Bitcoin is extremely secure and a disruptive technology that changes people’s lives, but the bitcoin blockchain is also “the most inefficient database,” says bitcoin expert Tuur Demeester.
At the 2017 Cayman Investment Forum organized by Cayman’s CFA Society, he warned that the rush to develop blockchain solutions for all kinds of financial services transactions may not be warranted.
“Think hard if you really want to use it for solving a problem, because you are storing everything forever,” the founder and editor-in-chief of Adamant Research said.
Using the blockchain technology to solve specific problems in financial transactions “only makes sense if you store a lot of value, because it really is secure,” he said. “Bitcoin is the most secure financial protocol on the planet. It makes sense to use it for digital gold, but a lot of other applications I am not sure.”
Mr. Demeester compared bitcoin and other cryptocurrencies to the competition between internet protocols in the 1990s to form the basis of the internet. Ultimately, the TCP/IP model prevailed.
“These protocols are very sticky,” he said. Even if people do not like them, they tend to live for a long time, because the protocols are the foundation upon which many other layers of technology are built.
Bitcoin, he argued, will remain the dominant cryptocurrency due to the large amount of development on top of it and the pedigree of the people behind it.
In the long term, there will be several cryptocurrencies but bitcoin is likely to maintain a dominant market share, Mr. Demeester speculated. However, it would take decades for bitcoin to become accepted as a medium of exchange for everyday goods and services. “Right now, the value of bitcoin is as a store of value.”
Bitcoin’s value proposition as “an extremely secure system” will be reinforced, the more economic activity the cryptocurrency is involved in. The energy intensity of bitcoin mining serves as a firewall, Mr. Demeester said. Statistics show that earlier this year all bitcoin miners globally were using about 1,200 terawatts of electricity.
“In order to attack this network, you would need at least 600 terawatts of energy spent and that does not even mean you could revert the entire history or steal massive amounts. It would just mean that you could temporarily slow down the network and make transactions more difficult,” he said. “That’s a pretty solid strategy to protect a decentralized network.”
The energy requirements also make bitcoin mining extremely competitive and eliminate anyone who does not have access to cheap electricity of 20 cents per megawatt or less. For many miners, bitcoin mining only makes sense, if they have access to excess energy of hydroplants or geothermal installations. This pushes bitcoin mining to more remote places, he said.
Although, bitcoin was conceived as a digital bearer asset, it still exhibits high volatility.
For Demeester, this is simply an indication of an immature market, similar to the early days of the oil market or other new commodities. The market capitalization is so small that if a lot of money enters or exits the currency, its price reacts strongly. More recently, the market has become more liquid, and it is now possible to move $10 million in and out of bitcoin without any slippage.
But bitcoin is still in the early stages of the adoption life cycle, which means early adopters will have to go through a chasm before the cryptocurrency is widely used.
“I think that is what bitcoin is going through right now. You are building the rails and you are encountering bottleneck after bottleneck, and you have to push through all of them before your pipeline is big enough for general adoption.”
This also makes bitcoin a risky investment.
“It is one thing to be convinced of the value of blockchain technology and it is another thing trying to decide what should I invest in,” Mr. Demeester, a bitcoin investor himself, said.
“I am concerned that a lot of the new blockchains are actually pretty insignificant improvements to the bitcoin protocol.”
In addition, there are a lot of dubious projects that raise large amounts of money and are likely to fail, he said.
“It is hard to do due diligence on these projects. There are so many. One thing I have noticed is dubious claims about what the technology can do.”
New companies often make big promises, trying to raise money in an initial coin offering solely based on a whitepaper. “But are these companies, that are basically paid up front, actually going to deliver?” he asked.