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Should you Use Bitcoin?

2020 November 15

[bitcoin] [cryptocurrency] [money] [opinion] [privacy] [tech]


At the time of writing this post (2020 November 15), here was my "investment" in cryptocurrencies:

I also briefly worked at a cryptocurrency-related company, and I have some stock options in that company. I tried looking up the company for the purpose of this disclaimer, and it may now be defunct (I'm not sure how to tell).

(For the sake of this disclosure, I'm setting aside philosophical debates about the meaning of "ownership" and understanding it in the way that maximizes the amount of stuff that can be considered "mine".)

This is to say that I stood to benefit financially from more people using Bitcoin.

This disclosure statement was added on 2021 November 5.

Should you use Bitcoin?

Probably not.

For one thing, Bitcoin is horrible for the environment. I go into a bit of detail on why below.

Let's talk about some of the reasons one might think Bitcoin is a good idea and whether it lives up to these. I'll try to make this post accessible to a non-technical audience.

Bitcoin is anonymous!

It's not. Bitcoin is pseudonymous, and this is a very important distinction. Bitcoin users are identified by a public key or a hash (which to abstract away the more technical details can be thought of as a random ID number).

In the traditional centralized banking model, your bank keeps track of how much money you have. With Bitcoin, there are no banks, so instead, everyone has a copy of your financial records, past, present, and future. Even if you use a new "ID", there are a number of ways your "IDs" can be associated with each other. Furthermore, obtaining bitcoins can be difficult to do without providing lots of government-official information about yourself because exchanges have to comply with Know Your Customer and Anti-Money Laundering laws.

It is possible to use Bitcoin without associating it with your true identity, but you must be careful and remember that all your transactions will be public and associated with each other.

Bitcoin is decentralized!

Truth is, Bitcoin does a very poor job of decentralization.

The goal of Bitcoin is to have a peer-to-peer money system where people can send money directly to each other. The idea was to stop having to go through banks as central arbiters of which transactions are allowed.

Bitcoin attempts to accomplish this through a process called mining, which is essentially a lottery that happens every 10 minutes. Anyone can participate, and whoever wins gets to choose which new transactions to approve. (They can only approve valid transactions, but they get to prioritize some transactions over others.) They also get a reward in the form of newly minted bitcoins.

Participation in this lottery is achieved by performing some computation. The more computations you can do, the greater your chances are of winning. These computations are not useful for any purpose outside of Bitcoin. They don't work towards curing disease or anything; they just exist to make the "decentralized" money work. In other words, mining is basically a competition to see who can waste the most electricity in 10 minutes.

In such a competition, individuals using their own computers fare poorly. You do better by pooling your resources together with others and splitting the rewards. Consider your odds of winning the lottery if you buy a ticket, versus your odds of making some money off the lottery if you and 249,999 other people each buy one ticket and promise to split the rewards if one of your tickets wins.

So what we have in practice is a small number of large mining pools which dominate this lottery. And of course, this system benefits the rich and powerful who can afford both powerful equipment that can waste electricity faster and all the elctricity they're wasting. Sure sounds like pretty centralized to me. Except unlike the traditional centralized banks, this centralized money system is holding constant competitions to see who can waste the most energy in the process.

Ultimately, Bitcoin does not allow you to just send money directly to someone; you still need to get someone's permission. The number of these entities who can effectively grant permission is effectively small, and the process that allows them to grant permission is horrible for the environment.

I'll get rich investing in Bitcoin!

This is one of the most common reasons for interest in Bitcoin. It's also very boring. I have no advice for you except to consider the environmental impact first.

Bitcoin is free software!

This is actually true. Bitcoin is free software, meaning you are free to use, study, modify, and distribute copies of it. (Free software is more commonly referred to by its corporate-friendly monicker, "open source".) Cryptocurrencies like Bitcoin are one of the only ways to send money over the internet using only free software. (There are other projects like GNU Taler for this, but to my knowledge, they are not yet useable.)

That said, there's no reason it has to be that way. There's no special property that Bitcoin has that other services would also need to be free software. There's no reason your bank couldn't let you use free software for online banking. There's no reason services like Paypal and Stripe couldn't process your credit card information without requiring you to use nonfree software. They just don't care about your freedom.

There is a need which Bitcoin fills here, but it can and should be filled instead by more efficient, less environmentally destructive services.

I can use Bitcoin for money laundering/buying drugs/other illegal things!


I want to buy a cup of coffee!

Buying a cup of coffee is a common example for explaining how to use Bitcoin. In truth, Bitcoin transaction fees small-value prohibitively expensive.

To explain briefly, fees are required for Bitcoin transactions. (If you're rich, thought, you can do your "higher priority" transactions without a fee.) Bitcoin transaction fees are based not on the value transacted but on the size of the transaction. You're basically paying for the electricity wasted to process your transaction, rather than anything based on how much money you spend.

A $2 fee is nothing to process a $5,000 transaction. But paying an additional 50 percent on a $4 cup of coffee? That's too much!

(To provide a little bit more context, It's an intentional design choice to make small-value transactions expensive because this prevents attackers from spamming the network with tiny transactions. Requiring a small fraction of a bitcoin as payment for each transaction was the way to make such transactions expensive. However, the value of a bitcoin compared to other currencies has skyrocketed over the past 11 years, so what were once tiny transactions are now reasonable amounts of money to spend.)

This post was a bit disorganized, and I probably missed some of the important Bitcoin talking points, but hopefully this helps.

Also, I have no affiliation to this book or its author, but I can't recommend Attack of the 50 Foot Blockchain by David Gerard enough for an accessible explanation of some of these ideas and more. (Unfortunately, it looks like the physical book is only available through Amazon, but the ebook appears to be available through other sites.)