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Why Bitcoin is bullshit, explained by an expert

It turns out cryptocurrencies and blockchains have a few problems.

Cryptocurrencies like Bitcoin are constantly in the news, as is the blockchain technology behind them.

If, like me, you don’t really understand these things, it’s hard to know what to make of all this. Is Bitcoin, and other cryptocurrencies, the future or will this experiment gradually fade away like a historical footnote? Are cryptocurrencies actually decentralized or are they controlled by small groups of people? Are they fraud-proof or can they be manipulated by insiders?

To get some answers, I reached out to Nicholas Weaver, a researcher at the International Computer Science Institute at UC Berkeley. Weaver teaches a course on blockchains and seems to think the technology is, at best, misguided and, at worst, a fraud. So I asked him to lay out his case in the simplest possible terms.

A lightly edited transcript of our conversation follows.

Sean Illing

I don’t really understand Bitcoin or blockchains, and my sense is that I’m not alone. So let’s start with a basic question: What is a blockchain?

Nicholas Weaver

It depends on what you mean. There are private blockchains, which is a 20-year-old technology that somehow causes idiots to throw money at it, and then you have public blockchains, which is supposed to be a decentralized record-keeping structure but, in reality, is both centralized and horribly inefficient. The use of private blockchains is pretty varied because there’s nothing new and it’s an old idea. The use of public blockchains is basically limited to cryptocurrencies.

Sean Illing

You say that cryptocurrencies like Bitcoin aren’t decentralized, and yet people are enamored with these currencies precisely because they believe they’re decentralized. What are they missing?

Nicholas Weaver

None of the cryptocurrencies are truly decentralized. They’re actually centrally controlled by the miners, who can basically rewrite history at will.

Sean Illing

I’m not sure we can understand who the miners are unless we understand how Bitcoin works. Can you walk me through this?

Nicholas Weaver

Imagine we have a public square that has written down everyone’s bank balance, and if I want to send you some money, I basically write a check to you and post it in the town square. The miners gather up all these unconfirmed checks and carve them into stone tablets that then go into the public square.

So if I sent you a check and you want to see that it’s good, you just look on the stone tablets and confirm that it’s good. Think of the miners as the record-keepers who manage all of this. They validate the checks, create them into a bundle (called a block), and then they get paid for their role in the process. These miners are the de facto central authority in cryptocurrency exchanges.

Sean Illing

There are plenty of people who see cryptocurrencies, however flawed, as a step in the right direction because they at least take power away from governing authorities and give individuals more freedom. But you seem to think this is bullshit. Why?

Nicholas Weaver

Well, there are multiple arguments. These systems require an obscene amount of energy to function. And the blockchains are not decentralized and they’re not efficient, so that undercuts the two main points in their favor. But the cryptocurrencies don’t work either, because they don’t actually work as currencies.

Sean Illing

What do you mean they don’t work as currencies?

Nicholas Weaver

The rationale for these things is that there’s no central authority, which means no one can block or undo a transaction. And so far at least, it’s true that transactions aren’t blocked. But why do you need such a system? Because you’re doing a transaction that a central authority would otherwise block, like paying off a hitman or buying drugs.

If that’s what you need money for, the cryptocurrencies are the only game in town. But if you don’t need to buy drugs or hitmen, the cryptocurrencies are vastly less efficient. I mean, look at the volatility of Bitcoin and other digital currencies — they’re all over the place. So if you go to one of the few legitimate merchants that take Bitcoins, they aren’t actually taking Bitcoins. They’re using a service that allows them to price in dollars, and that service immediately sells the Bitcoins and deposits the dollars with the merchants. So there’s a mandatory conversion step.

If I want to buy something with Bitcoin, I don’t like that the price is bouncing up and down either. So I have to turn my dollars into Bitcoins and then do the transaction, and that is a remarkably costly process. That, in my opinion, is not a system that works.

Sean Illing

It appears that Bitcoin’s main accomplishment is that it allows people to buy things clandestinely, only in an absurdly inefficient way.

Nicholas Weaver

Correct. But if you want to buy something you don’t want people to know about, you can just use a pre-paid credit card. There’s still no need for Bitcoin.

Sean Illing

You also say that all cryptocurrencies are plagued by frauds that were banned in the 1930s. Can you explain?

Nicholas Weaver

Cryptocurrency exchanges are not like regular stock exchanges. In a stock market exchange, stocks are all tied to together so the prices are very close. These Bitcoin exchanges are unregulated entities that allow all sorts of things that are outright frauds. For example, in a regular stock exchange, you’re not allowed to trade with yourself because that’s price manipulation. But that’s a regular occurrence on these cryptocurrency exchanges.

Some of these cryptocurrency exchanges are accused of front-running as well, which means the people who run them are using their access to see what customers want to trade and then trading ahead of them to get an advantage. There are also plausible claims about insider trading in various cryptocurrency exchanges. I could go on, but you get the point.

Sean Illing

Do you see a cryptocurrency emerging in the future that is more viable than what we’ve seen so far?

Nicholas Weaver

Well, in order to make a cryptocurrency work, you need stability. The value has to hold. So what you need is an entity that will take, say, dollars, and give you cryptodollars one-for-one and vice versa. But we know what these institutions are; they’re called banks and they use banknotes. And if you build a cryptocurrency that way, you’ve got one of three choices.

One, you act like a regulated financial entity like PayPal or Venmo and don’t allow the criminality. So where’s the novelty there? Two, you become like a wildcat bank from the 1800s and issue banknotes that aren’t backed, but then you run the risk of a bank run and your value going to zero. So what’s the point? Or you have a cryptocurrency that actually is banked by money, and doesn’t allow criminal activity, but that’s been tried before; it was called Liberty Reserve, and it was shut down for money laundering in 2013 by the US government.

Sean Illing

Is yours a minority opinion in the world of cryptocurrency?

Nicholas Weaver

Yes, because there’s a self-selecting bias. Most people who think this is bogus simply walk away. Those who are believers are believers. Very few people have followed it like I have for five years and still find it ridiculous, but that’s because I’m an academic and I have the space to do it and I find parts of it, especially the criminality, interesting. But the arguments in defense of this stuff are getting loonier and loonier.