The Bitcoin Disillusion
To understand what lies beneath Bitcoin’s facade, the asset must be understood separately from its technological underpinnings. The underlying principle of Bitcoin and several other cryptocurrencies rests on blockchain technology. In a nutshell, blockchain operates as an inalienable decentralized database of digital records. While mostly known for its critical role as a ledger of the “mining” (computation of mathematical formulas) of Bitcoin units, blockchain as a technology can be applied in several settings — from legal contracts to non-fungible tokens (NFTs). Blockchain is likely to hold an increasing place in financial technology and online transactions, especially if its diverse applications are leveraged by governments and central banks alike. Indeed, there is value to the technological innovation that is blockchain. Nevertheless, cryptocurrencies should not be seen as assets representative of the technology’s value. Increasingly, cryptocurrencies — particularly Bitcoin — are starting to show glaring flaws that should inevitably lead level-headed investors to think twice about buying in.
The libertarian nature of decentralized cryptocurrencies initially offered individuals a way to eschew government control over their assets. It was said that Bitcoin would guarantee anonymity through the untraceable nature of its code; inevitably, this claim drew the attention of malicious actors who tested its ethical limits. In 2021 alone, the IRS seized over $1.2 billion USD worth of cryptocurrencies from non-compliant individuals. In the highest-profile case of cryptocurrency fraud, two people in early 2022 were arrested in a massive conspiracy to launder $4.5 billion worth of stolen crypto assets. As of February 2022, $3.6 billion of that amount had already been recovered and seized by American authorities. To many, these recurring events put into question what they thought they knew about these digital assets, and by doing so, diminish their intrinsic value. To that end, President Biden announced in early March 2022 that he and his administration intended to sign into force an executive order that would increase federal oversight of cryptocurrencies. Other jurisdictions are likely to follow suit, and the writing is now on the wall. With Bitcoin and other cryptos now well within reach of governments around the globe, more and more people will question whether they have lost their purpose.
Recent events have expanded Bitcoin’s presence in the world of international finance, albeit in ways that were quickly rebutted as reckless. In September 2021, El Salvador became the first country to adopt Bitcoin as legal tender, used alongside the USD. To many Bitcoin enthusiasts, this development was seen as the crypto’s watershed moment; it seemed other states were certain to follow in El Salvador’s footsteps. However, international bodies of financial and economic experts were quick to highlight the massive risks that such a move would incur for the country. The International Monetary Fund (IMF) pressed El Salvador to walk back on this decision, arguing that the cryptocurrency as a legal tender is a risk to the nation’s financial stability and its capacity to receive international loans; the volatility and unpredictability of Bitcoin could threaten the long-term economic well-being of the developing country, as well as its credibility on international markets. For El Salvador and those holding significant sums in the asset, a burst of the Bitcoin bubble — which is increasingly likely as its shortfalls grow in prominence — could have devastating effects that are not properly factored into its current market value.
No longer a frictionless means of payment shielded from government oversight, some may wonder what the future holds for this cryptocurrency. This much is clear to those who critically analyze the fundamentals of Bitcoin: its value — and the quick money grabs that have fed its notoriety — will be sustained for as long as its mystique endures. Like any other conspicuous financial bubble, the growth in value of the cryptocurrency will come to a screeching halt as soon as investors see it for what it is — a decentralized multi-level marketing scheme, upheld solely by the investments of its staunchest apostles and those who blindly follow suit.