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| Boilerpipe Text | Commentary
Op-ed
The brutal truth about Bitcoin
July 20, 2021
7 min read
Bitcoin, the original cryptocurrency, has been on a wild ride since itsÂ
creation in 2009
. Earlier this year, theÂ
price of one Bitcoin
 surged to over $60,000, an eightfold increase in 12 months. Then it fell to half that value in just a few weeks. Values of other cryptocurrencies such asÂ
Dogecoin
 have risen and fallen even more sharply, often based just onÂ
Elon Musk’s tweets
. Even after the recent fall in their prices, the totalÂ
market value
of all cryptocurrencies now exceeds $1.5 trillion, a staggering amount for virtual objects that are nothing more than computer code.
Are cryptocurrencies the wave of the future and should you be using and investing in them? And do the massive swings in their prices—nearly
$1 trillion was wiped off their total value
in May—portend trouble for the financial system?
Bitcoin wasÂ
created
 (by a person or group that remains unidentified to this day) asÂ
a way to conduct transactions
 without the intervention of a trusted third party, such as a central bank or financial institution. Its emergence amid the global financial crisis, which shook trust in banks and even governments, was perfectly timed. Bitcoin enabled transactions using only digital identities, granting users some degree of anonymity. This made Bitcoin the preferred currency for illicit activities, including recent ransomware attacks. ItÂ
powered the shadowy darknet
 of illegal online commerce much like PayPal helped the rise of eBay by making payments easier.
While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the revolution in money and finance it has set off that will ultimately affect every one of us, for better and worse.
As it grew in popularity, Bitcoin became cumbersome, slow, and expensive to use. It takesÂ
about 10 minutes
 to validate most transactions using the cryptocurrency and theÂ
transaction fee
 has been at a median of about $20 this year. Bitcoin’s unstable value has also made it an unviable medium of exchange. It is as though your $10 bill could buy you a beer on one day and a bottle of fine wine on another.
Moreover, it has become clear that Bitcoin does not offer true anonymity. The government’s success inÂ
tracking and retrieving part of the Bitcoin ransom
 paid to the hacking collective DarkSide in the Colonial Pipeline ransomware attack has heightened doubts about the security and nontraceability of Bitcoin transactions.
While Bitcoin has failed in its stated objectives, it has become a speculative investment. This is puzzling. It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a
fixed cap
 of 21 million digital coins (nearlyÂ
19 million
have been created so far). But scarcity by itself can hardly be a source of value. Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.
Related Content
Despite their high valuations on paper, a collapse of Bitcoin and other cryptocurrencies is unlikely to rattle the financial system. Banks have mostly stayed on the sidelines. As with any speculative bubble, naive investors who come to the party late are at greatest risk of losses. The government should certainly caution retail investors that, much like in the
GameStop saga
, they act at their own peril. Securities that enable speculation on Bitcoin prices areÂ
already regulated
, but there is not much more the government can or ought to do.
Bitcoin is not innocuous. Transactions are processed by “miners” using massive amounts of computing power in return for rewards in the form of Bitcoin. By some estimates, the Bitcoin networkÂ
consumes
 as much energy as entire countries like Argentina and Norway, not to mention theÂ
mountains of electronic waste
 from specialized machines used for such mining operations that burn out rapidly.
Whatever Bitcoin’s eventual fate, itsÂ
blockchain technology
 is trulyÂ
ingenious and groundbreaking
. Bitcoin has shown how programs running on networks of computers can be harnessed to securely conduct payments, within and between countries, without relying on avaricious financial institutions that charge high fees. For migrant workers sending remittances back to their home countries, for instance, such fees are a major burden. Technologies that make payments cheaper, quicker and easier to track would benefit consumers and businesses, facilitating both domestic and international commerce.
The technology is not without risks. Facebook plans to issue its own cryptocurrency calledÂ
Diem
 intended to make digital payments easier. Unlike Bitcoin, Diem would be fully backed by reserves of U.S. dollars or other major currencies, ensuring stable value. But, as with its other ostensibly high-minded initiatives, Facebook can hardly be trusted to put the public’s welfare above its own. The prospect of multinational corporations one day issuing their own unbacked cryptocurrencies worldwide is deeply disquieting. Such currencies won’t threaten the U.S. dollar, but could wipe out the currencies of smaller and less developed countries.
Related Books
Variants of Bitcoin’s technology are also making many financial products and services available to the masses at low cost, directly connecting savers and borrowers. These developments and the possibilities created by the new technologies have spurred central banks to consider issuing digital versions of their own currencies.Â
China
,Â
Japan
, andÂ
Sweden
 are already conducting trials of their digital currencies.
Ironically, rather than truly democratizing finance, some of these innovations may exacerbate inequality. Unequal financial literacy and digital access might result in sophisticated investors garnering the benefits while the less well off, dazzled by new technologies, take on risks they do not fully comprehend. Computer algorithms could worsen entrenched racial and other biases in credit scoring and financial decisions, rather than reducing them. The ubiquity of digital payments could also destroy any remaining vestiges of privacy in our day-to-day lives.
While Bitcoin’s roller-coaster prices garner attention, of far more consequence is theÂ
revolution in money and finance
 it has set off that will ultimately affect every one of us, for better and worse.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a
diverse array of funders
. In line with our
values and policies
, each Brookings publication represents the sole views of its author(s). | |||||||||
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[Op-ed](https://www.brookings.edu/articles/the-brutal-truth-about-bitcoin/)
# The brutal truth about Bitcoin
##### [Eswar Prasad](https://www.brookings.edu/people/eswar-prasad/) [](https://www.brookings.edu/people/eswar-prasad/) [Eswar Prasad](https://www.brookings.edu/people/eswar-prasad/) Senior Fellow \- [Global Economy and Development](https://www.brookings.edu/programs/global-economy-and-development/)
July 20, 2021
- 7 min read
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**Editor's note:**
This op-ed was originally published by [The New York Times](https://www.nytimes.com/2021/06/14/opinion/bitcoin-cryptocurrency-flaws.html).
Bitcoin, the original cryptocurrency, has been on a wild ride since its [creation in 2009](https://bitcoin.org/en/bitcoin-paper). Earlier this year, the [price of one Bitcoin](https://coinmarketcap.com/currencies/bitcoin/) surged to over \$60,000, an eightfold increase in 12 months. Then it fell to half that value in just a few weeks. Values of other cryptocurrencies such as [Dogecoin](https://coinmarketcap.com/currencies/dogecoin/) have risen and fallen even more sharply, often based just on [Elon Musk’s tweets](https://www.cnbc.com/2021/05/20/dogecoin-jumps-on-elon-musk-tweet-as-wild-cryptocurrency-trading-continues.html). Even after the recent fall in their prices, the total [market value](http://coinmarketcap.com/) of all cryptocurrencies now exceeds \$1.5 trillion, a staggering amount for virtual objects that are nothing more than computer code.
Are cryptocurrencies the wave of the future and should you be using and investing in them? And do the massive swings in their prices—nearly [\$1 trillion was wiped off their total value](https://coinmarketcap.com/charts/) in May—portend trouble for the financial system?
Bitcoin was [created](https://bitcoin.org/en/faq) (by a person or group that remains unidentified to this day) as [a way to conduct transactions](https://bitcoin.org/bitcoin.pdf) without the intervention of a trusted third party, such as a central bank or financial institution. Its emergence amid the global financial crisis, which shook trust in banks and even governments, was perfectly timed. Bitcoin enabled transactions using only digital identities, granting users some degree of anonymity. This made Bitcoin the preferred currency for illicit activities, including recent ransomware attacks. It [powered the shadowy darknet](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645) of illegal online commerce much like PayPal helped the rise of eBay by making payments easier.
> While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the revolution in money and finance it has set off that will ultimately affect every one of us, for better and worse.
As it grew in popularity, Bitcoin became cumbersome, slow, and expensive to use. It takes [about 10 minutes](https://www.statista.com/statistics/793539/bitcoin-transaction-confirmation-time/) to validate most transactions using the cryptocurrency and the [transaction fee](https://ycharts.com/indicators/bitcoin_average_transaction_fee) has been at a median of about \$20 this year. Bitcoin’s unstable value has also made it an unviable medium of exchange. It is as though your \$10 bill could buy you a beer on one day and a bottle of fine wine on another.
Moreover, it has become clear that Bitcoin does not offer true anonymity. The government’s success in [tracking and retrieving part of the Bitcoin ransom](https://www.nytimes.com/2021/06/09/technology/bitcoin-untraceable-pipeline-ransomware.html) paid to the hacking collective DarkSide in the Colonial Pipeline ransomware attack has heightened doubts about the security and nontraceability of Bitcoin transactions.
While Bitcoin has failed in its stated objectives, it has become a speculative investment. This is puzzling. It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a [fixed cap](https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/) of 21 million digital coins (nearly [19 million](https://www.blockchain.com/charts/total-bitcoins) have been created so far). But scarcity by itself can hardly be a source of value. Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.
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July 23, 2020
Despite their high valuations on paper, a collapse of Bitcoin and other cryptocurrencies is unlikely to rattle the financial system. Banks have mostly stayed on the sidelines. As with any speculative bubble, naive investors who come to the party late are at greatest risk of losses. The government should certainly caution retail investors that, much like in the [GameStop saga](https://www.nytimes.com/2021/02/07/business/gamestop-stock-losses.html), they act at their own peril. Securities that enable speculation on Bitcoin prices are [already regulated](https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11), but there is not much more the government can or ought to do.
Bitcoin is not innocuous. Transactions are processed by “miners” using massive amounts of computing power in return for rewards in the form of Bitcoin. By some estimates, the Bitcoin network [consumes](https://digiconomist.net/bitcoin-energy-consumption) as much energy as entire countries like Argentina and Norway, not to mention the [mountains of electronic waste](https://digiconomist.net/bitcoin-electronic-waste-monitor/) from specialized machines used for such mining operations that burn out rapidly.
Whatever Bitcoin’s eventual fate, its [blockchain technology](https://blockgeeks.com/guides/what-is-blockchain-technology/) is truly [ingenious and groundbreaking](http://bitcoinbook.cs.princeton.edu/). Bitcoin has shown how programs running on networks of computers can be harnessed to securely conduct payments, within and between countries, without relying on avaricious financial institutions that charge high fees. For migrant workers sending remittances back to their home countries, for instance, such fees are a major burden. Technologies that make payments cheaper, quicker and easier to track would benefit consumers and businesses, facilitating both domestic and international commerce.
The technology is not without risks. Facebook plans to issue its own cryptocurrency called [Diem](https://www.diem.com/en-us/) intended to make digital payments easier. Unlike Bitcoin, Diem would be fully backed by reserves of U.S. dollars or other major currencies, ensuring stable value. But, as with its other ostensibly high-minded initiatives, Facebook can hardly be trusted to put the public’s welfare above its own. The prospect of multinational corporations one day issuing their own unbacked cryptocurrencies worldwide is deeply disquieting. Such currencies won’t threaten the U.S. dollar, but could wipe out the currencies of smaller and less developed countries.
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Variants of Bitcoin’s technology are also making many financial products and services available to the masses at low cost, directly connecting savers and borrowers. These developments and the possibilities created by the new technologies have spurred central banks to consider issuing digital versions of their own currencies. [China](https://www.nytimes.com/2021/03/01/technology/china-national-digital-currency.html), [Japan](https://www.boj.or.jp/en/announcements/release_2021/rel210405b.pdf), and [Sweden](https://www.riksbank.se/en-gb/payments--cash/e-krona/) are already conducting trials of their digital currencies.
Ironically, rather than truly democratizing finance, some of these innovations may exacerbate inequality. Unequal financial literacy and digital access might result in sophisticated investors garnering the benefits while the less well off, dazzled by new technologies, take on risks they do not fully comprehend. Computer algorithms could worsen entrenched racial and other biases in credit scoring and financial decisions, rather than reducing them. The ubiquity of digital payments could also destroy any remaining vestiges of privacy in our day-to-day lives.
While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the [revolution in money and finance](https://futureofmoneybook.com/) it has set off that will ultimately affect every one of us, for better and worse.
Author
[](https://www.brookings.edu/people/eswar-prasad/)
[Eswar Prasad](https://www.brookings.edu/people/eswar-prasad/) Senior Fellow \- [Global Economy and Development](https://www.brookings.edu/programs/global-economy-and-development/)
[@EswarSPrasad](https://twitter.com/EswarSPrasad)
**The Brookings Institution is committed to quality, independence, and impact.** We are supported by a [diverse array of funders](https://www.brookings.edu/about-us/annual-report/). In line with our [values and policies](https://www.brookings.edu/about-us/research-independence-and-integrity-policies/), each Brookings publication represents the sole views of its author(s).
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| Readable Markdown | Commentary
[Op-ed](https://www.brookings.edu/articles/the-brutal-truth-about-bitcoin/)
## The brutal truth about Bitcoin
#####
July 20, 2021
- 7 min read
Bitcoin, the original cryptocurrency, has been on a wild ride since its [creation in 2009](https://bitcoin.org/en/bitcoin-paper). Earlier this year, the [price of one Bitcoin](https://coinmarketcap.com/currencies/bitcoin/) surged to over \$60,000, an eightfold increase in 12 months. Then it fell to half that value in just a few weeks. Values of other cryptocurrencies such as [Dogecoin](https://coinmarketcap.com/currencies/dogecoin/) have risen and fallen even more sharply, often based just on [Elon Musk’s tweets](https://www.cnbc.com/2021/05/20/dogecoin-jumps-on-elon-musk-tweet-as-wild-cryptocurrency-trading-continues.html). Even after the recent fall in their prices, the total [market value](http://coinmarketcap.com/) of all cryptocurrencies now exceeds \$1.5 trillion, a staggering amount for virtual objects that are nothing more than computer code.
Are cryptocurrencies the wave of the future and should you be using and investing in them? And do the massive swings in their prices—nearly [\$1 trillion was wiped off their total value](https://coinmarketcap.com/charts/) in May—portend trouble for the financial system?
Bitcoin was [created](https://bitcoin.org/en/faq) (by a person or group that remains unidentified to this day) as [a way to conduct transactions](https://bitcoin.org/bitcoin.pdf) without the intervention of a trusted third party, such as a central bank or financial institution. Its emergence amid the global financial crisis, which shook trust in banks and even governments, was perfectly timed. Bitcoin enabled transactions using only digital identities, granting users some degree of anonymity. This made Bitcoin the preferred currency for illicit activities, including recent ransomware attacks. It [powered the shadowy darknet](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645) of illegal online commerce much like PayPal helped the rise of eBay by making payments easier.
> While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the revolution in money and finance it has set off that will ultimately affect every one of us, for better and worse.
As it grew in popularity, Bitcoin became cumbersome, slow, and expensive to use. It takes [about 10 minutes](https://www.statista.com/statistics/793539/bitcoin-transaction-confirmation-time/) to validate most transactions using the cryptocurrency and the [transaction fee](https://ycharts.com/indicators/bitcoin_average_transaction_fee) has been at a median of about \$20 this year. Bitcoin’s unstable value has also made it an unviable medium of exchange. It is as though your \$10 bill could buy you a beer on one day and a bottle of fine wine on another.
Moreover, it has become clear that Bitcoin does not offer true anonymity. The government’s success in [tracking and retrieving part of the Bitcoin ransom](https://www.nytimes.com/2021/06/09/technology/bitcoin-untraceable-pipeline-ransomware.html) paid to the hacking collective DarkSide in the Colonial Pipeline ransomware attack has heightened doubts about the security and nontraceability of Bitcoin transactions.
While Bitcoin has failed in its stated objectives, it has become a speculative investment. This is puzzling. It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a [fixed cap](https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/) of 21 million digital coins (nearly [19 million](https://www.blockchain.com/charts/total-bitcoins) have been created so far). But scarcity by itself can hardly be a source of value. Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.
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Despite their high valuations on paper, a collapse of Bitcoin and other cryptocurrencies is unlikely to rattle the financial system. Banks have mostly stayed on the sidelines. As with any speculative bubble, naive investors who come to the party late are at greatest risk of losses. The government should certainly caution retail investors that, much like in the [GameStop saga](https://www.nytimes.com/2021/02/07/business/gamestop-stock-losses.html), they act at their own peril. Securities that enable speculation on Bitcoin prices are [already regulated](https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11), but there is not much more the government can or ought to do.
Bitcoin is not innocuous. Transactions are processed by “miners” using massive amounts of computing power in return for rewards in the form of Bitcoin. By some estimates, the Bitcoin network [consumes](https://digiconomist.net/bitcoin-energy-consumption) as much energy as entire countries like Argentina and Norway, not to mention the [mountains of electronic waste](https://digiconomist.net/bitcoin-electronic-waste-monitor/) from specialized machines used for such mining operations that burn out rapidly.
Whatever Bitcoin’s eventual fate, its [blockchain technology](https://blockgeeks.com/guides/what-is-blockchain-technology/) is truly [ingenious and groundbreaking](http://bitcoinbook.cs.princeton.edu/). Bitcoin has shown how programs running on networks of computers can be harnessed to securely conduct payments, within and between countries, without relying on avaricious financial institutions that charge high fees. For migrant workers sending remittances back to their home countries, for instance, such fees are a major burden. Technologies that make payments cheaper, quicker and easier to track would benefit consumers and businesses, facilitating both domestic and international commerce.
The technology is not without risks. Facebook plans to issue its own cryptocurrency called [Diem](https://www.diem.com/en-us/) intended to make digital payments easier. Unlike Bitcoin, Diem would be fully backed by reserves of U.S. dollars or other major currencies, ensuring stable value. But, as with its other ostensibly high-minded initiatives, Facebook can hardly be trusted to put the public’s welfare above its own. The prospect of multinational corporations one day issuing their own unbacked cryptocurrencies worldwide is deeply disquieting. Such currencies won’t threaten the U.S. dollar, but could wipe out the currencies of smaller and less developed countries.
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Variants of Bitcoin’s technology are also making many financial products and services available to the masses at low cost, directly connecting savers and borrowers. These developments and the possibilities created by the new technologies have spurred central banks to consider issuing digital versions of their own currencies. [China](https://www.nytimes.com/2021/03/01/technology/china-national-digital-currency.html), [Japan](https://www.boj.or.jp/en/announcements/release_2021/rel210405b.pdf), and [Sweden](https://www.riksbank.se/en-gb/payments--cash/e-krona/) are already conducting trials of their digital currencies.
Ironically, rather than truly democratizing finance, some of these innovations may exacerbate inequality. Unequal financial literacy and digital access might result in sophisticated investors garnering the benefits while the less well off, dazzled by new technologies, take on risks they do not fully comprehend. Computer algorithms could worsen entrenched racial and other biases in credit scoring and financial decisions, rather than reducing them. The ubiquity of digital payments could also destroy any remaining vestiges of privacy in our day-to-day lives.
While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the [revolution in money and finance](https://futureofmoneybook.com/) it has set off that will ultimately affect every one of us, for better and worse.
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