Now, for the Bitcoin (and blockchain) blowback; what’s this for again?

What goes up must…well, who knows. Click for latest chart from CoinIndex.com

Call it Bitcoin blowback if you will. And that didn’t take long.  Bitcoin’s meteoric valuation rise late last year had the usual impact of such a speculative bubble — during the holidays, everyone from your barista to your grandfather to your taxi driver was asking questions about blockchain.  And, looking to get in before it was too late.

Such irrational exuberance brings out the critics, in force.   Bitcoin is too slow to be a unit of exchange, too volatile to be a store of value, too wasteful to exist on planet Earth, and too unpredictable to serve…well, any purpose, really.   The barista who bought in during December could have lost almost 25% of her money by now.

Nothing justifies a 5,000% valuation rise in a year, but we’ve see this movie before. Early Amazon investors saw their stock soar to a (split-adjusted) $110 a share in 1999…and then fall below $10 in 2001.  If you got out then, well, I’m sorry. Amazon is selling for almost $1,250 today.

This “movie” many very turn out to be yet another example of the Gartner technology “hype cycle.” A new thing is invented, it breaks through obscurity somehow and quickly reaches peak “inflated expectations,” then lets everyone down and suffers a long stretch the “trough of disillusionment.”  While most folks move on, chastened technologists refine their product and it slowly makes a comeback, this time performing well against more realistic expectations, and the thing becomes a real business.

Is this the path of Bitcoin/blockchain?  How the heck would I know?  But in the interest of balancing out the hype cycle, I’ve read some pretty compelling thoughts lately about fundamental problems facing cryptocoins and the Blockchain in general.

First, a VERY quick review. (If you want more background, I wrote a comprehensive guide to Blockchain for Magnify Money recently.)

Cryptocoins are exciting to many people because they offer the promise of money that’s not affiliated with any government or traditional banking system.Every transaction, transparently published in a public ledger  so there can be no fraud.  So if you are libertarian, and you hate both banks and governments, cryptocoins could be the technology that ushers in an entirely new era of human history.

At least, that’s the idea.

Security expert Harri Hursti, founder of Nordic Innovation Labs, says cryptocoins — and Bitcoin, specifically — have failed to deliver on this premise, however.

“Bitcoin really hasn’t turned out even remotely as it was marketed to do,’ he said, and then rattled off a rather big laundry list of failures.”Rather than a currency, it’s become a speculative asset. Rather than efficient, the energy and CPU costs are extravagant. Rather than being real time, transaction clearance takes often hours. Rather than being suitable for developing markets, the transaction fees jump to be as high as daily salary in developing countries. Rather than decentralized, ownership and mining power are hugely concentrated. Rather than being anonymous it is trackable via public ledger.”

Cryptocoins have been criticized as a solution looking for a problem, but Hursti goes much farther, suggesting Bitcoin has failed even at the things it’s supposed to do well.

In each of those criticisms, however, there seems to be a roadmap for improvement, however, towards Gartner’s “Slope of Enlightenment.”  Take slow and expensive transactions: Bitcoin, or a future imitator, could improve transaction processing times, making the e-money more practical to spend.  A tall order, but if we’re talking about changing the course of human history, we have time, right?

The real problem might be more fundamental, however.  It’s been considered accepted wisdom that the blockchain technology behind cryptocoins is indeed intrinsically valuable, and its value goes way beyond money. It will one day change the way every kind of transaction is audited — from selling designer handbags to publishing software.

No so fast.

Writing at Hackernoon in late December, Kai Stinchcombe raised this provacative point: “Ten years in, nobody has come up with a use for blockchain.” In it, he goes through all the various use cases that public-ledger blockchain enthusiasts usually tout — smart contracts, authenticating diamonds or handbags, micropayments –and explains why exisiting technology is at least as good.  In a particularly damning segment, he explains the moment a blockchain-driven investment vehicle required human intervention. As with so many technologies, while taking people out of the equation always seems like a good idea, exceptions always occur — and people are necessary after all.

Then, around New Year’s, Jake Williams, a malware expert, threw down the gauntlet and asked his readers to suggest a viable non-currency use for blockchain. If you’re curious, I recommend following the entire thread. There are plenty of fascinating suggestions, like this:

Or

Or

But, so many of these use cases come down to a rather primal question: Isn’t a central authority with hearty backups at least as effective, if not better and much cheaper, than a massive distributed and de-centralized system?  Sure, blockchain theoretically takes these duties away from a government agency, and if you fundamentally hate the notion of government, that’s appealing.  But that’s a different problem.  There are other ways to take food safety or birth certificate issuance away from governments without needing a massive and (at least for now) slow and fuel-guzzling worldwide system.

This much seems clear: Despite all the hype, there’s no blockchain killer app yet, other than making some speculators very rich very quickly.

As mentioned, I have no idea if cryptocoins or the blockchain will survive this collapse from the hype cycle (or the next one, or the next one).  It’s entirely possible that refined forms of blockchain will emerge which are clearly an improvement on today’s way of doing things. Enthusiasts will point out how early we are in the possible cryptocoin hype cycle.

But as you talk to your grandparents or your taxi driver about Bitcoin, always keep asking yourself this question:

What is Bitcoin for, again?

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About Bob Sullivan 1255 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

1 Comment

  1. Read your article and still don’t know how this works.How it’s created,etc?It sure does seem like speculative manias of the past.Wonder if this is a sign of too much optimism in all investments and if a crash in crytos will take the stock market down with it.

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