Revisiting Persistent Bitcoin Criticisms By Fidelity Digital Assets

Two days ago I wrote about Fidelity's risk-reward analysis and how bitcoin outperformed all other investment assets. Normally, I don't write on the similar topic back to back, I like to jump from one topic to another. What I have read from Fidelity today was super interesting, and I couldn't wait to share. About a week ago Fidelity Digital Assets have published their an article answering to common criticisms about bitcoin. The article is titled - Revisiting Persistent Bitcoin Criticisms. This is an update on the original article they published three years ago addressing common bitcoin criticisms. They go through five old criticisms addressed in the past, but also add four new ones they found needed addressing as well. Fidelity Digital Assets is a subsidiary of Fidelity Investments and operates as a separate business dedicated to digital assets.

Readers of my posts are very knowledgable about bitcoin, and most likely have seen these topics addressed in the past and probably would share the same thoughts. Yet, this 13-page articles is well written and interesting. I highly encourage everybody to read the full articles. As bull market seems to be here or market is just getting ready for bitcoin friendly months and years to come, having this information available might be useful, since we all will find friends and family asking about bitcoin and most likely bring up common criticism about it. When these topics come up during Thanksgiving this year, reasons Fidelity provides in favor of bitcoin may become useful.

First five criticisms and misconceptions Fidelity addresses are:

1. Bitcoin is too volatile to be a store of value.
2. Bitcoin has failed as a means of payment.
3. Bitcoin is wasteful and/or bad for the environment.
4. Bitcoin will be replaced by a competitor.
5. Bitcoin is not backed by anything.

Four more new criticisms and misconceptions Fidelity provides answers for are:

1. A bug in a Bitcoin's code could render it worthless.
2. Regulations will slow Bitcoin adoption.
3. People could lose interest.
4. There are "unknown unknowns."

All of these topics are interesting. The misconceptions and criticisms I find the most interesting are bitcoin is not backed by anything, and A bug in a Bitcoin's code could render it worthless. When reading about the second, I learned something new. I wasn't aware that bitcoin actually did have a bug in the past that needed to be fixed.

Bitcoin is not backed by anything, it is not real, it is imaginary, it is not physical, it has no actual use, etc are among the most common criticisms we may hear, and they all mean the same. We can take defensive position and say the same thing about fiat currencies, as they are not backed by gold anymore. For some reason, mays seem to think that fiat is still backed by gold. Fiat is not backed by anything is equally wrong statement. Fiat currencies are usually backed by the issuing governments and countries economies. Bitcoin doesn't belong to any government or country. However what it belongs to is its network. My simple answer usually starts by stating that bitcoin is backed by the network, a powerful and revolutionary one. Fidelity does give a similar answer but they put in a more articulate way.

Bitcoin is backed by code that is brought to life by the social contract that exists among its stakeholders:

• Users who choose to transact on the network.
• Miners who choose to incur costs to process transaction and secure the network.
• Nodes that choose to run Bitcoin code and validate transactions.
• Developers who choose to maintain Bitcoin code.
• Holders who choose to store some portion of their wealth in bitcoin.

Bitcoin’s stakeholders make these explicit choices, bringing bitcoin’s unique attributes to life—its perfect scarcity, transaction irreversibility, and seizure- and censorship-resistance. Bitcoin’s network effect, or the addition of every new stakeholder, makes bitcoin more reliable and further hardens its properties, attracting more stakeholders to the asset, and so on. Bitcoin code presents the rules, but the execution of and agreement on the rules by stakeholders gives rise to the secure, open, and global value storage and transfer system that exists today.
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Bitcoin's network and its participants makes the magic happen. Due to its decentralized nation, as more and more participants join the network, it just keeps getting better. So, yes bitcoin is not backed by one thing, one person, or entity. It is backed by many participants and the network as a whole. Even those who don't frequently get involved in the network, they can put it to test by simply transferring value anywhere in the world. While transferring value is one of the features of bitcoin, it is easy to put to test and demonstrated to true power of the network. If a person or entity chooses to transfer a dollar, or a million dollars, or a billion somewhere in the world, and by doing so able to retain its value without a need for third parties, that is powerful. The bitcoin network makes it possible.

The possible criticism or concern regarding the bitcoin code and discovery of bug making bitcoin worthless is another interesting one. I agree with Fidelity it is a legitimate question to ask. In their answer what I learned something new. Since bitcoin is just a software, revolutionary one, but still as a software it may have bugs. As this software run within the network of money, bugs may pose a security risk and people losing their money wouldn't be ideal for a money network. I can see how people could easily lose trust in this trust-less network if there was a bug that put their money at risk. Apparently, there were two bugs discovered in its early days. The first one was in August of 2010. Somebody was able to exploit this bug and create 184 billion bitcoins. Wow, lol. This happened when Satoshi was still involved in the development of bitcoin.

The bug was noticed by others within hours and a code update was created and sent out by Satoshi in the ensuing hours. Soon, enough validating nodes upgraded and continued to build on the “good” version of the blockchain (where the 184 billion bitcoin did not exist) and it overtook the “bugged” version, highlighting the role of community and social consensus in the process.
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The second bug happened in March 2013. This one took the network offline for about six hours. A version upgrade to the bitcoin software caused the network to fork into to two version running simultaneously. No coins were effected, but exchanges has to pause the transactions. Developers and miners communicated with each other and reached consensus to revert back to the previous version, and the issue was resolved. While these two hiccups did happen in bitcoins early days, these hasn't been no other bugs discovered, no other network downtime for more than a decade. That is impressive! Since bitcoin is an open source code and open network, everybody is welcome to study, analyze, and contribute. With so many stakeholders involved in the network, there are many with high stakes and incentives to keep close attention for every block production, every movements within the network to ensure the stability and security of the network. Can more bugs be discovered in the future? Yes. There is no 100% guarantee everything will be flawless all the time. But due to the reasons mentioned above, the likelihood of this happening is low. Even if another buy were to be discovered again, I am sure the participants will react in timely manner and things will be back to normal in no time.

Please read the article yourself when you get a chance or save for a future reference. Let me know your thoughts in the comments.