how small the blog, the moment an article on Bitcoin is posted, these people (or bots) show up in the comments – like clockwork. They probably will make an appearance in the comments for this article…

It is now far too late to make it big on Bitcoin. The people who made millions where those who got into it in the early days. If you start mining for Bitcoin today on your computer or even specialised hardware, you will be spending more on electricity than you will earn in Bitcoin. Make no mistake, Bitcoin is just like any other gold rush – the best way to make money is to sell shovels. Most of the people you hear singing Bitcoin praises haven’t struck gold themselves – but they do have a shovel they would like to sell you.

In addition to volatility, converting your savings to Bitcoin is a losing proposition due to security considerations, in abstract and concrete terms. In the abstract: brick-and-mortar banks have to adhere to regulations around depositor protection, audits, insurance and banking procedures. In concrete terms: vaults and armed cash transit. Bitcoin is completely unregulated – Bitcoin exchanges (bank equivalent) have disappeared without a trace, others have been “robbed” (in quotes because it might have been fraud by the owners – please read about the Mt.Gox if you have the time). There are viruses in the wild designed to steal Bitcoins from wallets on users’ computers, I do not believe the average user is able to adequately secure their computer (see WannaCry) keeping cash under the bad is safer.

The blockchain is an interesting concept with great potential – maybe not as great as the more zealous believers thing, but great nonetheless. I remain convinced that Bitcoin is an early but flawed prototype. The technology is mostly sound and appealing to technologists, but it will will ultimately fail because we are human and can’t have nice things – especially when there is no authority, no enforcement and no rules to enforce.


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14 thoughts on “Not Everything that Glitters is Gold: A Dissenting Opinion on Bitcoin

  1. Like the “selling shovels” analogy, very true. Thanks for the article , people need to know the good as well as the bad before making such decisions.

  2. These crypto-currencies are dangerous and operate along the same principles of a Ponzi scheme. The level of volatility is scary and the fact that the market is virtually unregulated makes it even scarier.

    1. How much more of a Ponzi scheme is it as compared even to the US Dollar that is backed by nothing since the 1930s? Like any financial instrument, Bitcoin will have its dangers and risks but Ponzi scheme , at least i think, is a stretch too far. Regulation itself has never been an issue, especially to those who make money off what isn’t regulated. Sub prime mortgages remained unregulated till the global crash of 2007/8, but the bankers still made billions from is. depends on your point of view i guess

  3. So your basic premise is Bitcoin will fail because there is no central authority? Those of use who have been in the bitcoin game since the “early days” have heard it before and it has been rebutted countless times.

    Does gold need a central authority to maintain its value? It doesn’t because it has intrinsic properties like its scarcity, fungibility, longevity etc. Bitcoin also has similar properties from which it derives its value. Value doesn’t arise by government decree, Zimbabweans especially should know this otherwise Gononomics would have been a success.

    1. Charles Muzonzini…I think if you read carefully , it is not only the lack of central authority that one should be concerned with.Various other issues which are really valid have been raised

  4. Interesting opinion piece on bitcoin but I think as a user I would also like to share a few thoughts as well.
    Firstly the biggest “users” of bitcoin are not transacting users as you stated [I wish you provided references for your stats] but are traders and long term holders.Fewer people actually use bitcoin to transact. Traders love bitcoin for the very nature of its current characteristics, large traded volumes (i.e. it’s a liquid asset) and volatility. The Chinese you mention externalizing money through bitcoin was an assumption made by PBOC with withdrawals being suspended from leading Chinese exchanges but that did not stop them from trading bitcoin because as I mentioned it is largely a traders tool and they continue trading.
    No one was promised millions by investing in bitcoin and that assumption of millions is to say the least very naïve. I am a trader, I purchase and sell bitcoin – and I am making a decent living from doing this. I am not aiming to be a millionaire but I am able to pay my bills here in Zimbabwe. It is not a walk in the park, to be honest I lost a lot of money when I started out, but with anything in life practice makes one better.
    I ask you to please give reference to your claim that Russians externalize funds using bitcoin, as this is the first that I have heard about such? Russia’s central bank has actually recognized bitcoin as a digital currency recently.
    If you note over the past 2 months among the leading volume drivers are Japan and this is due to their central bank adopting accepting bitcoin as a payment currency to the tune of them setting targets for acceptance by the public.
    You mention hacks and wallets being emptied? With any valuable asset, one has to take steps to secure themselves. In the same manner, some people install safes in their houses one has to learn to secure their bitcoin. Bitfinex was hacked and $60 million in bitcoin was stolen, but I would expect you to have mentioned that as of April 2017 every single customer was reimbursed 100% for their stolen coins. You mention MtGox, yes, they went under, but then again can I ask you how many banks have gone under in Zimbabwe? And even in America big banks holding USD such as Lehman Brother went under. One has to take the necessary precautions before they use any exchange the same way you would do due diligence before you put your money in a bank.
    Bitcoin thrives in periods of uncertainty, when legacy markets are dipping bitcoin rises, when the dollar takes a hit bitcoin rises, when gold declines bitcoin rises, so to say it is not a store of value that would be incorrect. It is a hedge against uncertainty. But with any investment one has to do their own research and homework. Some people hedge in the stock markets other are choosing bitcoin, but to label it a ponzi scheme is an unbalanced and shallow accusation. Yes, the likes of MMM have capitalized bitcoin for their ponzi schemes but bitcoin in the same manner as USD was used by Bernie Madoff was their currency of choice.
    Lastly, I am not a bot but a Zimbabwean who has learnt a little about bitcoin & crypto and feel it is largely viewed negatively because of lack of information.

  5. Although there are some truths to what he is saying, the author of this article clearly doesn’t understand how those who DO make money, do it by leveraging the power of Markets and investing. In this respect Bitcoin is just another Market. Also, saying Bitcoin technology is flawed, tells me he doesn’t understand how SHA256 or the Blockchain works. It may not be perfect, but it is a hell of a lot better than the currency which we are used to.

    If I wanted to steal money, it would be much more difficult for me to steal Bitcoin money than hard currency or electronic currency using eg. credit card skimming.

    So considering this, which system is really flawed. Does this man have any idea what the Fractional reserve system is and how it and currency trading in the traditional money system worked together to make Zimbabwe’s currency worthless? The currency he puts his faith in builds and destroys the value of countries every year in a similar way as it did to the Zimbabwean dollar. So what makes this one better except it less (not more) flawed security by virtue of it’s algorythm and blockchain ledger.

    So before I take his advise on currency matters, I would first like to see how much money he has in his wallet that is not Zimbabwean Dollars. Then I might put faith in him to tell me what to do with mine.

    The definition of a Ponzi Scheme is very different from what he clearly thinks it is and the author of this article is not informed at all in investment, so maybe he should rather write about something which he knows a bit more about and leave money matters, investing and banking to people who understands how it works and who have been making money from this so called “flawed” currency.

  6. Zimbos notoriously love speculation and bitcoin fits perfectly in this….. It’s a dog eat dog Zimbabwe and we see from the comments who has the shovels and who is digging… I’m sure the MMM Ponzi players were defending it to the death and to their own relatives for that matter….. Greed has gotten the better of us before actual work

  7. Thanks @Fusion. When a currency requires you to go to school first before you can start using it – it loses “common appeal”. I have worked with computers long enough to understand some fundamentals. They need electricity (check how an electrical problem caused the recent BA fiasco) and because every program executed by a computer is designed and written by a human being and all the hardware is also designed and assembled mainly by humans – the chance of error is still there. This on its own is a very high and unquantified risk.
    I understand that the Barclay family started their bank as a safe “store of value” on the back of the slave trade, and are now called Barclays Bank. The deep or dark web has been mentioned as taking advantage of these crypto currencies and its pundits will defend it to the core. Those who have waded into the deep/dark web will testify to the monstrosities inherent therein.
    As with all “new” technologies, the dis-illusionment phase is when most early-adopters a.k.a. high risk takers “make a killing”….long term no-one really knows. Remember the dotcom boom, then the bubble that burst? Nothing is as certain as death (we need to study more of this – that is the FUTURE). I stagger to imagine the day that we have AI and engineering so advanced that robots actually start writing code – in the Far East, they are already serving in restaurants or robots driving Tesla cars!!

  8. Ignorance will cost africa a lot.Bitcoin is a digital currency that is peer to peer which means decentralised unlike banks.People can send money between each other without a 3rd parties thus cutting transfer costs.Bitcoin has an exchange rate of 1BTC =USD$2400 surpassing the gold mark as of today.There are over 800 such currencies e.g Ether,ripple,litecoin,steem etc..BTC does not charge such transactional fees like banks which charge exhorbitantly.You can transfer any amount of money at near zero cost instantly, & globally.Anonymity of transactions is its strenth also found in monero or zcash .It uses highest level of security called crytpography to secure your accounts or wallets.Micropayments can be done e.g pricing product less that a cent because of its 8 decimal value.Bitcoin has a Market cap of $30 billion in circulation and Japan has officially accepted it as a national currency.USA, EU, China, Russia ,india & Dubai .”Satoshi Nakamoto” is the creator code name of the entitities behind bitcoin creation who chose anonymity to launch bitcoin for security reasons since governments and banks are rivals to bitcoin adoption.Once launched they can’t alter it anymore but the BTC community consensus can now make decisions.Satoshi is necessarily not a Japanese.Society is not well taught and learnt about the advantages of cryptocurrencies.Crytocurrencies are playing a major role in remmitances e.g Ripple RTGS system even banks make use of it. BTC Bitcoin advantages: Fast & Instant.Zero transactional fees.Cashless environment.Highest level of security protocol.Risk is on the choice of bitcoin exchanges.Exchages are volunteers who choose to change fiats (dollars pounds etc) online and offer cloud based services.They are prone to audit and depositor protection systems e.g Bitfinex.Their websites may be vulnerable to hacks e.g Mt Gox ,but pioneers like Blockchain.info has been there since BTC inception 2009.Wallets use 2 way verification.BTC now has debit cards as well e.g Xapo.This technology behind bitcoin is called blockchain which has changed how the internet operates.Decentralisation means machines and server nodes make decisions and not human manipulation can control the system. IBM, Microsoft, Amazon ,ebay, Be forward and many more merchants are adopting BTC as the future of money as of now hundreds of blockchain systems are being developed and Venture Capitalists are investing millions into blockchain. Congratulations to Kenyan digital currency payments platform BitPesa. Africa is still legging behind in understanding this latest technology of money called Fintech.Volatility has been in the positive as bitcoin is gaining value every day, I definitely implore regulators to consider BTC adoption as a solution to the currency cash crisis.As a fintech expert based in Zimbabwe we advise engagement to demystify lies behind blockchain technology. It is unfortunate that the darknet e.g Silkroad and Alphabay had access to the technology before ethical use in community.Other challenges are ponzi schemes taking advantage of the strength of bitcoin e.g MMM failure and other players who cause more harm to cryptocurrencies.Blockchain innovation is the best tech of the 21st century which is being used to develop decentralised unalterable databases for real estate, government systems, private blockchains, public databases, retail chain distribution systems.I pray for a day when Zimbabwe will have blockchain developers e.g ethereum a sister platform Bitcoin is used to create smart contracts which execute without human intervention .Musicoin is the latest platform which pays artists music realtime and against piracy. We have also another for writers e.g steemit social network which pays realtime bloggers for the content they upload books ..stories etc…

  9. I am guessing the author prefers Real Time Goat Settlement and Bond Goats as his store of value. 🙂

  10. I watched a documentary on Al Jazeera called the Debt Machine and it put a lot of things in perspective for me. The 2008/9 financial crash arose because banks were operating Ponzi schemes – whose model is simple. There are always naive people out there. Debt was “cheap” – everyone could get a housing loan with no collateral and the banks made their money on interest, until there was no money to loan out – the Ponzi had bottomed-out! Ultimately, the fraudsters were never really punished, the debt was simply transferred from private hands to public debt. With bitcoins I guess the resurgence of Ponzi scheme cannot be ruled out, the fear to adopt is based mostly on ignorance and risk of losing wealth “in a flash” should anything go wrong. I need to hear/read of a more solid argument along the lines of security (apart from cryptography) preferably from a qualified and experienced security expert as my assumption is that most contributions are coming from “end users” whose concept of security is limited to their perception of it, and not knowledge or experience of it. I am more interested in the transactional value of bitcoins.
    There was a show less than a fortnight ago on BBC BRIT or Click where a certain “expert” was recommending their hardware as “secure” and “hack proof” until the real hackers started tearing apart this “expert”‘s assertion right before the viewers’ eyes.

    1. We are a Tech research and development company involved in offensive security, penetration testing, telecomms and application development.We are giving our assertions from a developer pespective.Giant tech companies have seen the blockchain as more secure than other systems we are relying on and it has its pros and cons. Resistance to technological developments is not something new to communities.We give users that allowance for technolgy to prove itself.It is true that as much as there are loopholes backdoors and hacker risks we reffered to in allusion the advantages of a car are more than foot, electricity is better than firewood likewise technology is pivotal to advancement and development.Security issues should not be downplayed but when a positive development happens an early adoption like Japan is very crucial than Africa who are always on the late entry full of sceptisism which cost our economies.That is the reason why we are always importing technology than being market leaders of innovation.Risk assessment plan and pilot runs prior to implementation like Canadian banks and Russia are testing local crypto currency options, IBM is doing blockchains ,Microsoft is doing the same, President Putin has keen interest with ethereum hence a meeting this week with Vitalik Buterin CEO of Ethereum foundation. Tech based economies industrialised faster because of early adoption to global achievements.Security experts in Africa and Europe or America are no different, even Windows was hacked last week by ransomware which tore apart security systems.Experts create systems and rogue experts tear down.Hence we do no stop buying cars because of road accidents but we hieghten safety , security protocols to make end users investments safe through government policy regulation and community consensus e.g when the DAO was hacked the ethereum community effected a fok to settle the flaw.We need progressive thinking and critisism, if my Antivirus picks malware that doesnt stop me relying on my computer for data processing because more are the advantages than the loses.What technology has achieved to this day and you typing to this commentry is data.Let us balance in advise on how to tackle tech challenges and promote growth.I am glad Zimbabwe has mushroomed lots of techstartups which are promising to a better future.

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