Why bitcoin may be worthless

The Bank for International Settlements isn’t exactly a household name. Based in Basel, Switzerland, and founded nearly 90 years ago, it’s the central bank of the world’s central banks, fostering cross-border capital flows and monetary policy cooperation.

But it’s also the home of some of the best independent research on the macroeconomy. And it’s surprisingly nonconformist, including warning of real estate excesses in the mid-aughts and, more recently, sounding the alarm on overly aggressive monetary policy stimulus and eye-watering global debt levels.

In an early release chapter from its upcoming annual report, the BIS eviscerates the bullish case for bitcoin and other cryptocurrencies: They aren’t scalable, they aren’t efficient, they aren’t secure, and they have no intrinsic value and no intellectual property moat. Initial coin offerings, which investors have flocked to despite outright fraud and regulatory warnings, have often “turned out to be fraudulent Ponzi schemes.”

The bullish VC investors in crypto, including prominent names like Andreessen Horowitz, should pay attention.

I’ve been skeptical of bitcoin and outlined my skepticism from multiple angles. Covering the lie that may have driven prices aloft late last year. That the blockchain technology powering cryptocurrencies could be usurped by sovereign powers. And wondering if bitcoin risks falling to zero as new competitors rise to solve structural problems with the pioneering cryptocurrency.

But now, the BIS is adding its voice to the chorus of bitcoin bears who believe prices are headed lower. Much lower. The main arguments in its annual report can be summarized as:

Inefficiency: It simply requires way too much computer power, and thus actual electrical power, to generate the decentralized trust via the blockchain, since every entry into the distributed ledger must be duplicated millions of times. Bitcoin’s power usage already equals all of Switzerland’s because of its onerous proof-of-work system to add blocks to the ledger. Ether, with a more efficient proof-of-stake system, is still consuming upwards of 15 terawatts per hour. More than all of Cuba.

In the BIS’s words, “Put in the simplest terms, the quest for decentralized trust has quickly become an environmental disaster.”

Scalability: Unlike sovereign fiat currency such as the US dollar, bitcoin and other cryptocurrencies don’t scale. Each and every user must download and verify the entire history of all transactions ever made including amount paid, payee, payer and other details. With every transaction, the blockchain grows larger. Currently, the bitcoin blockchain is growing at a pace of roughly 50 gigabytes per year and recently stood at 170 GB.

Processing such large files dramatically slows transaction speed relative to alternatives like Visa, MasterCard or even PayPal. And the “include everything” requirement means that a cryptocurrency would need a ledger larger than 100,000 GB to accommodate all US retail transactions.

Value stability: Unlike sovereign-based fiat currencies, where value is assigned based on things like military prowess, economic vitality and macroeconomic health, cryptocurrency values are based solely on demand, since the rate of new supply is fixed, in the case of bitcoin, by a mathematical formula over time. Thus, price volatility has been extreme and reduces the appropriateness of bitcoin as a means of exchange for day-to-day transactions.

Further undermining value stability is the extreme rate at which new cryptocurrencies are created. With no patent protection, there is nothing to stop the knockoffs. Many of which have been “forked” or birthed out of existing cryptos. Like Bitcoin Cash and Bitcoin Gold from bitcoin. But also others trying to cash in on name recognition like BitcoinDark, Bitcoin Green and Bitcoin Diamond.

Trust in finality of payments: And finally, unlike the regulated banking system where, once payments work through the national payment system, they cannot be revoked, cryptocurrencies are vulnerable to rival blockchain ledgers and transaction rollbacks. Something that can be manipulated by bitcoin miners controlling large amounts of computing power.

The March 11, 2013, temporary fork in bitcoin is an example of this, when a bad software update temporarily split the ledger and resulted in voided transactions.

Ultimately, these criticisms will likely prove fatal for bitcoin and many of its would-be successors. Looking around, it feels like the bloom is off the rose. ICO activity is collapsing. Bitcoin prices are mired below the $7,000 threshold.

Analysts at Bank of America Merrill Lynch are plotting bitcoin’s fall from grace against the bursting of other famous asset bubbles, as shown above. The team at Capital Economics, while noting bitcoin has traded in tandem with stocks and other risk assets in recent months, believes in the end “Bitcoin is essentially worthless” and will deviate to the downside in the coming month. Morgan Stanley warns that bitcoin miners are losing money at any price below $8,600 as the cost of computing hardware and electricity makes keeping their rigs running—and thus, processing bitcoin transactions–increasingly unprofitable.

And even John McAfee, the colorful computer anti-virus pioneer turned vigilante turned crypto cheerleader, is retreating. Last year, McAfee famously tweeted that he would eat his man parts on national television if bitcoin didn’t hit $500,000 within three years. He doubled down in November and raised the bet to $1 million by 2020. His recommendations helped crypto entrepreneurs so much that he was charging more than $100,000 per tweet.

Yet earlier this week, he said he would no longer pitch ICOs due to tightened regulations and warned that “those doing ICOs can all look forward to arrest.” No word on the other thing.

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