Why Bitcoin Will Take Over The World: Coinbase CEO Brian Armstrong

This reminds me of the story, possibly apocryphal, about Joe Kennedy and the shoeshine boy. Joe said, “If shoeshine boys are giving stock tips, then it’s time to get out of the market.” When everyone is talking about Bitcoin, that might be the time to get out.

I came away from this interview with mixed feelings. On the one hand, I thought Mr. Armstrong came across as a thoughtful young man with whom I can easily find myself in agreement. I was impressed by his stance on a culture war-free workplace, and I'll take his word for it that freedom is an important motivator for him. I think those things are laudable. Frankly, based on this single interview, I quite like the fellow.

But I began the interview deeply skeptical of cryptocurrencies, and nothing said in any way reduced my skepticism.

Here are a few things I would have liked to have heard brought up.

How Many Crypto "Users"?

Brian repeatedly mentioned that 52 million Americans (400 million globally) have "used" crypto. That claim is only plausible if using includes buying and trading cryptocurrencies. If using refers to conducting transactions for goods and services -- what we normally think of as "using" a currency -- then Peter is absolutely correct: cryptocurrency use is miniscule. Brian leaves the impression that there are hundreds of millions of people actually using these currencies, when in fact there are (or may be) simply hundreds of millions who own portions of them as investments.

Why Isn't Crypto Used?

Peter asked this question. It's a good question.

The truth is that cryptocurrencies have very little utility for the vast majority of us -- certainly for the vast majority of Americans. (I wrote about this a long time ago, here.) They're great if you want to conduct criminal activity, or if you want to execute transactions prohibited by your government. Beyond that they offer essentially no benefits over other virtual payment systems (Paypal, Venmo, Zell, etc.), and some serious drawbacks.

What drawbacks? Three big ones are: high transaction costs, confusing complexity, and susceptibility to fraud.

Transaction Cost

Perhaps most importantly, cryptocurrency transactions are extraordinarily expensive from a computational standpoint. Sure, the transaction may be free to the person who makes it, but enormous amounts of energy and computer resources are consumed for each transaction.

This is by design. The reason Bitcoin (for example) is "provably scarce" (and Brian was correct when he made that assertion) is that new Bitcoins are created only by processing transactions into the blockchain, and it is provably difficult to process transactions.

How difficult? Bitcoin has a transaction rate of under 10 transactions per second. That's ten. In contrast, Visa processes about 24,000 transactions per second, and does so for orders of magnitude less total expense than does Bitcoin, which consumes about 125,000 gigawatts of power per year to give you that ten transactions per second.

Confusing Complexity

Relatively few people actually use cryptocurrencies; very few who do use them use them directly. Most people who transact purchases using cryptocurrencies do so through a service, some kind of digital wallet, that sits between them and the actual cryptocurrency system. Go back and read that old post I linked to understand why this effectively sacrifices the very few real advantages cryptocurrencies have to offer.

Risk and Vulnerability

It's true that Bitcoin, for example, can be used safely by the technically savvy. It requires an awareness of computer security issues and careful management of keys and passwords. Most of us prefer to let Venmo, Zell, Paypal, Visa, and Square handle those details for us. Using Bitcoin directly is like using Linux as your desktop operating system: it works fine if you know what you're doing and have a lot of enthusiasm for messing with computers. But those other payment systems take care of the messy details for you -- much as Apple hides their Linux-like operating system behind an easy-to-use presentation.

You can have Bitcoin without the risk, but that means sacrificing the anonymity and independence that are, supposedly, the great features of Bitcoin.

So that's why few people actually use cryptocurrencies to transact business. The majority of those who hold cryptocurrencies do so as an investment: these are speculative instruments popular with people who like to gamble.

A Layman's Case for Crypto

At about 55:00 Peter offered what he thought were "strong" arguments for crypto.

His first was transaction cost: merchants can use crypto, he suggested, to avoid standard fees on credit card transactions. But ask yourself how many people can take advantage of that if the total Bitcoin transaction rate is under ten transactions per second? Meanwhile, the actual cost per transaction for Bitcoin is astronomical compared to that for conventionally, centrally-managed systems like Venmo or Zell.

His next was security, and he cited an example in which a "cyberattack paralyzes largest healthcare payment system...." It isn't clear to me how cryptocurrencies could make such attacks less likely. The fact that the blockchain is itself secure doesn't mean that payment systems built on top of it are more secure than those built on top of traditional data networks. There may be some aspects of cryptocurrencies that offer superior security in institutional settings (though I'm skeptical); it's hard to imagine that they justify their vastly higher transaction costs.

Peter's third point was crypto's utility for executing "micro-transactions" of a few cents each.

If it isn't clear already: the high transaction costs of cryptocurrencies make them peculiarly inappropriate for micro-transaction systems. More, these kinds of micro-transactions are probably the type least likely to benefit from the anonymity cryptocurrencies offer. (In fact, Venmo makes the public display of other people's transactions a feature of their product.)

In Summary

Tens of millions of people don't use cryptocurrencies. Surveys suggest that a single-digit percentage of all those who hold cryptocurrencies actually transact business with those currencies -- business beyond speculating in the currencies themselves. There are good reasons why cryptocurrencies aren't practical for most transactions.

What do people use? (2022 figures from Bankrate)

Square, about 16 million times each month. Venmo, about 38 million times each month. Zell, about 58 million times each month.

The maximum possible transaction volume for Bitcoin is about 18 million transactions per month, and, again, most of those transactions are not for goods and services, but rather for speculation in Bitcoin itself. I think it likely that the true cost of the Bitcoin transactions that do occur -- the cost in energy and resources -- is greater than the combined total cost of all other electronic transaction systems.

Cryptocurrencies haven't caught on because they're inherently a bad idea for a currency -- unless perhaps you're a criminal or you live under a repressive regime.

It's too deflationary to make that statement. It's too much change. You are talking about completely overhauling everything.

The other thing is, you can't really use it as money for a variety of reasons. It's simply a speculative asset.

Coinkydink: I’d just completed an order for the pre-release book Hijacking Bitcoin, by Roger Ver, and was opening Ricochet to mention it in a post. This post was the first thing I saw.

For me to suddenly up and order a book about Bitcoin was a surprising event to myself. Hence the coincidence.

I had learned the math, economics, and ideological and historical ramifications of Bitcoin years ago, when it was fairly new. All are very interesting!

But once you understand it, following the evolution and debates about it becomes just another long movie about the depressing course of human stupidity, arrogance, economic ignorance, and corruption. So I’d lost interest.

A book about the history of the corruption, itself, breathed new life into the subject.

Very informative and absolutely fascinating; many ideas for me to mull over. I’ve learned something and better understand crypto currencies. Of course I understood virtually nothing about crypto before watching this interview.