Support Bitcoin! Fidelity report refutes six major doubts about Bitcoin

Fidelity Digital Assets has refuted some common criticisms of Bitcoin in a blog post published recently.

The article believes that although some of the criticisms of Bitcoin are old-fashioned, due to the increase in attention to Bitcoin in recent times, Fidelity needs to make an updated response.

The six major doubts about Bitcoin refuted in the article include:

•Bitcoin is too volatile to be suitable as a store of value.

•Bitcoin has failed as a means of payment.

•Bitcoin is extremely wasteful.

•Bitcoin is used for illegal activities.

•The value of Bitcoin is not backed by anything.

•Bitcoin will be replaced by competitors.

Criticism 1: Bitcoin is too volatile to be a store of value

Response:

The trajectory of a new asset from neglect to becoming a global store of value is unlikely to be linear, and as Bitcoin becomes more widely adopted and derivatives and investment products develop, Bitcoin price volatility is likely to continue to decline.

Bitcoin is currently an emerging store of value that is undergoing financialization and is solidifying its position as a store of value. As liquidity in the spot and derivatives markets increases, and products are developed that allow investors to express their interest in Bitcoin in different ways, daily volatility should decline over time. As Bitcoin ownership becomes more common, the price of Bitcoin should stabilize, while the ability of new participants to drive the market will decrease.

One way to look at Bitcoin's volatility is to compare it to gold in the 1970s. As Bitwise Investments' Matt Hougan said, when the U.S. left the gold standard, investors were unclear about the role of gold, which led to volatility in the price of gold, similar to Bitcoin today.

Another way to understand Bitcoin's volatility is that it is the result of a perfectly inelastic supply for the asset. Increases in demand do not result in an increase in the supply of Bitcoin or an increase in the velocity of Bitcoin issuance, and this inelasticity of supply is what makes Bitcoin scarce and valuable. Therefore, Bitcoin investors accept volatility as a cost or premium to enter an ever-rising store of value asset that they view as a huge untapped target market.

Bitcoin's volatility can also be explained by the fact that Bitcoin has a market that is resistant to intervention, and no central bank or government can step in to support or prop up the market to artificially suppress volatility. Bitcoin's volatility is the price of an undisturbed market. A true price with volatility may be preferable to artificial stability, which could collapse without intervention if it results in a distorted market.

Criticism 2: Bitcoin has failed as a means of payment

Response:

Bitcoin was developed with deliberate consideration, with limited and expensive capacity designed to provide core properties such as decentralization and immutability. Given its high settlement guarantee, Bitcoin offers limited settlement capacity.

Many still believe that Bitcoin’s core use case is as a means of payment for everyday, low-value transactions. Critics who hold this view argue that Bitcoin has failed because it cannot provide the same transaction throughput as payment rails such as Visa, Mastercard or PayPal.

But in fact, transaction means may be one of the use scenarios of Bitcoin in specific circumstances, but it is not the core or only function of Bitcoin.

Bitcoin’s properties make it a viable payment instrument, it is portable, fungible, and divisible. On the other hand, it also has limitations, as it is volatile and has limited throughput. As discussed above, volatility is the price Bitcoin pays for its scarcity, and limited throughput is the sacrifice Bitcoin makes for decentralization. By capping throughput, Bitcoin makes it possible for anyone with an average computer to run a validating node. Validating nodes are important because they verify the work performed by mining nodes and provide checks and balances on the miners responsible for creating blocks and processing transactions, so that no single group of stakeholders has too much power and influence, allowing Bitcoin to be decentralized.

The most valuable payment capability of Bitcoin is not for daily payments, but for transactions similar to global settlements between international companies or even settlements between central banks and governments. For example, BitPesa helps small and medium-sized enterprises and multinational companies buy, sell and trade foreign exchange in African countries through Bitcoin. BitPesa is one of the first companies to use Bitcoin for commercial settlements to reduce the cost and friction of doing business in emerging markets.

In addition, although the on-chain settlement capabilities are limited, Bitcoin second-layer solutions such as the Lightning Network may solve the needs of small Bitcoin transactions.

Taxation is another factor that makes Bitcoin difficult to use as a means of payment in countries such as the United States. For example, the Internal Revenue Service (IRS) classifies Bitcoin as "property." In a payment context, this means that Bitcoin users must calculate their gains or losses when using Bitcoin to make payments or purchases, which reduces the appeal and integrity of Bitcoin as a payment tool.

Criticism 3: Bitcoin is wasteful

Response:

A large portion of Bitcoin mining is powered by renewable energy that would otherwise go to waste. Furthermore, the energy consumed by the Bitcoin network is an efficient and significant use of resources.

There are different estimates of the proportion of Bitcoin mining that is powered by renewable energy. For example, the third Global Cryptoasset Benchmark Report published by the Cambridge Center for Alternative Finance (CCAF) estimates that 76% of miners use renewable energy (especially hydropower) as part of their energy mix. CCAF data shows that renewable energy accounts for 39% of the total energy consumption of Bitcoin miners. CoinShares estimates that as of December 2019, the penetration rate of renewable energy supporting Bitcoin mining is 73%. Both estimates indicate that a significant portion of mining operations are powered by renewable energy (such as hydropower, wind, solar).

Recently, there are companies using natural gas byproducts from oil fields to power Bitcoin mining, reducing carbon and methane emissions in the process. Companies that use these byproducts to mine Bitcoin also have the potential to earn more revenue.

However, it is undeniable that Bitcoin mining does consume energy. Therefore, the question becomes, is it worth using energy to secure the Bitcoin network and process transactions? Bitcoin is a scarce, decentralized, censorship-resistant digital asset, and its most important properties are directly related to the real-world resources used to mine it. Only if it is expensive to mine and maintain can Bitcoin fulfill its role as a secure, global value transfer and storage system.

Criticism 4: Bitcoin is used for illegal activities

Response:

Like cash or the internet, Bitcoin is neutral and can have value to both good and bad actors. However, in terms of volume, the number of Bitcoin transactions associated with illegal activity is very low.

Criticizing Bitcoin for being used for criminal activity is like criticizing cash for being used for illegal activity, or criticizing the Internet for hosting darknet and illegal markets. Bitcoin (like cash or the Internet) is neutral. Bitcoin offers novel features that have a positive impact on society; however, it can also be exploited by criminals who take advantage of Bitcoin's decentralized and censorship-resistant properties.

It is important not to consider Bitcoin's use in illegal activities in isolation. According to blockchain analytics firm Elliptic, Bitcoin's use in illegal activities (such as black markets, ransomware, fraud) has been on a downward trend, with transactions related to illegal activities accounting for less than 1% of total Bitcoin transactions in recent years. Bitcoin's transparent nature allows us to build a specific model to estimate Bitcoin's use for illegal activities. According to data from the United Nations Office on Crime and Crime and Chainalysis, for every $1 spent on Bitcoin on the dark web, at least $800 in cash is laundered.

Law enforcement can use blockchain forensics to detect and punish criminal activity, which also creates obstacles for criminals to use Bitcoin. Bitcoin is pseudonymous rather than anonymous, and blockchain analysis companies have developed sophisticated technology to track criminal activity through Bitcoin to find their real-world identities.

In addition, as Bitcoin becomes more financialized, regulators’ attention and scrutiny of Bitcoin will only increase.

Criticism 5: Bitcoin’s value is not backed by anything

Response:

Bitcoin is not backed by cash, industrial use, or fiat. It is backed by code and consensus among key stakeholders.

Robert Greer defines three asset “categories”: capital assets, consumable/convertible (C/T) assets, and store of value (SOV) assets. He classifies gold as a SOV category, and because of its industrial uses, gold is also a C/T asset.

He also categorizes fiat currencies as SOV assets. The argument for fiat currencies is that they are backed by the full faith and credit of the government. However, in many cases, faith in the ability of governments and central banks to properly manage fiat currencies is misplaced. Many central banks and governments have exhausted their monetary and fiscal policy levers, causing the purchasing power of their currencies to decline significantly over time.

According to Greer's definition, Bitcoin fits best into the SOV category. Bitcoin is not backed by cash flows, nor is it backed by industrial use or fiat. It is clearly backed by code, which is brought about by the social contract that exists between its key stakeholders. These groups of stakeholders are in a state of equilibrium, with no single group having excessive power.

Criticism 6: Bitcoin will be replaced by competitors

Response:

While Bitcoin’s open-source software may be forked, its community and network effects cannot.

Many digital assets claim to improve upon Bitcoin's flaws. However, to date, none have been able to achieve the network effects of Bitcoin. As mentioned several times in this article, Bitcoin has properties that make it valuable. While competitors have tried to improve upon Bitcoin's limitations, this has come at the expense of the core attributes that make Bitcoin valuable. This explains why Bitcoin continues to dominate in terms of market capitalization, investors and users, miners and validators, and retail and institutional infrastructure and products.

While Bitcoin’s software is open source and may be forked or “improved,” its network effects and community of stakeholders (users, miners, validators, developers, service providers) cannot be easily replicated.

in conclusion

While this article does not cover all criticisms of Bitcoin, the responses listed here may be applicable to address other common misconceptions. In an increasingly digital world, Bitcoin is a unique digital asset that requires digging deeper to understand its core properties.