Is Bitcoin the Future? A Critical View
Although Bitcoin was pioneering and revolutionary, its role as the foundation of a global financial system reveals key limitations that merit careful consideration.
Structural limitations
Bitcoin by its nature is limited to only 21 million coins. If we were able to mine them faster (quantum computing, I’m looking at you) or we run out (2150’s according to latest estimates), we will experience a crash akin to the silver boom of the 1850’s or the gold scarcity of the early 1900’s. This is giving away a powerful stabilization tool, i.e. monetary policy, to the quickness of mining. Relying on an external force to underpin global stability ends in catastrophe.
While the narrative of decentralized freedom of the individual against corrupt forces trying to control the world is a great story, life is more nuanced than that and underpinning the stability of the world’s economy to the mining and availability of bitcoin seems foolhardy to me. If bitcoin is cash and cash is bitcoin, any loss of bitcoin will mean a permanent loss of cash. So if someone were to mistakenly discard a hard drive, all of us collectively would have to live with less money. That is a problem, specially given our expansionary economies.
This is only highlighting a narrow issue. You have to also take into account the externalities of such a system, one of them being energy consumption in a world that is now hungrier than ever before for power, and many others which are outside the scope of this post.
The real future of cryptocurrencies
I believe in a not too distant future we will use the full benefits of crypto, decentralized ledgers, tokenization, smart contracts, and frictionless flows of capital. But I don’t think we will do it with bitcoin.
All throughout history humanity has tended to favour standardization and liquidity as they are more efficient over any other concerns when dealing with our methods of exchange for goods and services. The fungibility of gold nuggets (and its wide availability spread almost evenly worldwide) made it outcompete barter. These nuggets which in turn were displaced with coins, which were displaced by notes backed with that gold, which were displaced by debt backed by those notes backed by gold until we got to where we are today, where the exchange of services is backed by debt underpinned in trust.
To many people, the underpinning of the global economy in trust is a crazy idea born out of the lunacy derived from the Bretton Woods system, and it is true that our current economic model was partially developed at that conference. However, the idea is much older than that—about 1700 years old in fact.
Is it true that fiat money is backed by nothing? Correct, as its backing is not a tangible thing but an intangible one: trust. The world economy is fuelled by debt, which is a promise of deferred consumption in exchange for a future greater payment.
The real revolution
The big change I see derived from the crypto breakthrough is that trust can now be decentralized and assigned on an individual basis to anything and everyone around us. So in the future I could buy a car A using Z crypto which the dealer can convert to coin Y directly without having to rely on intermediaries or governments. This system will be backed both by the asset itself and the underlying expansionary coins we develop, which will be a mix of trust and asset backed.
Ironically, this would make the whole system pretty much a barter-based economy but with the fungibility, standardization, and liquidity of our current system.
In my opinion, crypto will be the foundation of our future method of exchange of goods and services, but it won’t be bitcoin.
Would love to hear your thoughts—why you think I’m right or why you think I’m wrong.
Source: Daniel Sánchez
