Twitter CEO Jack Dorsey recently argued that bitcoin would one day become the world currency, possibly within the next ten years or sooner. While many cryptocurrency supporters celebrated the suggestion, bitcoin naysayers saw a perfect opportunity to hound Dorsey with ridicule. The Financial Times joined in on the criticism, with one of their writers, Jamie Powell, launching a scathing attack on the claim. But does the argument hold any water, or is it all just bluster?
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Missing the Forest for the Trees
In an article called “Sorry Jack, Bitcoin Will Not Become The Global Currency”, in response to the Twitter CEO’s assertions, author Jamie Powell of the FT Alphaville blog wrote a highly critical piece suggesting that not only is Jack, the “tech-bro,” wrong, but his idea is patently absurd.
Powell first suggests that if bitcoin were to replace the theoretical M1 global money supply, then each bitcoin (that would ever exist) would be worth $10 million USD. This number is a gross miscalculation – but more on that later. The article suggests that if this replacement of M1 by bitcoin were to occur, the Winklevoss twins would effectively own 5% of all the world’s wealth. Even worse, Satoshi Nakamoto’s stash would be worth $10 trillion.
The second component to Powell’s argument relies on the classic bitcoin naysayers’ classic chestnut: bitcoin uses too much energy. Powell says that about 4/5ths of the cost of mining goes toward energy, and this number increases every year.
Using these figures, Powell calculates the startling suggestion that in the year 2028, a single bitcoin transaction will cost $10,000. Not content with stopping there, Powell suggests that bitcoin could eventually consume hundreds of times more energy than the entire world did in 2016, based on information provided by BP. Obviously, the world is not currently capable of producing that much energy, so the numbers he produces are pointless at best, ridiculous at worst.
A Dose of Reality
Powell’s article is practically bursting with glaring omissions and counter-factual assumptions. Firstly, the writer fails to understand how bitcoin is mined. Early on in the article, Powell suggested that bitcoin is still mined by GPUs (and will continue to be in 2028), a blatant inaccuracy. His “21 million bitcoin accounts for M1” argument conveniently overlooks the fact that the 21 millionth bitcoin is not expected to be mined until sometime around 2140. So, if bitcoin were to replace M1, each bitcoin would be worth, in fact, more than $10 million.
Novice errors and a blatant disregard for fact-checking aside, let’s give Powell’s assertions some deeper consideration. Dorsey’s statement was:
“The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin.”
Generating alarming bitcoin prices ignores one fundamental quality of the cryptocurrency: divisibility. Currently, bitcoin is programmatically divisible into eight decimal places – down to the satoshi. With network consensus, additional decimal places can be added as needed. Bitcoin is infinitely divisible. To say, then, that one bitcoin will one day be as valuable as $10 million is no more absurd to say that $10 million is as valuable as $10 million.
The Energy Consumption Argument That Will Never Die
The second glaring issue with Powell’s primary argument is his outlandish projections for energy requirements and the cost of transacting in bitcoin. If we compare the amount of electricity required to produce a single hash on a CPU when bitcoin first started to the electricity usage of a single hash on today’s most energy efficient ASIC miner, the contrast is stark.
Not only that, but this trend will undoubtedly continue. As network difficulties increase, so will the efficiency and effectiveness of mining hardware. Furthermore, if bitcoin were to some day replace the M1 money supply, undoubtedly many billions of dollars would be invested in developing ever more efficient and effective mining hardware and software. The suggestion that a single transaction would cost $10,000 is, as Powell himself conceded, picking “numbers out of the air”.
Not only is bitcoin mining hardware constantly getting more efficient, but bitcoin software and second-layer solutions like the Lightning Network and RSK are making transactions increasingly efficient, and more importantly, cheap.
Predictions Are Always Fraught with Risk
Bitcoin is not an unchanging monolith that will follow a linear trajectory. Now that the Lightning Network is up and running, and SegWit is seeing wider adoption, bitcoin fees are the lowest they have been in many months, and the downward trend is continuing.
Yes, Jack Dorsey made a bold claim that bitcoin may become the world currency. Powell would better spend him time examining the validity of such a bold statement, rather than rely on hyperbolic ridiculing to counter the statement. His treatise reads more as an “I hope that isn’t true” opus than a “That can’t be true” examination of facts.
Did Powell completely miss the mark or is there some truth in this argument? Let us know in the comments.
Images via Pixabay, Pxhere