Steph McGovern and Robert Peston on The Rest is Money were were asking for people’s thoughts about cryptocurrency. I wrote the below as an email but they haven’t used it, so I thought I’d keep it here. I bought 19 bitcoin in early 2011 (for £11 each) and I’ve thought about the technology, and the value, quite a lot.

Disclosure: I’ve done well out of my initial punt in 2011, with an initial strategy of selling a bitcoin each time the price doubled (after the £200 mark). It paid for camera gear, a new bathroom and eventually helped to pay off my mortgage. I have not bought or mined any since 2011, and I have 1 bitcoin left.

Hit-tip to Steve Gibson on the Security Now podcast, that podcast prompted my punt at such an early stage.

However, since about 2017 my advice is: Don’t touch bitcoin (or any crypto currency) with a barge poll, it’s too late.

People watch the graphs go up and down, and you can play it like a currency to make money. But there is nothing underneath that, there is no intrinsic value.

People make the same point about fiat currency, it’s all a shared illusion that only works because people believe in it. However, national currencies at least have a government backing them. It is in the interests of everyone in the country to maintain that belief. In a similar way, shares are a form of ownership of of a company, there is something behind them. Crypto currencies don’t have anything behind them except the shared belief, so the value will fall to zero if not enough people decide it is worth having.

I think Bitcoin has done so well because it was the original, and a bit like the “million dollar homepage” (for those old and geeky enough to remember), it has the novelty and momentum. The copycats come and go. It has also been useful for people paying for things on the darknet, and people extorting money with ransomware. I’d love to know the proportion of legitimate vs illegal transactions there are.

The technology is interesting, but it has a big problem for use as a currency: It does not scale to the number of transactions you would need for mainstream usage. It can handle about 7 transactions per second, and it takes roughly an hour to confirm the transaction. Companies like Visa and Paypal handle thousands of transactions per second with near instant confirmation. Can you see people waiting around an hour in a shop to pay for things?

There are cryptocurrencies designed for speedier transactions, but then you’re just putting a different front-end onto your fiat currency or bitcoin back-end.

Bitcoin’s technology is based on a distributed ledger, which means you don’t have to trust any particular party to do transactions. But you have to ask, is that a good enough reason not to use a set of companies (who compete with each other) that have big, fast databases to do transactions?

There are also cryptocurrencies which tie their value to fiat currency (usually the dollar). But in that case there is no rise or fall in value, you are just using a different (and probably worse) mechanism to store value and make payments.

Also, don’t forget the alarming externality of the environmental damage. The cost is in the transactions, so I’ve avoided that for quite a while.

Distributed ledgers do have some interesting use-cases such as:

• Voting. The flexibility of the technology could allow you to cast your votes with trusted experts in a topic. (Assuming that we moved on from a first-past-the-post geographical system.)
• Automatically distributing funds from purchases. I bought a music track with Etherium that automatically distributed the currency to the singer, drummer, producer etc. That was 9 years ago though, I haven’t seen it take off.

Overall, I can’t see Bitcoin becoming more than a digital equivalent of gold, i.e. a store of value. Except that Bitcoin’s value could fall to zero if people stop believing. At least with gold you can make some pretty jewellery.