It is used by criminals and terrorists

The anonymous nature of the blockchain certainly has some appeal for people who are looking to store and transfer large sums of money around without people knowing who they are, but using that as an attack on Bitcoin is somewhat misguided. Every transaction that occurs on the blockchain is publicly available for anyone to see. If you were to dive in and do some data analysis you could probably find suspicious transactions and activity on the blockchain and flag certain wallets to monitor.

Paper money is more difficult to trace than Bitcoin, and that can also be used by criminals and terrorists. Big banks have a conflict of interest when it comes to terrorist organizations. They have a moral and legal duty to report any suspicious transactions to authorities, but it is just as easy for them to look the other way and claim ignorance. It will ultimately mean more business for them and more money to be made. In fact, this is exactly what HSBC did a few years ago. According to the article, they failed to monitor $60 trillion in wire transfers and account activity. With Bitcoin, anyone in the world can monitor the transactions, and the responsibility is not trusted to any single entity or corporation.

If the government was to ban Bitcoin because it can be used by terrorists then shouldn’t they also ban knives, cars, batteries, cellphones, the Internet, electricity, and even the US dollar? Where do you draw the line?

It is not backed by a government

This is one of the most interesting criticisms of Bitcoin because most of the people who believe in Bitcoin use the same argument as a positive. Take a look at how government backed currencies have done in Venezuela and Zimbabwe. In Venezuela, the annual inflation rate has climbed to nearly 1600%, and it has been pushing many people into poverty. Their outlet has been to try to purchase or mine Bitcoin as a safe haven since their own currency is becoming worthless. In Zimbabwe, a similar situation has been unfolding which has led to people paying a nearly 100% premium to purchase Bitcoin. This means Bitcoin is providing real value to real people.

If you had to choose which would you pick:

A currency with an infinite supply where more can be printed at any time backed by a government that is over $20 trillion in debt

A deflationary currency with a maximum supply of 21 million where it is very difficult to mine new coins, created by the people for the people

Here is a chart of the inflation of all of the US dollars in circulation:

The US dollar used to be backed by gold with a direct conversion of $35 per ounce. When the value of gold increased this led to problems with regards to exchange rates for other currencies. In 1971, President Nixon removed the gold backing of the US dollar, and this has allowed the Federal Reserve to print as much money as they want to. The more they print the less the money sitting in your bank account is worth.

It is too volatile to be a currency

Out of all of the arguments against Bitcoin this is the one that I think has the most credibility right now. Using Bitcoin as a currency today does not make a lot of sense. Why would you spend 0.0003 BTC to buy a coffee today when the same coffee could cost 0.0002 BTC tomorrow. That is partially related to the volatility and also related to the fact that Bitcoin is deflationary.

The issue with this criticism is that Bitcoin does not have to be a currency right now in order for it to be successful or valuable. What Bitcoin can do today is it can store a large amount of value in a secure way without having to entrust it to any third party. Rather than buying gold blocks and finding a place to store them, you can hold bitcoins in a secure wallet on your smartphone or computer. There is very little friction to buy and sell them since all it requires is access to the Internet. Using Bitcoin as a store of value is more important right now than using Bitcoin as a currency. Over time, as Bitcoin adoption grows, the price should become a bit more stable, transactions should be faster, transaction fees should decrease, and using it as a currency will be more feasible.

It is a speculative bubble similar to Tulip Mania

Based on the recent price increases and everyone trying to get in on the action, it is hard to argue with the fact that Bitcoin appears to be in some sort of bubble right now, but comparing it to the tulip bulb bubble from the 17th century is silly. Tulip bulbs were something unfamiliar at the time and people found them fascinating, but unlike Bitcoin, they were a perishable item (not a transformative technology), had a local market, and had an unlimited supply (you could always grow more tulips).

Another reason this comparison is foolish is because no one making the comparison was alive in the 1600s. According to this article published a few months ago in Smithsonian magazine, the entire story has been exaggerated over the years, and the events that really took place were not nearly as grand or exciting as the media makes it out to be.

As for the current Bitcoin growth, I am not going to deny that a lot of it is speculative, but one thing to keep in mind is that Bitcoin is a disruptive technology, and those tend to follow s-curve adoption trends. Bitcoin has already had a series of smaller bubbles and crashes and each one has been larger than the previous one. This phenomenon is described in Speculative Bitcoin Adoption/Price Theory by Michael B. Casey published around a year ago. His theory states:

The growth of adoption of Bitcoin and therefore bitcoin price is following an S-Curve of Technological Adoption, which is itself characterized by fractally repeating, exponentially increasing Gartner Hype Cycles.

It remains to be seen if this will hold true in the long term, but I wouldn’t bet against it.

It has no value

This is perhaps my favorite criticism. A lot of people have trouble deciding on a value for Bitcoin. This is for a lot of reasons. It is not particularly useful as a currency (as mentioned previously), it is not a physical object, it does not represent ownership in a company, it does not payback dividends. So then why does it have value?

Technology

Bitcoin is a transformative technology. It allows you to store and send value in a secure digital wallet in a way that does not require any government or bank. Bitcoin has the potential to revolutionize the financial industry the same way that the Internet revolutionized the news and media industries. Everyone who tells you otherwise does not truly understand what Bitcoin is.

Bitcoin could eventually render the banking system as we know it obsolete. There are still certain things that banks can do that bitcoin can’t yet such as issue loans, mortgages, and credit cards, but for many other things Bitcoin/crypto currencies can do them and do them better.

In the future it is very likely that crypto currency wallets in some form could supplant bank accounts as we know them today. New tools will be developed that can do everything that banks can do but also will be able to do new things that we can’t even imagine today. Why send an ACH money transfer that will take 5–7 days when you can send money over the Blockchain in just minutes. Not only does this technology threaten banks, but also all of the trusted intermediaries that deal with money transfers are no longer needed.

Global currency

Bitcoin is the first truly global currency. That alone is a very valuable thing. If adoption takes off, it has the ability to tear down borders. If you move to another country, you would not have to worry about opening a new bank account or converting your holdings to another currency. You can just use Bitcoin.

Store of value

There are other properties of Bitcoin that make it a good store of value. It has a limited supply of 21 million, and it is sub-divisible into any denomination (for example 0.00132456 BTC). The smallest unit of a bitcoin is known as a “Satoshi”. Gold has similar properties, but gold isn’t as easy to buy, sell, store, or transfer. Many people see Bitcoin as a hedge in case of a larger financial collapse.

The network

There is also value in the network itself. There are thousands of miners all around the world who are approving transactions and incurring actual costs for mining hardware and electricity.

Many critics say that there is nothing stopping anyone else from launching a competing crypto currency. That, of course, is true, but you could make the same argument about any technology. Any software engineer can make a social network to compete with Facebook, but it won’t have any value if no one is using it.

Blockchain, not Bitcoin

This is another thing most of the critics say that I wanted to touch on briefly. After explaining how Bitcoin is worthless they make some comment about how Blockchain technology is useful. The problem is you can’t really have one without the other.

Yes, it is entirely possible for a bank to set up its own Blockchain to store transaction data, but what mechanism will be used to ensure that the data is valid and hasn’t been tampered with?

The Bitcoin Blockchain is public and is shared between all of the miners. If one of them tries to alter a transaction the others will flag it as invalid. Bitcoins are the reward mechanism for miners to make sure the network is secure.

If a Blockchain is controlled by a single organization with no incentives then all it takes is one engineer with access to the network to change the transaction data on all of the nodes. That does not really provide any value over a traditional, centralized system at that point.

Anyone who separates crypto currencies (Bitcoin) from blockchain technology does not truly understand how they work.

Conclusion

As Bitcoin grows there will be no shortage of critics and skeptics, and it will face increasing attacks from bankers and government officials who want it to fail, but it is important to do your own research and educate yourself about what it is and why it is important.

The next time a big banker or investor or government official comes out and criticizes Bitcoin ask yourself “What does he or she have to gain from this attack?”. You may be surprised.