I came across an article on Coindesk recently, titled, “Bitcoin Will Still Bite the Dust“. The author is Kevin Dowd, a Professor of Finance and Economics in the Business School at Durham University, and the co-author of the 2015 paper “Bitcoin Will Bite the Dust.”
The author makes a couple of interesting but perhaps overly naive points in support of his argument that bitcoin will eventually go to $0, while also claiming that he has yet to hear “a single intelligent challenge to this argument from the bitcoin community.” Instead, he claims that “the typical response has been personal abuse.”
The bitcoin community is just like any other online (or even offline) community — with its quality of members ranging from absolute genius to totally lacking in logic and decency. Therefore, I find it hard to believe his claim that he ONLY encountered name-calling but not any intelligent counter arguments from the community.
Regardless, since he claims to not have encountered any logical challenge to his opinion, I will hereby write my personal challenge to his opinion in a civilized and hopefully intelligent manner. I do disclose upfront though, that unlike Mr. Dowd, I do not have a Ph.D. in Economics to my name. Hopefully my arguments still count!
Most Industries are “Natural Monopolies”
Mr. Dowd’s first argument for bitcoin’s downfall is that the bitcoin mining industry bears the characteristics of a “natural monopoly”, and is therefore doomed to become one. This monopolization will remove bitcoin of its most important value proposition, decentralization, and hence destroy it.
While I agree that bitcoin mining perhaps comes across as one of the most vulnerable elements of the bitcoin ecosystem, I do not believe monopolization of the bitcoin mining industry is as black and white as Mr. Dowd believes.
Let’s first use some other real world examples for comparison — as a matter of fact, the majority of industries in our world display “natural monopoly” characteristics. The only exceptions might be the industries involving rare artwork, artifacts, and tailored products and services typically for the UHNI. Nearly every common industry involving commodities, raw materials, consumer products, or even data, benefits from economies of scale. But this has rarely led to total monopolization of an industry by a single entity.
Many factors are in play to auto-regulate the state of any industry, for example natural market cycles, poor/good business decisions, and external interference from governments or force majeure. There was a time recently when people were claiming that bitcoin is dead because Bitmain owns the majority of bitcoin mining, but look where we are now — bitcoin is kicking on business as usual, while Bitmain is rumoured to be seriously struggling.
The mining industry as we know it is currently a free market driven by supply and demand, which correlates directly with bitcoin price. The story of Bitmain has shown us that it is no easy feat to perfectly manage between bitcoin price vs. business decisions vs. supply/production vs. market demand vs. external or regulatory interference. Similar examples can be seen in other industries such as oil and gas, metals, etc., where proof-of-work is required and economies of scale is important. There is a reason oil and metals’ prices fluctuate rather than rise straight through the roof, as you would expect in the case of a complete monopoly.
On top of all this, the power of miners is not absolute. Despite the common (and false) belief that bitcoin is controlled by a few large miners and therefore vulnerable, it still has an impeccable security record and is extremely expensive (and likely unfruitful) to attack. There are many pieces written by qualified people in the bitcoin community dispelling myths about miners and explaining the balance of power in the bitcoin ecosystem. For example, here, here, and here.
It has been clearly laid out many times before that bitcoin was designed so that every actor in the ecosystem acts on behalf of their own utmost greedy interest, and the system functions best under these circumstances. Hashrate, mining difficulty auto-adjustments, and price all work in harmony to ensure the system’s continuous, normal function.
Bitcoin is Not Simply a Product
Mr. Dowd’s second argument is rather weak. I would have expected a more thorough analysis and understanding from someone of his pedigree, to be honest.
Mr. Dowd argues that bitcoin’s cryptocurrency market cap dominance has been going down over the years, and will lead to its impending doom to zero. This claim is rather moot as it is impossible to go anywhere but down when BTC started with 100% market cap dominance.
He argues that “according to CoinMarketCap, bitcoin’s share of the cryptocurrency market had fallen to 94.29 percent by April 28, 2013 (the first date for which they provide data) to 52.29 percent by today“, without noting the obvious that there were almost no altcoins in existence prior to 2017.
This brings me to my next point — the “crypto” market cap is a rather useless metric. The “cryptocurrency market cap” found on CoinMarketCap lumps in everything that considers itself a “crypto”, literally everything. When you are putting censorship-resistant supra-sovereign money in the same category as closed-circuit gift cards or totally pointless ERC-20 tokens issued by your neighbour, then we have a rather useless metric.
When the reality is that new and mostly useless “tokens” are continuously being added to the mix, then certainly the dominance of existing coins will drop — simple mathematics. However, as we are seeing currently, a healthy prolonged bear market is putting a lot of these diluents out of their misery and giving some of that “market dominance” back to BTC.
The “crypto market cap” metric is a representation of speculative interest at the moment, and not an accurate reflection of dollar value invested or user demand. Bitcoin dominance in this metric will continue to fluctuate up and down as people throw money into smaller-cap shitcoins expecting to make bigger returns, and then watch much of their speculative money disappear following healthy market corrections.
Now let me address the comparison of bitcoin as a product to the Ford Model T — this comparison was absurd.
The Ford Model T is a “closed” product — it’s a one-time consumer product that cannot be continuously upgraded or improved. More importantly, it is a, I repeat, CONSUMER product that depreciates in value with usage (until it reaches antiquity status a century later). People bought Ford Model T’s to drive themselves to work and to show their status, not as an investment nor an act of reclaiming financial responsibility.
Bitcoin, on the other hand, is a protocol and a network that is continuously open to development and technical upgrades. It is not a physical consumer product that cannot stand the test of time. More importantly, though, bitcoin is a social phenomenon that increases in value with usage. People buy bitcoin as an investment, as an asset, or as an expression of individual financial control. Oh, did I mention that bitcoin is not produced by a company and does not have a CEO?
The difference between bitcoin and a Ford Model T here is clear as day to me. I am rather surprised that Mr. Dowd drew up this comparison to support his argument.
I hope that this piece reaches Mr. Dowd, as I would like to hear his counter arguments. As an extra note, I noticed that Mr. Dowd penned both of his opinions at the depths of the bitcoin bear markets, in late 2014 and in early 2019. If Mr. Dowd really does believe so strongly in his opinions of bitcoin going to $0, I would love to see him come up with a third piece boldly claiming his prediction at the peak of the next bitcoin bull market.
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