There’s no denying bitcoin’s meteoric rise since being introduced by the mysterious Satoshi Nakamoto in 2009. It’s incredible price appreciation has many people fearing that they’re missing out on a big opportunity. And while it is an exciting new technology, the forerunner of blockchain technology and decentralized finance (DeFi) – innovations that will forever alter the way we live and transact – many believe that buying bitcoin is still akin to gambling. It’s too new, some argue. As of yet unproven as a true currency alternative or store of value. Others argue that it is vulnerable to disruption by technology superior to bitcoin or government regulation and cryptocurrencies backed by central banks. Still others believe that bitcoin’s code will be cracked by quantum computers in less than a decade, so out of necessity, we’ll be required to adopt new-and-improved cryptocurrencies built on quantum-secure blockchains.
Below are three compelling bearish cases for bitcoin (BTC), by three well-respected authorities in finance and technology.
Governments Can Outlaw Bitcoin (And Will)
According to legendary commodity investor Jim Rogers, governments don’t like competition, and once they decide to ban bitcoin, they can easily deter its utility as a store of value and means of transactions. Governments, after all, control access to the internet, have the ability to surveil transactions, and means to enforce the law.
Nearly every country and their central bank is working on “crypto money” says Jim Rogers. “Governments don’t want to give up their monopoly money… governments love the power and the control. That’s one of the things (fiat currencies) that give them the most control. And by the way, they love computer money,” Jim continues, “because they can track every transaction and they love that.”
Jim Rogers poses the question. If central banks say, “from now on its an act of treason if you use bitcoin,” how many people will continue using bitcoin as a store of wealth? “I sure won’t be,” answers Rogers. Remember, all bitcoin transactions are are public record, and since governments make the laws and have the biggest guns, there probably aren’t a lot of citizens who will disobey their government’s mandate.
Bitcoin Doesn’t Meet Criteria As An Investment, Nor As A Currency Alternative
According to Jesse Felder, former Bear Sterns hedge fund manager and publisher of The Felder Report, Bitcoin doesn’t make sense as an investment, nor as a currency alternative. And while most are buying it because they do, in fact, believe it to be a good investment or currency alternative, the price action has hallmarks of typical speculation.
Felder points to the “old school” definition of an investment, according to Benjamin Graham.
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
“Since bitcoin provides neither safety of principal nor an adequate return it therefore can only be considered speculative,” says Felder. And while he concedes that “bitcoin may make a great deal of sense as a speculation – Ponzi schemes can work out great for early adopters – this doesn’t make it, in any shape or form, a good investment.”
With respect to bitcoin being a currency alternative, that is to say, as a medium of exchange and/or store of value, Felder is equally as skeptical. Felder says, “bitcoin isn’t used in any meaningful way as a medium of exchange today, and more importantly, as a store of value it has failed miserably countless times for countless cryptocurrency aficionados.”
Millions of dollars worth of bitcoin has been hacked even though crypto believers claim this is not possible. I’m not a fan of dollars but at least the $20 in my real world wallet can’t be stolen from the comfort of a hacker’s couch.
There’s also the problem with hard forks. Bitcoin believers rely entirely on the idea that bitcoin is limited in supply making it far more attractive than fiat currencies that are being printed like mad by central bankers around the world. However, bitcoin has already hard forked several times, multiplying the number and type of bitcoins in circulation. In fact, if you put together all the hard forks bitcoin has undergone since it was first created, the number of total bitcoins has actually grown faster than the number of dollars. That’s a fact.
Finally, Felder draws attention to the fact that that new cryptocurrencies are being created all the time, many of which may be technologically superior to bitcoin. Fiat currencies, on the other hand, they have value because the powers that be declare they have value; that’s what “fiat” means. So, “how can we know that, without this sort of support, bitcoin will not be supplanted by a better cryptocurrency, perhaps one that has yet to be invented (or one created by the powers that be and vested with full fiat support)?” Jesse Felder answers his own question, “we can’t.”
Quantum Computers Could Crack Bitcoin Within A Few Years
Another prescient voice with insights into the future of bitcoin, believes that quantum computing technology could break present-day crypto in just a few years. In a November 2019 interview with Decrypt, Andersen Cheng, CEO of London-based cryptography company Post-Quantum, stated that “the entire digital currency world is based on trust and the security of private key signing. If that trust is gone, then the value of your bitcoin will go to zero, immediately.”
Using quantum computers, Cheng asserts, hackers could hijack a victim’s private keys and use them to fraudulently validate transactions. And since blockchains have no middle-man to determine which transactions were made fraudulently, “the whole thing falls apart.”
No stranger to the intelligence community, Cheng’s company Post-Quantum, has worked with counter-terrorism departments such as NATO, GCHQ, and NCSC, so his assertion that the threat is imminent, shouldn’t be taken lightly. Speaking of sources within the British intelligence community (Cheng was also the former head of TRL – a leading counter-terrorism technology supplier to the UK government), he said, “I have heard from more than one party in my community [that quantum computing will become a threat] in less than five years.” And considering that western nations are lagging China on quantum research and spending, and that no government is going to let on that they have a huge quantum computer “the size of a stadium” hidden away in an underground bunker, even that estimate may be conservative.
Those guys never want to launch it. They will always want to keep quiet about it. Why would they tell the world that they got it working when they can start cracking the communications between the US and the UK, or the stock exchange trading information, or bitcoin transfers. By the time the commercial world has heard about it, it’s probably too late.
As for comments by Sundar Pichai, CEO of Google and Alphabet, that “in a 5 to 10 year time frame, quantum computing will break encryption as we know it today,” Cheng also called this overly conservative. For Pichai to sell Google’s quantum computer to other companies, it would have to be stable and practical. But for a government computer, none of this matters “so long as you can start cracking encryption,” said Cheng.
Cheng also dismissed concerns that a quantum computer would have to be purpose-built to crack Bitcoin’s code, and whether that could take even longer. Since Shor and Grover’s algorithms already exist, “people know exactly what to do, but they just haven’t got the power to do it.” Now, people are “just waiting for the power to arise.”
Right now, it’s up to the blockchain and cryptography community to build quantum-secure blockchains. Until then, bitcoin holders will be living in a state of uncertainty. And Andersen Cheng isn’t taking any chances. He said he prefers paper bank statements to digital ones. “If [the bank] got hacked and if people no longer know their bank balances, at least I will be the first in the queue with the paper statements.”
Investing In Bitcoin Considering The Risks
Now if you’re still tempted to buy bitcoin, always be cognizant of the inherent risks, and don’t forget about asset bubbles of the past. Sure there were winners in speculative frenzies like the Dutch Tulip Bubble, South Sea Bubble, and Dotcom Bubble, particularly for early adopters with the wisdom and discipline to take profits, but far more people lost money when they were the last ones holding the bag. In short, never put “all your eggs in one basket” (there are other promising cryptocurrencies in circulation that can help mitigate the risk), and never buy more bitcoin than you can afford to lose.
Bitcoin As An Asymmetric Bet
While there are too many risks and unknowns to put a significant amount of your savings in bitcoin, it may still be a good asymmetric bet, an effective hedge against the loss of purchasing power due to currency debasement.
You don’t really want to be speculating on stocks unless you take a really long-term view. And bonds are at all-time highs and paying, basically, nothing. So perhaps its prudent to convert a small percentage of your savings into bitcoin as a hedge against the future inflation that is very likely to happen given all the debt that’s been accumulated around the world and all of the money printing.
With respect to bitcoin’s risk asymmetry, it will either go to zero (if the aforementioned experts are correct), or see a 50x to 100x increase if they’re not (50x if bitcoin replaces gold as a store of value, and 100x plus if it reaches world reserve status). In this respect, bitcoin works as an effective hedge since you only have to risk a small percentage (1 to 5 percent) in order to capture quite a bit of upside and protect your savings against significant fiat currency debasement.
Risk-Mitigating Alternatives To Bitcoin
Privacy coins are cryptocurrencies that give users anonymity when making transactions on the blockchain. Whereas bitcoin is public record (its possible to look up the origin, destination and value details of every transaction since the platform’s inception), privacy coins focus on keeping transactions anonymous and untraceable, reducing government risk.
Quantum Resistant Ledgers
A quantum algorithm developed by mathematician Peter Shor, allows anyone with a sufficiently large quantum computer, the ability to derive a private key from its corresponding public key, and thus, falsify any digital signature. And while many argue that this is still years away, new post-quantum secure blockchains are being developed to ensure safe custody of digital assets.
Investing In Precious Metals
Bitcoin was launched as 2009. Gold has been a store of value for over 3,000 years. Will bitcoin mature into a gold-like store of value? Its still too early know. Therefore, if you truly want to protect purchasing power, here are a few ways to invest in gold and precious metals.