Image: 123RF
Image: 123RF

Bitcoin turned 10 last week, providing something of a reference point to examine the turbulent history of the global phenomenon and cryptocurrencies in general. Has a decade of bitcoin use enhanced the idea behind the currency or demonstrated its shortcomings? Has the decade proved its utility or illustrated its uselessness?

If you were to look at the market on its own, the answer would be easy. The value of bitcoin has fallen by around 70% since its peak late last year. Cryptocurrencies such as Ether, EOS, Litecoin, and XRP have all fallen by more than 80%, while thousands of others have dropped between 90% and 99%. That level of decline suggests not a lack of market appreciation but outright fraud. 

Yet, the defenders of bitcoin argue that its premise remains sound, in two important respects. It promised instant wealth, and what could be more enticing than that? But behind that implicit claim, which has not turned out to be false, there is an arguably more important claim. Bitcoin and the other cryptocurrencies had become an object of global fascination because they promise to create a peer-to-peer money system that excludes banks and governments.

Even if you leave these aspects out of it and focus on the hallowed idea of distributed ledgers — ledgers that exist on the internet and that everyone can see — Nouriel Roubini remains sceptical

Instead of governments manipulating the value of the currency for trade or fiscal reasons, cryptocurrencies would rely on the notion of the code being the law; it would be immutable and secure. Instead of banks being able to monopolise the movement of money and therefore profit from it, a public ledger would cheaply, easily and transparently maintain the integrity of the system. 

Sadly, this is not the way it has worked out. Perhaps the lead flag-bearer of the negative school is Nouriel Roubini, a professor at New York University’s Stern School of Business.

Writing for Project Syndicate, Roubini says its obvious that cryptocurrency is not about “decentralisation and democracy; it is about greed”. That’s obvious since a small group of companies, mostly located in “such bastions of democracy as Russia, Georgia and China, control between two-thirds and three-quarters of all crypto-mining activity. Apparently, blockchain fanatics would have us put our faith in an anonymous cartel subject to no rule of law, rather than trust central banks and regulated financial intermediaries.” 

Even if you leave these aspects out of it and focus on the hallowed idea of distributed ledgers — ledgers that exist on the internet and that everyone can see — Roubini remains sceptical, calling it the most overhyped  and least useful  technology in human history.

“There is no institution under the sun ... that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralised peer-to-peer permissionless ledgers. There is no good reason why such proprietary and highly valuable information should be recorded publicly."

Several technical issues buttress Roubini’s arguments. One was a limit of seven transactions a second which was written into the original code and that led to a protracted fight among developers how to enhance the payments system. The dispute dented the image of currency, and forced developers to introduce a “fork”; some supported a new system, others the traditional one. But that created its own problems since one of the founding arguments was that the system is not fungible. In fact, it turns out, it is. 

The 2017 rush into the currency put pressure on the network and as a result, transaction fees jumped to as much as $54 per transaction. That undermined the idea of seamless, practically costless transactions. They are now back down to 50 US cents, but the damage was done. 

Even its reputation as a store of value has collapsed, not only because of the decline in the price but because of price volatility, which it turns out is higher than gold’s. Many of the companies that accepted bitcoin, such as Dell and Expedia, have dropped it.

Yet, it remains a fascinating phenomenon and accounts for a percentage point of the financial market. These are early days for cryptocurrencies. Joseph Lubin, a Bitcoin founder, was confronted with Roubini’s criticisms recently and asked: “Where do you think you could be wrong?”

Lubin said, “I think I may be wrong when I anticipate that it will all take more time.” Then he added, “It’s difficult being a human being living in exponential times.”