The Bitcoin Problem
icon32.png Posted: 02 Mar 2014 18:42

Like many Bitcoin investors, I too was drawn to what I perceived to be an alternative currency. Who doesn't like the idea of an anonymous digital currency that is invisible to an all-invasive governing body, and tax exempt. But there are a couple of root problems with Bitcoin.

1. The costs needed to generate new Bitcoin is higher than the value of the Bitcoin gained. Anyone in business understands that if your overhead is greater than your income then you are losing money. The only way to introduce new Bitcoin into the market is to virtually mine it through a distributed computer network, that requires electricity. The cost for electricity varies based on where you live but it has been found that for most people, the cost of electricity needed to run your computer to mine Bitcoin is greater than the value of the Bitcoin you earn.

Additionally, the computing effort and time needed to mine Bitcoin is constantly increasing so therefore the cost needed to generate it is also constantly climbing. Meanwhile the amount of Bitcoin gained through mining is decreasing, this is all by design. Those claiming that any Bitcoin increase in value is a sign of trust just don't understand the math behind Bitcoin. So why are people mining for Bitcoin? Most aren't paying the electric bill, or don't understand this problem.

2. Mining for Bitcoin is gambling. Despite all of the money needed to mine for Bitcoin, whether or not you gain Bitcoin is a gamble. Merely mining offers you no guarantee of return. With a real gold mine, you have the benefit of Geology and discovery of Gold to help you determine whether or not mining might be profitable. There is no such science with Bitcoin mining, it is pure chance. This is such a well known fact that many Bitcoin miners pool their collective mining efforts and then share any Bitcoin gained. This is the same method used in an office lottery pool.

In addition to the two primary root problems explained above, there are additional problems listed below. I will admit that the problems below can be fixed, but the root problems listed above cannot be fixed and alone discredit the entire Bitcoin endeavor.

3. Bitcoin is a commodity, not a currency. Supporters are not using Bitcoin as much as they are investing in it based on the speculation that its value will increase. This speculation has investors using traditional money they hate to buy it.

4. There are no real laws regulating the use of Bitcoin. Bitcoin was developed "anonymously". Why develop the "currency" anonymously unless you planned to use it to milk the public for real money. In fact that just happened with Mt. Gox, a Bitcoin currency exchange company that simply stopped their service and kept over $400 million in Bitcoin currency.

My opinion

The ideology behind Bitcoin is appealing and I'm very much in favor of a currency like it, but minus the problems listed above. In the U.S. printing and distribution of currency has been handed over to a 3rd party called the Federal Reserve, there is nothing "Federal" about it and it is probably one of the most corrupt organizations in the world. So don't misconstrue my criticism of Bitcoin to be support for the Federal Reserve, they both involve a currency that has little trust.