Bitcoin needs work if we're to take it seriously
Despite its populist rise, to my mind Bitcoin is still not a currency, a commodity or an investment.
I'll try to keep an open mind, because I promised my neighbour I would.
He owns a fraction of one for fun. For now we just shout crypto-whallops over the hedge at each other.
I've worked in enough currency markets to know this thing isn't behaving as one or being used as one.
Every commodity I've ever seen could be eaten, set on fire or made into something. Magic beans just don't cut it. And I've burnt enough of my britches in tech-stocks to know an asset can't be created out of thin air, unless it ends with its users becoming a product for the advertising industry.
Price stability: To use a farming euphemism, right now cryptos are about as much use as tits on a bull. It's pretty offensive these beasts are even allowed to call themselves a currency.
That would require some element of price stability, good security and fast processing.
Bitcoin is a partially developed fixed supply of 21 million magic beans that are currently held as an "asset" (a painful word to use) or as a method of shielding transactions from public view. Price instability prevents it having any practical use as a means of exchange.
Indeed that could change. Just not any time soon. Its design flaws mean it's not scalable to a size needed for a currency. Then there's the elephant in the room – the price is linked to nothing tangible. Maybe that's fine for now, but the price of a currency cannot exist in an economic data vacuum forever.
Price movements based on positive psychology and the latest scam doesn't translate into a reliable store of value from which we can trade. What will it eventually link itself to? Electricity prices perhaps? That's the cost driving its supply.
Security: With no Reserve Bank or national borders, you have to find a way to keep all the magic beans safe so they can't be hacked or spent twice. Every time you buy something, your magic-bean transaction is stuffed in a bag with others and a maths puzzle is created for security. It's just a mechanism to allow the beans to change hands safely. Computers whirr and race to be first with the correct answer. The winner earns themselves some freshly minted beans and a transaction fee. This is how the bean-supply is slowly growing towards the fixed amount of 21 million.
The beans change hands when the other puzzle-solvers agree the answer is correct and the bean ownership is correct. A record is added to a giant beanstalk that keeps growing in size. Many copies of the beanstalk exist in different locations.
It can only be hacked if a bean-robber got control of 51 per cent of the puzzle-solving capacity and rewrote the story held by multiple copies of the beanstalk. While this hasn't happened, a large Bitcoin exchange was slowly robbed over several years in Japan. At today's values it would now be worth billions of US dollars, but it's never been found.
Quick processing: The size of the beanstalk and its numerous copies present a problem. Too many copies all have to agree with each other, slowing down the processing rate. More storage and quicker computers don't solve the issues. Its very design prevents it from handling the large increase in transactions needed for a workable currency.
Maybe this is solvable with time, but not with generation-one of Bitcoin.
Rising prices: The whole bean supply will be in circulation in 20 years at which point the puzzle solvers need to survive on transaction fees alone. Let's hope they give the banks, Visa and Mastercard a run for their money.
Apparently the price will have to keep rising (according to bit-lievers) to make the transaction fees worthwhile for the puzzle-solvers. If they get no income, it all hits the compost heap. We better hope this becomes a popular method of trading real goods as bunches of magic beans sitting as assets in cold storage won't generate any fee income.
Environmental disaster: Bitcoin could drive an energy shortage. Custom-built computer rigs are used and they're already sucking more energy than countries such as Ireland and Denmark. The Chinese are searching for hydropower sources for their massive puzzle solving farms. In Iceland they're using geothermal plants. While some Bitcoin is carbon-neutral, much of it isn't.
Cryptocurrencies could disrupt electricity prices, supply, pollution levels and compete for resources with electric bikes and cars. Normal currencies and bank operations don't come without an energy requirement either, but electricity prices are the single driver of this whole new system of securing Bitcoin payments.
Environmentally, do we actually want Bitcoin and its mates to become scalable? If they do, a rise in energy stocks will be a big investment theme dragged along for the ride.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.