I’ve written a lot of positive things about Bitcoin, so you might think that I’ve got 80% of my portfolio in it.
Actually, only about 5% of my portfolio is in cryptocurrency.
That’s because while I believe Bitcoin solves a lot of the world’s problems, there are a lot of things I’m doubtful about too. Let me run through some of them.
Bitcoin is secured through a pairing of keys.
You have a private key and a public key.
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The public key is like a bank account number – you can share that with anyone you want so they can pay you.
The private key is like your banking password – you don’t share that with anyone or they have full access to your Bitcoins.
The way the Bitcoin ledger works is the public key is generated from your private key, based on an encryption code. However, Bitcoin developers assure people that this encryption code is “impossible” to break.
Also, whenever you generate a Bitcoin wallet, you get a new set of public and private keys. Somehow, these wallet addresses have infinite possibilities – I can connect to the blockchain right now and just generate key after key after key. Bitcoin developers assure us there are so many combinations that it’s “impossible” that two of the same public addresses will be generated.
I don’t find these assurances all that comforting. We all know that nothing is “impossible”. Perhaps it is impossible to crack the encryption today, but what about in 10 years when we have Terminator level computing? Maybe the code will be cracked with the press of a button.
I’m not a computer nerd so I can’t talk on this with any certainty. I do however have a feeling that somewhere down the line we’ll find out the code is not as secure as we thought it was. Luckily the Bitcoin community works round the clock trying to improve the Bitcoin platform – but that’s really the only assurance we have. This is one of the main reasons I haven’t invested more money into Bitcoin.
One thing I like about Bitcoin is it’s community driven. There are developers who constantly work on the Bitcoin protocol trying to make it faster, better, cheaper. It’s similar to Wikipedia. People donate hours of their free time to it, just because they believe in it. Passion builds better things than fat salary packets.
There’s a key difference, though. There’s an incentive with Bitcoin. Most of the community hold large amounts of Bitcoin, so it’s in their interests to make the platform as bulletproof as possible. We’ve already seen quite a few great developments in 2018, such as the first transaction on the new Lightning Network, which should massively improve transaction speed and decrease fees.
However, communities come and go. There’s nothing to say all the Bitcoin devs won’t hold a mutiny and decide to go rogue one day. What if a Black Swan event happens and a few of the key developers die in the same week? Things like this poke some questions about fragility at the network. We’ve seen it’s been rather antifragile thus far – even the original creator of Bitcoin has all but disappeared – but who knows what happens down the line.
Storage and ease of use
This is one of the biggest gripes I have with Bitcoin. It’s storage systems are from the 1980’s.
Did you know there are people that write down their private keys on paper, laminate it, and then deposit it in a bank’s safety deposit box? That’s because it’s actually the safest way to store your Bitcoin.
This is because if you lose your private keys, your Bitcoin is gone. If someone steals your private keys, your Bitcoin is gone. In fact, there are thousands of people who have lost their private keys and now their Bitcoin is gone forever. Technically, those people still own it. It’s there on the blockchain, you can still browse the ledger and see it. It’s just they can’t send it anywhere, because they don’t have the private key. It’s estimated that almost 20% of all Bitcoins ever mined are now unusable, because of the loss of private keys.
The safest way to store Bitcoin these days is with a hardware wallet (I use a Ledger Nano). This is a separate device that costs over $100. Pretty crazy for something that is supposed to be so technologically advanced, but right now that’s the best we’ve got.
Of course, I think this will develop quickly and soon we’ll be able to turn our fingerprints or eyeballs into private keys. But for now many Bitcoin owners are still left with writing down their keys on sheets of paper and stuffing them in a safe under the bed. This space needs to improve fast before we even think about reaching mass adoption.
Bitcoin prices have been moving in hugely volatile peaks and troughs. This is because people are treating it like a speculative penny stock. This is not what Bitcoin was designed for.
You can tell this by the fact that Bitcoin is mostly bought and sold on exchanges. If you log in to these exchanges, they look exactly like stock markets.
Bitcoin was intended as a peer-to-peer currency, with no third party. Yet people are buying and selling all their Bitcoin through third parties. This is exactly why exchanges are being hacked and coins getting stolen all the time. The Bitcoin whitepaper made it very clear that one of the goals was decentralization, so things like hacks (the Bitcoin version of a bank robbery) would never be an issue.
Until we see a higher adoption rate speculative trading will continue, which is just the nature of things whenever money is involved. We see exactly the same thing in the stock market and forex market and even the gold market today.
However, this activity takes away from the very purpose of Bitcoin, which makes it difficult to find its true value.
These are the points of interest I’ll be paying attention to as Bitcoin develops. I believe they will all be resolved eventually, but how and when we get to that point will make a big impact on how much of my portfolio I decide to put towards it.
Note: This is not financial advice, I am not your financial advisor. Do your own research before investing.