Having covered the benefits of Bitcoin in my previous article, I will now cover the other side of the coin. I will also state my views on Bitcoin at the end of this article.
“I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air. I think I should say modestly that the whole damn development is disgusting and contrary to the interests of civilization,” said Munger, a legendary investor in his own right, during a Q&A session at Berkshire annual shareholder meeting.
5 Cons of Bitcoins —
- Energy Consumption
According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes around 110 Terawatt Hours per year — 0.55% of global electricity production, or roughly equivalent to the annual energy draw of small countries like Malaysia or Sweden. This certainly sounds like a lot of energy.
First, there’s an important distinction between how much energy a system consumes and how much carbon it emits. To determine energy consumption is straightforward. Without knowing the energy mix, it is harder to determine the carbon emissions. For example, one unit of hydro energy will have much less environmental impact than the same unit of coal-powered energy.
Secondly, mining bitcoin consumes more energy than using it. It means that mining a fresh bitcoin consumes more energy than the energy required to validate a transaction.
2. Miners over-dependent on China
Almost all of the energy used worldwide must be produced relatively close to its end users — but Bitcoin has no such limitation, enabling miners to utilize power sources that are inaccessible for most other applications.
For eg — During the rainy season, excess electricity is produced from hydropower plants. China is responsible for 10% of global Bitcoin mining in the dry season and 50% in the wet season.
In May, the Chinese Vice Premier officially called for a ban on crypto mining and trading in a bid to stem financial risks emerging from cryptocurrencies. Soon, multiple regions in China began shutting mining operations. Authorities were asked to be more vigilant. Citizens were asked to report suspicious mining activity. Power companies were asked to cease supply to those suspected of running mining rigs. It all happened so quickly. And now it seems there is a discernible drop in hash rates — a term that’s often used to approximate the total computing power of all miners in the decentralized network. There’s no denying it anymore — Chinese crypto miners are shutting down their rigs for good. Bitcoin prices have fallen in the past few days.
3. Volatile asset
Bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer. A store of value is the function by which an asset can be useful in the future with some predictability. A store of value can be saved and exchanged for some good or service in the future.
4. Shady transactions
Ghost Security Group, a hacktivist and anti-terrorism group, claimed to have identified a chain of transactions to Bitcoin wallets believed to be owned by ISIS which contained funds between $4.7m and $15.7m — between one to three percent of their estimated annual income. The group stated to news network NewsBTC that ISIS is “extensively using Bitcoin for funding their operations”.
5. Risk of loss
Bitcoins are effectively “gone” if a hard drive crashes or a virus corrupts records, and the wallet file is corrupted. There’s nothing that can be done to get it back. These coins will remain orphaned in the scheme indefinitely. This has the potential to bankrupt a wealthy Bitcoin investor in a matter of seconds, with no means of recovering. The investor’s coins will be forever orphaned as well. There is no way to safeguard your bitcoins from human or technological errors. If you mess up your bitcoin wallet, you will lose all of your bitcoins. You can’t get it back, and they’re gone forever unless you’ve backed up your wallet with a backup phrase code.
What’s my take?
The financial crisis of 2007–08 saw the government thought the world using tax resources to prevent the collapse of large Banks. Since then, interest rates have fallen to near 0% levels. Money is borrowed and put into stocks which keeps boosting the asset values of the rich. The rich keep getting richer and the poor suffer. Inequality is at an all-time high. Bitcoin came into existence to tackle the messy current financial system that the world finds itself in today. Initially, the big American banks were quite hesitant to invest in Bitcoin. The case is very different now. With money flowing into cryptocurrency, the value of Bitcoin has gone through the roof.
Looking from a portfolio angle, Bitcoin is too volatile to consider it as an asset class. Add to it, the spread on Bitcoin values via various exchanges and the exchange rate fluctuation make Bitcoin a Big no for me right now.