Bitcoin Is the Worst Currency, Except for All the Others
Democracy is the worst form of government — except for all the others that have been tried.
Over its nearly 16 year history, Bitcoin has grown from a small experiment amongst a handful of cryptography nerds to a widely popular, multi-trillion dollar phenomenon. Federal Reserve chairman Jerome Powell remarked Bitcoin is “like gold.” Billions in Wall Street money has poured into Bitcoin ETFs. A handful of corporations and even governments are now storing portions of their treasuries in Bitcoin. Like Churchill’s view of democratic governance, Bitcoin may be deeply flawed as a currency — but when compared to the instability and corruption seen in fiat currencies, it might be the least-worst option.
Understanding Bitcoin
Bitcoin represents a radical reimagining of money for the digital age. At its core, Bitcoin is a decentralized digital currency built on a public ledger called the blockchain. This ledger records every transaction ever made with Bitcoin, and it’s maintained by a global network of computers rather than any central authority.
The Bitcoin blockchain works by grouping transactions into “blocks” approximately every 10 minutes. Each block is cryptographically linked to the previous one, creating an unbroken chain of transaction history that’s practically impossible to tamper with. This technological innovation solves the “double-spending” problem that previously made digital currency impossible without a central authority.
To use Bitcoin, you need a “wallet” — essentially a software program that stores the password to your account (i.e. your private key). These wallets can exist on your phone, computer, specialized hardware devices, or even as words written on paper. With a wallet, you can send Bitcoin to anyone else in the world who has one, typically within minutes and for minimal fees.
One of Bitcoin’s most distinctive features is its fixed supply: there will never be more than 21 million bitcoins. Currently, about 19.8 million exist, with new ones being created every 10 minutes as rewards for “miners” who secure the network. The rate of new bitcoin creation is cut in half every four years, leading to an annual inflation rate of about 1.7% as of 2024 lower than most national currencies.
A common misconception is that Bitcoin is “expensive” to buy, owing to its high notional value, or that the max supply of 21 million Bitcoin means we will “run out” of Bitcoin if we tried to run a global economy on it. As Bitcoin is a fully digital currency, it can be infinitely subdivided. You can currently send someone as little as 0.00000001 BTC (about $0.001), and more decimal places can be added in future software updates.
The “rules” of Bitcoin are enshrined in the code of the Bitcoin software, which is open source and auditable. Changing the rules would require a protocol “fork” which requires the vast majority of users to voluntarily upgrade their software. The governance process of Bitcoin is purposefully vague and can sometimes result in community splits, such as in 2017 when a portion of users split off into Bitcoin Cash (BCH) from the “main” Bitcoin due to disagreements on technical protocol rules. Who decides what is the “main” Bitcoin comes down to some vague notion of social consensus, which for bettor or worse, means it is very hard to change Bitcoin.
What is Money, Anyway?
To understand Bitcoin’s potential as a currency, we first need to understand what makes something “money” in the first place. People use money for three primary functions: it acts as a store of value, a medium of exchange, and a unit of account.
As a store of value, money needs to maintain its purchasing power over time. When you save money today, you want confidence that it will buy approximately the same amount of goods and services in the future. This is why people historically gravitated toward precious metals like gold — they’re durable, scarce, and have maintained their value for thousands of years.
As a medium of exchange, money needs to be easily transferable and widely accepted. It should be simple to exchange money for goods and services without the hassle of bartering. This is why we moved away from heavy gold coins to paper money and eventually digital payments.
Finally, as a unit of account, money provides a standard measurement of value. When you see a car priced at $30,000, you can immediately compare that to your salary or other purchases. This standardization of value makes economic calculation possible.
Bitcoin vs. Fiat
Traditional fiat currencies like the US Dollar derive their value from government decree and the faith people place in them. They’re managed by central banks that can essentially create new money at will, theoretically to maintain economic stability but sometimes leading to inflation or devaluation of the currency. The creation of money can sometimes temporarily improve economic growth and currency stability, but in the long run leads to this persistent devaluation. Central bank monetary policy is more of an art than a science, governments don’t have a great track record of getting it right.
With Bitcoin’s programmed monetary policy, there is no way for Bitcoin to respond to varying economic conditions to maintain its value. Instead, the value fluctuates with market forces, which are subject to volatile global events. Bitcoin has an average annual volatility of around 46% as of 2024, meaning one should expect the value of one’s Bitcoin to fluctuate around +/- 46% over the course of a year. Bitcoin’s volatility has been decreasing as it grows, but it is nowhere close to being as stable as fiat currencies. However, as Bitcoin’s long term value has dramatically outperformed fiat currencies, it has provided a decent store of value for long term use cases. Bitcoin cannot grow forever, and thus its high long term appreciation will eventually end. But even at some sort of equilibrium, as Bitcoin has a fixed supply, it would still theoretically store value better over long terms relative to inflating fiat currencies. Ultimately you’re taking a different set of risks storing value in Bitcoin than fiat currencies, and it’s generally a good idea to spread your risks across multiple assets. To be a good unit of account however, Bitcoin’s volatility would need to be closer to fiat’s.
As a decentralized digital currency, Bitcoin is inherently permissionless programmable money. This means anyone can create businesses, services, and software that use Bitcoin as a means of payment. Due to this open nature, we have seen rapid innovation in how Bitcoin is used. Every year, it gets substantially easier and cheaper to use Bitcoin for everyday transactions. The amount of people who accept Bitcoin or other cyptocurrencies as a means of payment is still small compared to the US dollar, which is almost universally accepted. Still, it’s growing rapidly and it’s fairly easy to convert between dollars and Bitcoin. Sending fiat currency to someone requires both to have a bank account, and can be a lengthy process, especially for larger amounts or international transactions. Bitcoin merely requires both parties to have a Bitcoin wallet and can send large amounts of money in minutes. While digital fiat payment systems have made some headway, they will never be as frictionless as Bitcoin for one simple reason: government regulation. Thus, as far as a means of exchange goes, Bitcoin currently gives fiat a run for its money, and looks better the more it grows.
Bitcoin vs. Gold
Gold has been humanity’s premier store of value for millennia, and Bitcoin is often likened to “digital gold.” The comparison is apt: both are scarce, durable, and independent of any government’s control.
However, Bitcoin offers several advantages over gold. It’s more portable — you can send any amount anywhere in the world in minutes. You can’t confiscate Bitcoin stored in someone’s memory, unlike physical gold. Verifying the authenticity of gold requires specialized equipment and expertise. Counterfeit gold bars have been found even in the vaults of major banks, often containing tungsten cores covered by a thin layer of real gold. In contrast, anyone running Bitcoin software can instantly verify the authenticity of their Bitcoin with mathematical certainty.
As a long term store of value, gold has a proven track record. Bitcoin on the other hand, has a comparatively short history and lots of unknowns about its long term future.
Gold’s supply, unlike Bitcoin’s, isn’t truly fixed. Each year, gold mining adds approximately 1-2% to the total supply. While this rate is relatively stable due to the difficulty of extracting gold, technological advances in mining could potentially increase it. More dramatically, emerging technologies like asteroid mining could theoretically flood the market. The asteroid “16 Psyche” is estimated to contain enough gold to give every person on Earth about $100 billion worth. While asteroid mining seems far out, it represents a “supply shock” risk that Bitcoin, with its mathematically-guaranteed scarcity, doesn’t face.
Full Faith and Credit
Money, at its core, is built on collective faith and trust. When that trust erodes, currencies can enter a death spiral of hyperinflation that’s difficult to escape. History provides numerous examples of this phenomenon, from the German Weimar Republic in the 1920s to more recent cases like Zimbabwe in 2008 and Venezuela in the 2010s.
The mechanism of these currency collapses often follows a similar pattern. It typically starts with a government facing mounting debts or economic pressures. As confidence in the government’s ability to manage its finances declines, bond buyers demand higher interest rates to compensate for the perceived risk. This increases the cost of borrowing, creating a vicious cycle where the government struggles even more to service its debt.
Faced with this situation, governments often resort to printing money in one way or another to pay their obligations. This monetary expansion leads to inflation, which further erodes faith in the currency. As people lose confidence, they rush to convert their money into more stable assets, causing the currency’s value to plummet even faster, like a bank run. This can quickly spiral into hyperinflation.
The relationship between government debt, taxes, and currency stability is particularly relevant to the US Dollar. The dollar’s strength partly relies on the US government’s ability to collect taxes and service its debt. As the national debt grows and political gridlock complicates fiscal policy, some worry about the long-term stability of this system. While the dollar benefits from its status as the world’s reserve currency and the strength of the US economy, history shows that no currency is immune to crises of confidence.
Bitcoin’s fixed supply and decentralized nature make it theoretically immune to this type of inflation spiral. However, it faces different psychological challenges — its value can still crash if people lose faith in its long-term prospects. The key difference is that Bitcoin’s rules can’t be changed by any central authority in response to a crisis, for better or worse. Additionally, the existence of a credible alternative to the US Dollar makes the mere threat of hyperinflation more likely to trigger a crisis of confidence.
Credible Neutrality
How would a US business feel using Chinese bank accounts and the yuan? How about a Chinese business using US bank accounts and the US dollar? Neither of them would would be happy with the fact that a foreign government controls their money. But Chinese and US businesses want to trade with each other, so what medium do they use? Credible neutrality is the idea that people prefer systems that do not favor one party over another. A system has credible neutrality if people believe it treats participants equally and fairly. For international finance, Bitcoin presents a more credibly neutral alternative to fiat currencies.
Risks of Bitcoin
Bitcoin isn’t without its own risks. While the core protocol has proven remarkably robust, potential software bugs could theoretically compromise the system. In 2010, about a year after Bitcoin was first released, a bug allowed a user to mint themselves billions of BTC. Protocol bugs are rare, but they can happen. Historically, the community has rallied around a software update to fix the issue, but as there is no formal governance process, it’s unclear who decides what counts as a bug, or what software upgrade to implement to fix it. Presumably, a bug like the aforementioned would be universally seen as warranting a fix, and the way to fix it as clear (essentially deleting the improperly minted coins). But as the Bitcoin community grows, it becomes harder to achieve widespread consensus.
Government bans represent another risk. While Bitcoin’s decentralized nature makes it impracticable to shut down completely, restrictions in major economies could significantly impact its value and utility. China has implemented various restrictions and bans on Bitcoin activities over the years, as authoritarian regimes really want to be able to use control of money as a means for power over the citizens. With enough caution and technical know-how, one can still download the Bitcoin software and use Bitcoin in China, but you’re not going to want to advertise that to the public. In other words, Chinese businesses are not likely to use Bitcoin to any significant degree. Thus a government ban on Bitcoin is quite effective at limiting its use. However, depending on how dire the situation is, one could still flee the country with their Bitcoin and start a new life somewhere that allows it. With other assets like fiat or gold, it’s much harder to leave with your money.
Self-custody is another concern. If you lose your Bitcoin wallet or forget the password, your Bitcoin is gone forever. There is no bank you can sue to get your Bitcoin back. Thus it’s imperative to lean how to store Bitcoin properly, if one is to self-custody. This typically involves using special hardware wallets like Trezor with paper backups in a secure location. There are now also custodians like Coinbase or the IBIT Bitcoin ETF that may be a better option if you aren’t comfortable with self-custody. Just know that if you don’t self-custody, a government can still freeze or confiscate your Bitcoin, if that is a risk you are concerned about.
Hacking is more of a risk with Bitcoin than other assets. While hackers do often gain access to people’s bank accounts, those transactions are typically blocked or reversed by the banks. With Bitcoin, if a hacker is able to steal your Bitcoin, there is essentially zero chance of getting it back. The same is true if you accidentally send Bitcoin to the wrong Bitcoin address. Again, hardware wallets help mitigate this risk, but serious users of Bitcoin will want to familiarize themselves with security best practices and take proper precautions. For example, if you are sending a large amount, do a small test transaction first to ensure it went to the intended destination. Using Bitcoin securely will get easier as the software improves, but for now it is still a bit of a learning curve, compared to using a bank account.
Technological obsolescence is another concern. While Bitcoin’s first-mover advantage is significant, a superior cryptocurrency could theoretically replace it. However, Bitcoin’s network effects and brand recognition provide substantial protection against this risk.
The Problem with Mining
Bitcoin secures the network through a process called “mining.” Miners run computers that compete to solve complex mathematical puzzles, which require a significant amount of computing power. The first miner to solve the puzzle gets to add a new block to the blockchain, which contains the transactions that have been verified by the network. This process is known as “proof-of-work” mining. It ensures no one party can monopolize control over adding transactions to the history.
Bitcoin’s proof-of-work mining system has become increasingly controversial due to its massive energy consumption. The network currently uses more electricity than many countries, which has drawn criticism from environmentalists and soured public opinion. While proponents argue that mining can incentivize renewable energy development and utilize otherwise wasted energy, the sheer scale of resource consumption remains a significant barrier to broader adoption.
Beyond environmental concerns, the mining system also presents security risks. A “51% attack,” where an entity controls the majority of mining computing power, could allow them to disrupt network operations by preventing transactions or even reversing recent ones. While such attacks are expensive to execute, they represent a serious risk from state actors who could either purchase or confiscate mining hardware. For instance, when China hosted the majority of Bitcoin mining, the CCP theoretically could have seized mining facilities to execute a prolonged attack on the network.
This vulnerability stands in contrast to newer cryptocurrencies that use “proof-of-stake” for security. Under this model, participants put up cryptocurrency as collateral, which they forfeit if they attempt to attack the network. Proof-of-stake systems can recover more quickly from attacks by simply deleting the attacker’s staked coins, whereas proof-of-work networks must either change their mining algorithm (obsoleting billions of dollars worth of mining hardware) or wait for more honest miners to come online. Additionally, proof-of-stake consumes only a tiny fraction of the resources needed for proof-of-work security.
Miners get their income from the new Bitcoins issued in the block mining reward and transaction fees. As the block reward halves every four years, it will eventually be only transaction fees that pay for the security of the network. There is some concern that the Bitcoin network won’t scale to a high enough transaction volume to support a large mining ecosystem. If the amount of honest miners becomes too small, the network will become more vulnerable to attacks. Proof-of-stake systems don’t need as much transaction fee revenue to secure the network, as the network is not paying the cost of huge mining operations.
While upgrading Bitcoin to proof-of-stake could address both the environmental and security concerns, such a change seems unlikely given Bitcoin’s conservative governance model and the community’s philosophical attachment to proof-of-work. This resistance to change could eventually become an existential issue if environmental concerns continue to mount or if a major 51% attack occurs. Bitcoin might face increasing pressure to either evolve or cede ground to more efficient competitors.
Bitcoin’s Governance Model
Bitcoin’s governance structure is unique among currencies: it has no formal governance at all. Changes to the protocol require broad consensus among users, miners, and developers on what is the “legitimate” Bitcoin. This makes Bitcoin highly resistant to change, which can be both a feature and a bug.
The 2017 Bitcoin “blocksize war” illustrates the strengths and weaknesses of Bitcoin’s informal governance. As transaction volumes grew, the community became divided over how to scale the network. The debate grew increasingly hostile, with various sides claiming to represent Bitcoin’s true vision. In August 2017, a group of miners and businesses attempted to force through a block size increase, creating “Bitcoin Cash” when they failed to achieve consensus. For several months, there was genuine uncertainty about which chain would become the dominant “Bitcoin.” Users had to decide whether to sell one fork’s coins to buy the other’s, or simply hold both and wait. The episode demonstrated how Bitcoin’s lack of formal governance can lead to chaotic and disruptive splits, while also showing the community’s ability to resist controversial changes that lack broad consensus. The original Bitcoin chain ultimately retained market dominance, but the event highlighted the challenges of coordinating protocol changes in a decentralized system.
The lack of central governance means no entity can unilaterally change Bitcoin’s rules. This stability protects Bitcoin’s core properties — like its fixed supply — from political pressure. However, it also makes it difficult to implement improvements or fix problems that might arise. Certainly, getting rid of mining in favor of a proof-of-stake system like Ethereum did in 2022 would be exceptionally difficult for Bitcoin.
Experiments in Governance
While Bitcoin eschews formal governance, other cryptocurrencies have experimented with more structured approaches. Many projects use token-based voting, where holders can vote on protocol changes in proportion to their holdings. Often these tokens are required to be staked or locked up for some period of time, to ensure voters have a stake in the outcome.
Some networks employ delegated voting systems, where token holders can assign their voting power to trusted representatives. This model attempts to balance broad participation with technical expertise. Liquid democracy takes this further by allowing voters to either vote directly or delegate their power, and even allow those delegates to re-delegate — creating chains of trust that can adapt to different types of decisions.
Newer systems like futarchy, where prediction markets guide decision-making, are also being explored. The idea is that people bet on the outcomes of different proposals, creating market-based signals about which changes would be most beneficial. While highly experimental, these mechanisms could potentially lead to more effective and resilient governance.
The emergence of decentralized identity protocols presents another intriguing possibility: democratic blockchain governance based on verified unique human participants. This could enable “one person, one vote” systems that are resistant to manipulation through wealth concentration. Such a capability could be particularly compelling for a cryptocurrency aiming to serve as a truly democratic form of money.
The rapid pace of innovation in crypto governance suggests that superior models may yet emerge. While Bitcoin’s conservative approach has served it well so far, a competitor combining sound monetary properties with more responsive governance could potentially challenge its dominance. The ability to efficiently coordinate protocol improvements while maintaining decentralization could prove to be a crucial competitive advantage in the long run.
A Place in Your Portfolio
Despite its risks, financial advisors are increasingly recommending small Bitcoin allocations as part of a diversified portfolio. A growing number of institutional investors and wealth management firms now view Bitcoin as a potential hedge against monetary debasement and geopolitical risks. While recommendations vary, many suggest allocations between 1–10% of a portfolio, treating Bitcoin as a high-risk, high-potential-reward asset class, in which it is prudent for investors to not invest more than they are willing to lose.
Institutional adoption has accelerated with the launch of Bitcoin ETFs, making it easier for traditional investors to gain exposure through their existing brokerage accounts. This accessibility, combined with growing concerns about monetary policy and government debt levels, has led more investors to consider Bitcoin as a small portion of their portfolios. However, given Bitcoin’s significant risks and volatility, most advisors emphasize the importance of sizing positions appropriately and maintaining a long-term perspective.
The trend toward Bitcoin allocation reflects broader concerns about the stability of the traditional financial system. As governments continue to accumulate debt and central banks expand their balance sheets, some investors worry about the long-term implications for fiat currencies. While Bitcoin’s future remains uncertain, its potential role as a hedge against monetary instability has attracted investors looking to diversify their currency exposure beyond traditional options like gold or foreign currencies.
The Bull Case
If Bitcoin succeeds in becoming a digital gold-like reserve asset, used by billions of people worldwide, that would likely put its marketcap within several multiples of gold. At gold’s current price of around $2690 per ounce, gold has a market cap of about $18 trillion. At this marketcap, one Bitcoin would be worth around $840k. At 3x, $2.5M. For this to happen, Bitcoin needs to avoid disaster from a number of possible technical or political issues and remain competitive with newer cryptocurrencies, and will test how strong the first mover advantage really is.
The Bear Case
Widespread government bans, technical problems, and competition from other cryptocurrencies could all lead to Bitcoin’s demise. If Bitcoin fails to fulfill the use cases of a digital currency, it will lose the vast majority of its value. It could still retain some value as a sort of digital collectors item, but this would be a tiny fraction of the value of a global reserve asset.
Conclusion
Bitcoin represents a fascinating experiment in digital currency, but one with significant challenges to overcome. While its decentralized nature and fixed supply make it an intriguing alternative to fiat currencies, issues around scalability, energy consumption, security, and governance pose serious obstacles to mainstream adoption. The lack of formal governance structures, while protecting Bitcoin’s core properties, may ultimately limit its ability to evolve and address these challenges.
The success of Bitcoin as a global reserve asset remains uncertain. Its first-mover advantage and network effects provide substantial protection, but competition from more technologically advanced cryptocurrencies could eventually erode its dominance. The emergence of new governance models and consensus mechanisms suggests that superior approaches to digital currency may yet emerge.
Whether it can overcome its limitations and fulfill its promise as “digital gold” will likely depend on how well it can maintain its security and utility in the face of evolving technological and regulatory landscapes. Those considering Bitcoin as an investment should carefully weigh these factors and understand both the potential rewards and significant risks involved.
This article represents my personal opinions and research. Nothing in this article should be taken as professional, financial, legal, or investment advice.