By Frank Karsten
“Every advantage has its disadvantage”, the famous soccer player Johan Cruyff once said. So it is with Bitcoin. Before you think I’m an uncritical fan who only wants to sing the praises of this digital currency, let me honestly mention the disadvantages.
According to economic theory, money has three important functions: the store of value, as a means of payment and as a unit of account. Bitcoin fulfills the first function quite well, but performs poorly in the other two areas.
If you have weak nerves, Bitcoin can feel like an emotional seesaw. The price fluctuates strongly and can sometimes rise or fall by as much as 10% per day. You don’t have that problem with, say, the rand, because it just drops predictably. From July to November 2021, the Bitcoin price happily doubled to R1 320 000, only to drop to just R300 000 within a year. So consult your doctor before jumping in head first with your savings!
Another disadvantage of Bitcoin is the enormous electricity consumption that environmental organizations and politicians complain about. The many “mining computers” that carry out transactions and create new coins consume an estimated 0.5% of the world’s total electricity. That’s as much as Sweden or Malaysia! This is of course a disadvantage, but I will argue in another column that it is nevertheless not a big problem.
Bitcoin is also not suitable for retail payments for now. The system is not yet scalable, as it is called, and can only handle an average of seven transactions per second. At the same time, Visa and Mastercard can easily process 30,000 payments per second. Moreover, it takes tens of minutes before a payment is actually confirmed – something that would cause angry faces in the queue at Checkers!
Payments are also relatively expensive, sometimes costing hundreds of rands at busy times. However, you usually pay no more than R50 per transaction, which is still too much when you buy a chocolate. This problem is increasingly overcome by the new Lightning Network, which offers a scalable, fast and low-cost payment layer on top of Bitcoin.
Unfortunately, Bitcoin is not really anonymous either. Although your name and address are not in the ledger or blockchain, payments can often be traced back to a person. If you pay with it at an online store, your Bitcoin address is linked to your name.
In addition, the government requires you to provide your personal data if you buy your coins from a crypto platform such as Coinbase or Kraken. Government agencies use various software programs to analyze the blockchain and link payments to individuals. It’s great if the government wants to arrest criminals, but not if you’re just a good citizen who bought Bitcoin in your old age and doesn’t want to be bothered by an insatiable government.
Anyone who wants to store Bitcoin securely needs to gain a lot of knowledge and experience. You can of course store your coins in an online crypto platform, but they can freeze your account or go bankrupt, like last year with the FTX debacle where their customers lost billions.
With a so-called wallet, you are your own bank and enjoy more security, because you have your own keys. But especially with a hardware wallet like a small USB device, you have to do a lot of research and you also have to monitor your own bank. Many people therefore find it too cumbersome to keep their coins under their own management.
So Bitcoin has significant disadvantages. Despite this, it is still a wonderful invention that can make the world freer and more prosperous. You may not see it yet, but to quote Cruijff again: “You will only see it when you realize it”.
And it can take quite a while with Bitcoin.
- Frank Karsten is the author of The Discrimination Myth (discriminationmyth.com) and co-author of The Democracy Beyond (beyonddemocracy.net).