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LONDON — The word disruption is often used in discussions on new technology that is changing the world order. Cryptocurrencies have disrupted the way we think about money and have evoked strong emotions in those who believe that Bitcoin and the currencies that followed it, heralds a new way of conducting financial transactions, while opponents like Dr Nicholas Weaver, who has been studying the technology believes the entire space ought to be burnt down in a fire. There was even a stronger reaction from Yves Mersch, a member of the European Central Bank who likened cryptocurrency to a “will-o’the-wisp, a malignant marsh dwelling creature that lured travellers from their path to their untimely death and a watery grave.” In a response to Dr Weaver’s attack on Bitcoin, Justin McCarthy, a Fintech specialist from UBU and Project Manager Ricki Allardice has used equally strong words in defending Bitcoin saying Weaver “is another public intellectual who has chosen BTC as a hill to die on” and his arguments are flawed and incoherent. One thing these commentators on cryptocurrencies appear to agree on, is a creative use of language in their arguments. – Linda van Tilburg
In response to Cryptocurrency is cow poo
By Justin McCarthy and Ricki Allardice*
In an article published by Biznews, Dr Nicholas Weaver attacked Bitcoin (BTC) and cryptocurrencies as technology that is deserving of being destroyed with fire. I rebut many of Weavers claims, several of which are logically inconsistent and patently false. The original interview was conducted on Bloomberg with Joe Weisenthal and Tracy Alloway.
The primary concern raised by Weaver is that BTC doesn’t work as a currency, saying “it cannot compete with payment networks such as PayPal, Visa and Mastercard and is significantly less efficient than these incumbent networks.” What Weaver means by efficiency, is unclear as he could be referring to the speed and ease of transferring value, or to integration with other payment gateways.
It’s clear that BTC won’t displace the incumbent networks as the payment processor of choice for the market any time soon. But the network is only a decade old and the development of layer two solutions such as The Lightning Network, are still in testing phases.
Simply, no serious BTC enthusiast expects it to replace Visa anytime soon. This argument is perpetuated by BTC-denialists. However, it’s important to note that BTC is an alternative to the incumbent systems, which gives users choice; to send money privately, quickly and cheaply to anyone who has a BTC wallet, without permission required. This alone is a phenomenal milestone in the development of money and should be celebrated. And because this alternative exists, the incumbent systems are forced to be transparent, as they now have competition from a system that plays by a different and immutable set of rules. The inevitable destructive outcome of fiat monetary systems will eventually manifest, as it always does. Combine this with dangerous central bank monetary policy of zero to negative interest rates (essentially a monoculture across all developed nations) and you have a plausible scenario where BTC may become the currency of choice following a crisis; just look at Venezuela and even Zimbabwe. More importantly, in the event of a global meltdown, BTC could become the global reserve currency overnight, replacing the US Dollar (USD). Even without such a scenario, the chances are increasing daily that BTC will naturally migrate to the global reserve standard.
“Financial institutions make people feel safe by hiding risk behind layers of complexity. Crypto brings risk front and center and brags about it on the internet.”
Weaver attests that BTC is only beneficial to use over conventional payment networks if your interest is criminal activity. A report published last year by The Foundation for Defense of Democracies, confirms that less than 1% of BTC is used for illegal purposes. Enough said.
Regarding BTC acquisition, Weaver claims it is difficult because transactions are immutable. Immutability of the blockchain and the user experience offered by crypto exchanges are separate issues. Purchasing BTC is as simple as opening an account on your local exchange, e.g. Luno, transferring cash from your bank account via EFT and purchasing BTC. If using reputable exchanges, the scam risk is almost zero. Furthermore, the suite of user options to purchase cryptocurrency, range from simple to complex. Entry level users looking for simplicity over privacy, versus advanced users who value their anonymity have various, suitable options available. Weaver details the risk of being defrauded by fake crypto sales as something that even caught Apple co-founder Steve Wozniak out. Presumably this example was used as an emotional play to lead readers into assuming that “if the founder of Apple can’t figure out how to buy BTC, what hope do I have?” Unfortunately Wozniak lost his money, because he didn’t make use of an escrow service, this is nothing more than bad operational security on the behalf of Woz.
The BTC immutability is the most distinguishing feature of the protocol. The fact that transactions cannot be reversed means that no central authority can bully BTC users by blocking or reversing their transactions. This creates an even playing field and a host of benefits for individual user sovereignty.
Security is another concern raised by Weaver. He correctly points out that exchanges and devices can be hacked. This happens regularly. The reason exchanges are hacked is because they act as honey pots for hackers. Once again, this highlights why decentralisation is so important. Exchanges hold large amounts of BTC and fiat currency on behalf of their users, so this custodial risk often leads to security breaches as hackers gain access to wallets connected to the internet. The simplest way to avoid this is by keeping control of your private keys and keeping your BTC on a hardware wallet such as a Ledger or Trezor device that is not connected to the internet. BTC allows individuals to become their own bank and just as banks have to secure client funds, so the same applies to BTC users. This is a feature, not a bug.
Furthering the “lack of security in cryptocurrency” claim, Weaver postulates that open source projects, which store their code on Github, may be subject to having code taken over by malicious actors. However, it is broadly accepted that open source projects have higher levels of security than those that make use of proprietary code, as there are more eyes scrutinising it. While it’s true that a hacker managed to inject malicious code into an open source crypto wallet owned by BitPay, the pros of utilising open source libraries far outweigh the cons. This case serves as a warning to other wallet developers that they need to maintain constant scrutiny of their code, regardless of how many contributors they have. Weaver made mention of hacking attempts by North Korea. It stands to reason that North Korea would use BTC if sanctions cut them off from using the USD, which is a feather in the BTC cap. Truth is, BTC protocol itself has never been hacked. Software deployed on top of BTC such as wallets and exchanges are at risk, and for this reason good personal operational security is required by all BTC users.
Weaver further claims that BTC is used by hackers when extorting individuals, as we saw during the Wannacry virus saga of 2017, as well as drug dealers seeking anonymity. By far, the currency most used by criminals, warlords, drug dealers and gangsters globally is the USD. Recent revelations indicate that even commercial banks have been involved with laundering billions of dollars for Mexican drug cartels. Money is nothing more than a tool, and blaming it for criminal activity is as asinine as blaming butter knives for the spate of stabbings seen in London recently.
Doubling down on his claim, Weaver questions how long before terrorists use BTC to extort the public with bomb threats and drone strikes. The same could be used against USD or other currencies. Weaver’s unspoken assumption is that BTC transactions are anonymous, which they are not. This is a slippery slope logical fallacy. Admittedly having BTC sent to a wallet is simpler than collecting a suitcase of cash, but spending it is also simpler. This is why terrorists settle for cash – they’re motivated by other factors beyond BTC.
A point made by Weaver around price manipulation within crypto markets is valid. Since the markets are relatively small compared to other capital markets, the ease and prevalence of manipulation is a concern. That said, as the market cap of BTC grows, the influence of individual malicious actors decreases. Concerns of manipulation in the gold and silver markets are present too, with fingers being pointed at the large banks as being conspirators. Similarly, George Soros did damage to the Pound in the early 1990’s. This doesn’t excuse crypto market manipulation, but it does indicate that it is a constant threat across many capital markets. Small alt-coins are more prone to massive price swings than BTC, due to market size, but this comes with the territory of being an asset class that is only a decade old.
Further, Weaver considers every initial coin offering (ICO) securities fraud. While there have been some ICO scams, there are many legitimate businesses too. The ICO model is a new method of raising capital. With the advent of BTC, and later Ethereum, businesses can now raise capital from individuals worldwide, at a fraction of the time and cost of conventional initial product offerings (IPO’s). Incumbents, such as law firms and merchant banks who earn income from the existing IPO framework are not pleased with this. But the ICO model is disruptive, decreasing the red-tape involved in raising capital, including investors who haven’t been involved in stock market investing, and increasing the efficiency of the overall system. Many ICO’s operate in good faith while developing the blockchain industry, which is supported by a recent action of US lawmakers seeking to classify tokens as a separate asset class to securities. While this has nothing to do with BTC, it illustrates the use case for BTC in transferring value from anywhere without permission required.
Weaver welcomes the crackdown of regulators on the cryptocurrency market, but feels that they are reactionary, rather than proactive. Furthermore he claims that the market has all, but collapsed. It’s the nature of bureaucratic institutions to be reactive and regulators are almost always behind the curve as it’s the nature of their role.
To his next point claiming that BTC has collapsed, refer to the chart below.
When speaking about equity markets, it’s commonly known that a five to ten year timeframe must be reviewed before drawing conclusions about the nature of average returns. This is due to varying degrees of annual or bi-annual variations in price. BTC is a volatile asset, and as such, it’s good practice to view it over time when considering the valuation trend. Detractors often reference the bear market initiated in December 2017, when they claim that BTC is dead. Evaluating BTC trends shows the average rate of price growth is 1% per day. Relative to 1 January 2017, the BTC price is still 500% higher as of mid-April 2019. The same cannot be said for all alt-coins, but it’s the nature of the free market. Many projects are destined for zero.
Weaver downplays the point of censorship resistance, which is a key feature of BTC. He claims that if you need censorship resistance, then you can always use cash. He does concede that moving sums of over $1,000 becomes tricky, which indicates that he doesn’t believe his own argument. If you can’t move large volumes of cash around without being censored by the banks, at the behest of governments, then cash doesn’t really provide censorship resistance. It’s particularly distressing is that as of April 2019 the central banks of the Eurozone, Bulgaria, Japan, Sweden, Denmark and Switzerland have all implemented zero or negative interest rates. This effectively taxes bank depositors on the capital they have on deposit with their banks. The natural response to this would be to withdraw your cash and keep it in your safe at home, as evidenced in Japan recently. The natural response of the banks and governments in these zero/negative interest rate jurisdictions is thus to outlaw or remove cash. By the admission of the International Monetary Fund on their blog, deeply negative interest rates are only possible in a cashless society, as depositors cannot withdraw their funds from the banking system. This is a very chilling and dystopian future vision. Over the next five years, we might see central banks rolling out crypto versions of their own sovereign currencies, but this is nothing more than an attempt to drive societies cashless. Luckily we have BTC.
The expensive cost associated with BTC and cryptocurrency transactions was cited by Weaver. He claims that Target gift cards are cheaper with a 4% fee. It’s true that in the peak of the 2017 bubble, BTC transactions were expensive, largely due to network congestion. Since then, numerous upgrades to the BTC network have been made to drastically reduce these fees. The most notable are Segwit and the development of Lightning Network. Currently the cost of sending a Bitcoin transaction for $100 at the most expensive rate is around $2.36 via the wallet provider Jaxx Liberty. This fee is reduced if you’re willing to wait a few more minutes. Alternatively, transactions across the Lightning Network cost 1 Satoshi, which is substantially less than the $4 charged for sending a $100 Target gift card. Furthermore, the BTC transaction cost remains essentially the same regardless of the value of the transaction. Traditional middlemen charge a percentage of the value of the transaction, while crypto is a once-off fee. A good case in point, is the first major Lightning Network transaction of $1m of BTC, which took seconds at a cost of just circa $0,02c.
Weaver also makes the case for not holding onto BTC long-term as hackers will steal your coins and price volatility will destroy the value. Neither of these are true. If you’re worried about hacking, secure your BTC private keys in a hardware wallet. If you’re worried about short-term price volatility, convert your BTC into a stable coin such as Maker Dai. Over the long-term, BTC price trends upwards so keeping your money in BTC is a good hedge against volatility. Also, BTC is inflation resistant.
Tether was brought up by Weaver referring to it as a criminal enterprise. While Tether has been central to much controversy, the parent company has yet to be indicted. That said, many stable coin competitors are popping up, and I expect Tether’s dominance to disappear quickly after. Weaver states that Tether is effectively the achilles heel of the crypto industry, and that if US regulators were to crackdown on blockchain enterprises, they should do so by cracking down on Tether. This proves that centralisation creates honey pots ripe for regulatory entrapment. The purpose of BTC is to decentralise. Tether is currently a weak link, but rest assured many blockchain developers are working on a decentralised solution to counter this.
The proof of work algorithm was attacked by Weaver, whereby he claims that it doesn’t provide security against 51% attacks on small chains and that the cost of securing the BTC chain is $5m per day. His first claim is correct. Small chains with low hash-rates are vulnerable to 51% attacks and this is the case with many smaller coins, trying to be currencies. They don’t have the requisite security, from a hash-rate perspective, to be as viable as currencies presently. However, this is not the case with the BTC blockchain, which is currently performing approximately 46,000 giga-hashes per second. This equates to approximately 821,000 Antminer S17 mining units. This is a large amount of hash-power and thus security and would cost close to $1.8bn just to purchase the hardware.
The second claim about the cost of securing the network is an impossible calculation to make accurately. In order to calculate the total electricity cost of the BTC blockchain, you’d need to know what the individual electricity input costs of each mining farm are. This data is simply not available. This is a wildly inaccurate and irresponsible remark.
BTC miners exploit areas with surplus electricity and/or is faced by a distribution challenge. This means BTC miners buy excess electricity from producers who can’t sell their power otherwise. Since BTC mining is highly competitive, the bulk of commercial miners purchase surplus electricity this way, as they can obtain it very cheaply. They tend to aggregate in areas with large excess power capacity, mainly China, India, Georgia and Iceland. The result is that using standard USA household electricity rates when calculating the cost of securing the BTC Blockchain over-estimates the cost by orders of magnitude. Furthermore, what the statistic does not indicate is that BTC mining is a net gain for society, as it uses power that would otherwise be wasted. To go even further, over 77% of all energy used in BTC mining operations globally is sourced from renewable energy sources. Should a malicious actor wish to attack the network, they’d need to purchase electricity at standard rates, since it is presumable that most cheap electricity is already being utilised by BTC miners. The cost to attack the network is far greater than the cost of securing it, which is compounded by the fact that an attacker would need to have a larger amount of hash-power than all other miners combined just to alter the last block mined.
This misinformation was taken further when Weaver insinuated that BTC could enter a mining death spiral if the price of the BTC token does not increase soon. This is not true. Firstly, while the price of BTC has dropped from near $20,000 to $5,000 since December 2017, more than three times the amount of hash-power has been allocated to mining. So it is obvious that there is no imminent mining death spiral.
Moreover, if the BTC price drops, fewer miners will mine as their fixed costs are greater than their profits made from mining. This effect is compounded by the difficulty adjustment algorithm taking two weeks before adjusting difficulty downwards, at which point, the price has dropped more and mining difficulty needs to be adjusted downwards again. So the cycle continues until there are no miners left. In reality this is not the case, as this argument fails to take human action into account. When Bitcoin price drops, some miners switch off their mining rigs, because they are no longer profitable. This is specific to every miner, as they all have different input costs. As miners leave the mining pool, those who remain effectively gain a larger share of the mining pool without having to spend any additional resources, and profitability goes up. This ensures that hash-rate doesn’t drop. Weaver’s argument assumes that BTC nodes will stand idle while watching BTC die, which won’t happen. The rules of BTC can be changed as long as consensus is reached between all parties. Thus in the “Death Spiral” scenario, the BTC community might implement a change in the protocol, which causes the difficulty retargeting algorithm to be implemented every three days instead of every two weeks, for instance, addressing the problem caused by a delay in difficulty retargeting. Either way, this scenario is unlikely to occur, and positive incentives are built into BTC to combat this.
In closing, it appears Weaver is another public intellectual who has chosen BTC as a hill to die on. Many like him have built their reputations on BTC-denialism, but their arguments are flawed and incoherent. BTC provides an alternative to billions of people who may yet choose to opt out of the conventional financial system or at the very least, aid in keeping the incumbent system honest.
- Justin McCarthy (CEO & Co-founder) and Ricki Allardice (Project Manager) of UBU.
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