By David Z. Morris
December 3, 2017

Bitcoin continues one of the most dramatic price runups of any asset in living memory, posting prices above $11,800 this morning after starting the year below $1,000 per digital token. In its early years, skeptics with little knowledge of blockchain technology were quick to dismiss Bitcoin as a fleeting trend. But as knowledge spreads and prices chase new highs, the skeptics have become more nuanced – and even if you love Bitcoin, they’re often worth listening to.

Here are a few of the most notable bear sentiments being aired as Bitcoin’s rip-roaring rampage continues.

Blockchain without Bitcoin?

At last week’s Consensus: Invest conference in Manhattan, some of the greatest minds in asset management came together to talk cryptocurrency. On a “Bulls and Bears” panel, Raoul Pal of the Real Vision financial news network repeated a favorite saw of today’s more informed bears – that while blockchain database security is a revolutionary technology, those blockchains will ultimately be privately managed by enterprises. That would eventually drive the value of public blockchains like Bitcoin to zero.

But the idea of a private blockchain at least partly misunderstands the core security premise of the technology. Cryptocurrency payouts attract a decentralized swarm of hosts who ensure the honesty of a shared ledger, without necessarily having a stake in its contents. Andreas Antonopoulos, long one of the smartest commentators in the space, has dismissed private blockchains as a fundamentally inefficient replacement for an old-fashioned database. Once real-world blockchain applications are up and running, most will likely be hosted on one of the trusted public blockchains, such as Bitcoin or Ethereum.

What the Fork

Not exactly a bear, Mike Novogratz has said that cryptocurrency is in a bubble, even while also starting a large fund specifically to invest in it. Novogratz has made a point that is far too rare in this realm – that not all cryptocurrencies are created equal, and not all of them will win. As an example, Novogratz has said he believes Litecoin, the 6th largest cryptocurrency, “doesn’t add enough new stuff to replace Bitcoin.”

The specific point is highly debatable – Litecoin has recently proven it can innovate and improve faster than Bitcoin. But the broader point is solid, particularly when it comes to recent “forks,” in which server operators split from an existing cryptocurrency and create copies of its code and assets. Forking spreads network resources thinner and thinner, and over time, if they don’t prove that they offer competitive innovations, forks like Bitcoin Cash, Bitcoin Gold, and Ethereum Classic will crash.

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No Underlying Value

Jack Bogle, Vanguard founder and father of the index fund, was a maverick in his day, so you might think he’d have a kind word for Bitcoin’s innovation. But you’d be wrong.

Last Tuesday at a Council on Foreign Relations event, Bogle advised listeners to “avoid Bitcoin like the plague,” and went on to lay out a common sentiment among crypto-skeptics.

“There is nothing to support Bitcoin except the hope that you will sell it to someone for more than you paid for it.”

With all due respect to a titan, Bogle is fundamentally wrong, and this line of criticism should have been buried years ago. Cryptocurrency prices certainly have little relationship to underlying value right now, but that doesn’t mean there’s nothing there at all. Cryptocurrency networks include vast amounts of bleeding-edge hardware, and they’re being managed by thousands of highly trained engineers and business developers. Bitcoin has the potential to grow into something of obviously huge value – a truly unhackable and totally open global financial network.

If Bitcoin were a public corporation instead of a decentralized swarm, it would probably have some extremely aggressive short-sellers right now (actually, the fact that it’s hard to short cryptocurrency is a good reason to be wary of it). But noone would say its assets had no value.

A Tool for Criminals

One of the perennial critiques of cryptocurrency was reiterated this week by Nobel Prize-winning economist Joseph Stiglitz, who has bigger things on his mind than a bubble – he thinks Bitcoin is morally dubious, and bad for global governance and the macroeconomy.

“Bitcoin is successful only because of its potential for circumvention [and] lack of oversight,” he told Bloomberg last week, “So it seems to me it ought to be outlawed, it doesn’t serve any useful social function.”

Stiglitz is right that much of Bitcoin’s early momentum was based on either lawbreaking or capital flight, and the scale of its ongoing use for tax evasion is likely massive. He’s also right that it isn’t currently useful for its core purpose – payments – thanks to network congestion, high fees, and extreme volatility.

But the long-term above-board applications for totally unhackable, distributed ledgers are still waiting in the wings: cryptocurrency could eventually run everything from cloud computing to ride-hailing to health records. And Stiglitz misses a crucial point – it would be very, very hard to regulate cryptocurrency out of existence. Its servers can be moved to any friendly jurisdiction (much like old-fashioned offshore tax shelters), and its traffic signature can be easily disguised.

That’s not a moral defense, but it’s a fact. Regulatory pressure in jurisdictions like the United States and Europe could absolutely keep away institutional investors and even hedge funds, whose future entry to the market is increasingly priced into the current crypto-surge. But its shady underbelly nearly guarantees that cryptocurrency as a whole will never drop to zero value.

 

 

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