Over the past year, I have consumed a lot of crypto-related content. Not because I seek it out, but because every writer and podcaster in the financial world has been covering it. I tried my best to ignore Bitcoin, but it’s become impossible as it completely dominates discussion in financial media.

In 2021 I began researching Bitcoin and cryptocurrencies with an open mind. I try my best to make evidence-based decisions with my money. In my crypto research, I was looking for some real evidence that this is something beyond a speculative asset.

Surely, with all of the hype, there must be some truly world-changing applications of Bitcoin. In all of the interviews I’ve listened to from the crypto evangelist’s over the past year, I have never heard a convincing answer to the following question:

What problem are cryptocurrencies, like Bitcoin, actually solving?

And if anyone can ever answer that question, I have a follow up:

Is it worth all of the negative externalities?

In this article, I lay out my skepticism of crypto. If you are a crypto true believer, my intent is not to offend but to offer a counterpoint to the common arguments I hear in favor of crypto.

Did you know 1/3 of all dollars were created in the past 12 months?

Anyone who has read a piece making the case for Bitcoin has without a doubt seen some statistic about the mass “money-printing” that’s about to lead to currency debasement and mass inflation.

It sounds terrifying, which is the entire point. Like with any evangelist, the crypto boosters need a good story to recruit new converts. If what you’re selling is a new currency, the logical story to push is that the old currencies are dying.

The floods are coming, but don’t worry we’ve already built the arks.

If one of the core value propositions of an investment is that the world is ending, you should be very skeptical and begin asking a lot of questions.

Here’s the first question you should ask before investing in crypto

Is there actually any evidence that mass inflation is coming?

Yes, we have printed a lot of money over the past 10 years.

So, what?

If you listen to the crypto boosters for long enough, you will begin to believe inflation has been the greatest economic challenge of our time.

Except it isn’t.

The only problem with inflation is that until very recently, we haven’t had enough of it.

A little bit of inflation is a good thing as it means there is strong demand for goods and services in the economy. Annual inflation in the 2%-3% range is a sign of a healthy economy.

If inflation was consistently running over 4%, we might have a real problem on our hands.

Do you know how many times inflation has been over 4% in the past 10 years?

Zero.

In fact, it’s only been over 3% once, and that was back in 2011. Over the past decade, inflation has struggled to crack 2% most years. This is summarized nicely in this chart;

So, yes, the impacts of inflation have been greatly exaggerated.

I recently attended a lecture from an agricultural economist at The University of Guelph, who presented a few simple statistics that perfectly summed up what a non-issue inflation has been.

• In 1935 a carton of eggs caused 31 cents in Canada.
• In 2008 it cost $2.57.

That a 730% increase! Look at that currency debasement; fiat currencies are on the verge of collapse!

Here’s a much more useful way of looking at the “true cost” of a carton of eggs.

• In 1935 a Canadian worker earning an average income had to work over 100 minutes to earn enough wages to buy a carton of eggs.
• In 2008 the average worker had to work less than 10 minutes to buy a carton of eggs.

In terms of time spent working, the cost of a carton of eggs dropped by 90%.

The true cost of anything is how many hours you need to work to buy it.

It’s easy to spin a story about currency debasement looking at the top line inflation numbers over a very long time period. But what we should be concerned about is not inflation but standard of living.

If the value of a dollar declines by 2.5% and I get a 2.5% pay raise, my standard of living remained unchanged, so why do I care?

The gold standard was a bad system, which is a problem for crypto

A common narrative surrounding Bitcoin is that it’s “the new gold.” Indeed, the crypto boosters make a lot of the same arguments that the gold bugs make. Money printing, currency debasement, economic catastrophe, and all that.

If Bitcoin is the new gold, it would be terrible to have Bitcoin or similar cryptocurrencies as the primary means of exchange. At one point, the dollar and many other fiat currencies were tied to the value of gold.

I’d recommend reading this article from money and banking dot com for a detailed breakdown of why the gold standard was a terrible idea.

The biggest takeaways:

1. The year-to-year variance in inflation was much higher under the gold standard.
2. Deflation was much more prominent under the gold standard. Deflation is a much bigger problem for the economy than inflation and is often harder to combat.
3. The variance in economic growth was much higher under the gold standard. Recessions, often painful ones, were much more common than under the fiat model.

If Bitcoin were to replace the dollar, we could expect similar levels of economic volatility.

Change does not mean things will be better. It just means things will be different.

Bitcoin’s massive energy use is finally in the spotlight

Bitcoin has a massive carbon footprint and consumes more energy than the entire country of Argentina, which has a population of 45 million. If you are worried at all about climate change, then you really need to stop and consider if it’s ethical to buy Bitcoin.

As the price of Bitcoin rises, so will Bitcoin mining activities and, along with it, CO2 emissions. This is the stated reason that Tesla stopped accepting Bitcoin as a form of payment. Buying an electric car with Bitcoin is kind of like buying solar panels with a bag of coal; any environmental benefits are instantly wiped out.

When you think about fossil fuel energy, it obviously has a huge carbon footprint, but we put up with it because that energy is vital (for now) to the global economy.

• If all the oil in the world instantly vanished, the global economy would fall into a crippling depression.
• If all the Bitcoin in the world instantly vanished, it would not impact the economy in any meaningful way because 12-years after its creation, Bitcoin plays no meaningful role in daily economic activities.

All the makings of a bubble

If you believe markets are efficient, it’s difficult to predict a bubble before it happens.

For all the reasons discussed in this article, I can’t think of many markets that are less efficient than Bitcoin. It appears that Bitcoin has two primary uses.

1. To facilitate Ransomeware attacks.
2. Speculative trading.

Is the cryptocurrency market a bubble waiting to pop?

Possibly.

If it is, that could be one of the greatest things to happen to cryptocurrency. In the 2000s, the dot com stock market bubble burst, and a lot of companies went under, and investors lost their shirts. But from the ashes rose Amazon, which has become one of the most dominant businesses in history.

If the crypto market crashes hard, could we see Bitcoin or some other cryptocurrency rise from the ashes?

Possibly.

But for that to happen, they will need a compelling answer to my original questions: what problem is this actually solving, and is it worth the negative externalities?

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://themakingofamillionaire.com/bitcoin-an-answer-in-search-of-a-problem-e0876e591f64?source=rss——-8—————–cryptocurrency