I participated in a panel on Cryptocurrencies at the Milken Institute Global Conference last week. We had a packed house and the panel was actually rescheduled to accommodate a much larger ballroom due to the higher than expected interest among Milken Global attendees. Supposedly we drew a larger crowd than Paul Ryan who was being interviewed at the same time in another ballroom. That is great news for Bitcoin and the broader cryptocurrency world.
Video of the entire Milken Global Crypto session along with my immediate post panel interview with the NY Post is embedded at the end of this post for your viewing enjoyment.
Cutting to the chase… What ensued during the panel was ridiculous as oft cited Bitcoin skeptic and so called Dr Doom, Keynesian economist Nouriel Roubini embarrassed himself by declaring Bitcoin “bullshit” and repeatedly making the claim over the course of the one hour panel. Of course he provided no real evidence to support his points so it’s not a surprise that he was relegated to simply using expletives with no basis in fact. According to my research Roubini has zero relevant experience in technology, although he is definitely entertaining. In case you’re wondering, I have worked in software, consumer internet, payments, cryptographic systems and e-commerce software for over 25 years. Abra, the leading retail smartphone app for investing in cryptocurrencies is part one of my life’s work in this space (there is more to come.)
Since I wasn’t going to get into an interrupting or shouting match in public with someone with no real insights into Bitcoin or my work I’ll simply lay out the facts here and let the interested public inform themselves. In his comments Roubini made three points all railing against bitcoin, while providing no evidence proving any of his points. Roubini argues that:
- Bitcoin is not useful as a store of value due to its price volatility
- Decentralization (and Bitcoin by extension) is “bullshit” due to mining centralization
- Bitcoin is useless for payments as it simply can’t scale.
— Carleton English (@carletonenglish) May 2, 2018
Bitcoin as a Store of Value and Underlying Fiat/Bitcoin Price Volatility
Before Bitcoin there was no way to store value in digital form. The telegraph revolutionized communication. In the same way Bitcoin is revolutionizing the store of digital value. Roubini thinks Bitcoin can’t be a store of value because of volatility. But aside from other cryptos, Bitcoin is the ONLY way to store value in digital form.
Bitcoin was not created to be a stable store of value versus fiat. Bitcoin was created to be stable versus bitcoin. In other words one bitcoin will always equal one bitcoin just like one gram of gold will always equal one gram of gold. Gold and real estate which are often used as a stable store of value both fluctuate in price versus fiat, sometimes wildly. Bitcoin simply fluctuates in price because it’s subject to market forces which is a good thing. Bitcoin exists to provide its own ecosystem, not to interact with traditional fiat money. Bitcoin has no knowledge of traditional money and its technology exists in the vacuum of pure mathematics and that is a good thing. Bitcoin is not a great medium of exchange yet (it will be soon,) but it is a great store of value, precisely because it doesn’t have the foolish expansionary monetary policy of fiat.
To build on that last thought, focusing on Bitcoin’s properties as a commodity, even though it isn’t, paints a picture of extreme price fluctuations vs USD. However this is to be expected given the extreme interest in Bitcoin and the growing retail and institutional investor awareness and interest. Fiat money is inflationary while Bitcoin is deflationary although it is still in its expansion period. That means that as it gets hoarded and interest grows its price will eventually explode to stratospheric levels.
As new technologies like Lightning (see Scalability below) that enable both micro transactions and large volumes of simultaneous transactions become mainstream, Bitcoin will migrate from being something akin to a digital gold to become more useful as a medium of exchange, i.e. means of payment. Which should drive its price even higher.
In relation to volatility, derivatives exist, such as Abra’s own synthetic currency model allowing holders of Bitcoin to temporarily fix the value to any fiat currency – aka stablecoins. Abra has large numbers of users who do this everyday and the numbers are growing quickly..
There are many hedging techniques used by multinational corporations to avoid volatility risk in currency markets when engaged in international sales. This is not inordinately difficult to do with cryptocurrencies and the cost of doing this is decreasing and will decrease even further as futures markets for crypto expand.
Lastly, I would claim that we should not be trying to artificially suppress the volatility between specific assets, such as between fiat and Bitcoin or between fiat and gold, as this is often what leads to spectacular crashes and black swan events. Volatility exists for a good and important reason.
Bitcoin and Mining is Decentralized
Roubini’s most vocal comment was “the idea that Bitcoin is decentralized is bullshit.” Napster was easily shut down as the US courts could force one company to flip a switch to the off position. BitTorrent on the other hand can’t be shut down because it’s “everywhere” with no central server. Bitcoin works on the same principle. There is simply no way to switch Bitcoin off without shutting down the Internet. So clearly Bitcoin is decentralized in the same way that BitTorrent is decentralized. There is no currency more decentralized than Bitcoin anywhere. Bitcoin’s digital nature as well as it’s permission-less design makes it more decentralized than either fiat or gold.
There are two aspects to understanding this decentralization argument. Our friend Jimmy Song has written extensively on this so I’m just going to paraphrase his works here as he’s so much better at explaining this than I am.
The first point has to do with why Bitcoin software itself is decentralized. As Song points out, Bitcoin lacks a single point of failure or a choke point in either its design or current instantiation. This becomes more true with every passing moment. It is effectively impossible to rewrite transactions on the bitcoin network. Rewriting the earliest of bitcoin transactions would likely require hundreds of billions of dollars worth of computing hardware to successfully mount such an attack. That is simply not true of centralized systems.
The second point addresses the fallacy of mining centralization. Bitcoin Mining is the process of creating new Bitcoin and accepting yet unconfirmed transactions onto the blockchain as confirmed. His argument is that someone who controls greater than 50% of the mining network’s computing (or hashing) power can rewrite history and determine the future. While any single entity achieving greater than 50% mining power is highly unlikely let’s give the point the benefit of the doubt for a moment. As Song points out owning greater than 50% of the network doesn’t give you complete control as miners with less than 50% of the hashing power would still win some Bitcoin and generate new blocks which means that the network would eventually be out of sync and either have to decide on which “fork” to follow or simply split into competing blocks (e.g. Bitcoin vs. Bitcoin Cash.) More importantly this type of attack is actually not economically viable and would only make sense if a rogue third party was motivated to destabilize bitcoin and had massive computing resources available. In reality they would need to control significantly more than 50% of the network in order for such an attack to be effective in rewriting history, enabling double spends or controlling the future Given the massive hashing power that bitcoin controls today, even the US government would have trouble funding such an attack, at least certainly not without the public knowing about it given the huge spend required.
To summarize, it is NOT the number of unique mining pools that determines Bitcoin’s level of centralization or decentralization. It is the hard cost of rewriting blockchain history or enabling a double spend that is the determinant factor and that cost goes up over time, at least during Bitcoin’s expansion period.
Perhaps Roubini’s weakest point in relation to centralization vs decentralization is that exchanges for buying and selling Bitcoin are centralized and therefore Bitcoin is centralized. This shows a complete lack of understanding of what Bitcoin is. It is the underlying software of Bitcoin that determines whether or not Bitcoin is decentralized. Centralized exchanges have nothing to do with the technology of Bitcoin and therefore play no role in determining its level of centralization. Exchanges simply act as an onramp from the old banking world into the new world of Bitcoin. Again, this has nothing whatsoever to do with the inner workings of Bitcoin.
Of course, even if all the Bitcoin in the world were held in one hosted exchange wallet that in and of itself would not make bitcoin centralized as that one wallet holder would not be able to change Bitcoin’s history or double spend their bitcoin. Fortunately that is not the case anyway as there are tens of millions of bitcoin wallets in existence now.
Scalability of Bitcoin
Roubini’s third argument against Bitcoin is that it simply won’t scale. Can you remember the last time an important technology was invented that couldn’t be made to scale by human inventiveness? I certainly can’t. While this was true in the early days of Bitcoin this argument is simply irrelevant. This is similar to saying that ethernet technology can’t scale to billions of devices when internet (TCP/IP) technologies were being developed in the 1980’s and 1990’s.
Roubini is an economist. What does he know about scaling technology? I worked at Netscape in the 90s. The Bitcoin space in 2018 is the most exciting and fast paced technology revolution I have ever experienced. The Bitcoin network is constantly trying and testing new ways to scale through a market-driven process. Roubini’s argument here also reminds me of Paul Krugman’s old argument that the Internet is like a fax machine and would never scale. Their qualifications to opine on the scalability of technology certainly align.
The fact is that Bitcoin is scaling. It seems difficult and it’s challenging of course. Again, this is how revolutionary technology always develops. Batched transactions is a good example of how bitcoin is already scaling. People talk about transaction throughput not realizing that a lot of Bitcoin companies, including Abra, batch transactions. A single transaction can include hundreds or even thousands of individual payments.
Very soon, second-layer technologies will push peer to peer payments off chain but in a way that takes full advantage of Bitcoin’s cryptographically imposed immutability. The most promising of these projects is the Lightning Network which has recently entered into production with multiple interoperable versions competing which is equally encouraging.
Lightning Network Payment Channels: In this system, two parties open a channel and commit funds to it. The opening of a channel gets broadcast to the blockchain and incurs the normal bitcoin transaction fee. The channel can stay open for however long—say, a month—during which time the two users can exchange as many payments as they like for free. When the time expires, the channel closes and broadcasts the final state of the pair’s transactions to the blockchain, incurring another transaction fee. If one party believes at some point that he or she was cheated, the aggrieved individual can broadcast the contested transaction to the blockchain, where other users can verify it and miners can update the ledger, forcing the offender to forfeit funds.
My impression upon investigation is that Mr. Roubini is not really interested in whether Bitcoin is truly a viable digital currency. He is really interested in his personal brand as a post-great-recession doomsayer pundit to promote his speaking fees, consulting business and future book sales. I sincerely wish that were not true but I believe it is.
More importantly the future of Bitcoin has never been brighter. Bitcoin is thriving and will continue to do so for decades to come.
Milken Global: Cryptocurrencies Panel
(Warning some educated viewers may find the content offensive!)
Post Panel Commentary
— Carleton English (@carletonenglish) May 2, 2018
My sincere thanks to my friend Staci Warden and her great colleagues at Milken for inviting me again to speak at their conference. I look forward to returning to continue the debate in the future, if they’ll have me back. While we all love the public and animated debates on topics that are so important we must hope that in the future we have the most qualified and diverse participants to these debates.
Special thanks to Jimmy Song, Vinny Lingham, Ishmael Riles and Willie Wang for their help in refining and editing this post.