Cyber Capital Fourteen Reasons Why We Don’t Invest in Bitcoin

Why We Choose Not to Invest in Bitcoin 14 Reasons from Cyber Capital

Author: Justin Bons, Founder of Cyber Capital Source: medium Translation: Shanoiuba, LianGuai

From the perspective of fundamental investment, it is obvious that Bitcoin should not be seen as an investment at all. BTC is an emperor without clothes, with no practicality or long-term security. Therefore, it has become a pure speculative asset, going against the original goal of the project.

Here are fourteen reasons why Cyber Capital has not invested in BTC since 2017:

1. No capacity (practicality)

The block size limit fundamentally limits the throughput of BTC to between 7-22 transactions per second, which means that it would take over 70 years for everyone in the world to complete a single transaction.

This means that widespread and significant Bitcoin usage is technically impossible because usage has been restricted. Therefore, it cannot and will not become the “currency of the future”.

Congestion also makes BTC transactions unreliable, as fee predictions cannot be perfectly made, resulting in failed transactions.

Some people propose the Lightning Network as a solution to this issue. However, introducing people to the Lightning Network in a non-custodial way actually requires multiple on-chain transactions, and during congestion, high fees are also shifted to Lightning Network users.

Therefore, the block size limit destroys all potential use cases for BTC because any significant usage is actually impossible. Whenever a real use case starts to develop, it only leads to skyrocketing fees and congestion, eventually driving people away; this is why BTC lacks practicality.

2. No long-term security (lack of practicality)

The security model of Bitcoin is currently in a bootstrap phase, with its security budget supported by high inflation. However, we are now approaching the next phase, where fees will replace inflation in supporting the security of the network, due to the halving mechanism. BTC was originally designed as a high-capacity payment network, where a large number of TX, each paying a small fee, would be able to support the security of the network based on this utility/service.

However, due to BTC fundamentally changing its roadmap, goals, and vision by refusing to increase the block size limit as planned, it now faces a different dilemma. Its security model has completely failed due to the inability to pay for its own security fees.

Now there are only two ways to keep Bitcoin secure while maintaining the same inflation schedule, and both are extremely unrealistic:

In the next century, the value of Bitcoin must double every four years or maintain extremely high fees in order to sustain the current level of security. Such growth is impossible, as based on the current price, it would exceed the current global GDP in 31 years.

After that, this doubling in price would need to continue for another 80 years until the security budget is completely depleted. If you understand exponential growth and economics, you should know that this is entirely impossible.

Due to the gears effect of the fee market, fees will never reach sustained extreme levels. It is unrealistic to pay hundreds of dollars for a single transaction in a competitive market. When fees skyrocket, users will leave, all due to unnecessarily increasing the block size limit.

All of this means that without exorbitant transaction fees, the long-term security of BTC is unsustainable. The security of BTC will inevitably continue to decline until it reaches such a low level that the network can profit from attacks, thus making BTC insecure. I predict that this situation will occur in five to nine years (two to three halvings).

The security and technical foundation of BTC are made of sand; false hope.

3. No predictable supply (no security guarantee)

If the block size limit is not increased before it is too late, there is a third, more realistic option to avoid this disaster.

Once the security of BTC falls below a certain threshold, increasing the inflation rate of BTC to over 21 million will be the only choice. Because once we reach this inevitable state, there are only two options left:

Option one is to allow review and double spending when the network is under a 51% attack.

Option two is to increase the supply inflation of BTC, exceeding the limit of 21 million.

I suspect that once this situation occurs in approximately ten years, both options will occur simultaneously, causing the network to split again and causing more chaos, all as a result of rejecting utility and the original vision of Bitcoin during the block size debate.

4. No value proposition (no security, utility, and predictable supply)

An insecure and purely speculative asset cannot be a good store of value, or even a good form of currency. The best store of value is one that has a utility-based foundation, as this creates a more stable basis for speculation. Furthermore, its long-term security model is about to fail, completely debunking all claims of Bitcoin being an investment in the absence of utility.

The reality is that aside from speculation, Bitcoin cannot provide any value. This is why it has become a purely speculative asset, making it highly volatile and ultimately meaningless, which is very different from competing blockchains like ETH, which provide significant utility and indeed have mechanisms like token burning that can return some of the value generated by the tokens. The utility of the blockchain returns to the token holders.

Making investments in third and fourth-generation blockchains more attractive, not only from a utilitarian perspective but also from a store of value perspective. As all of this translates into more secure and scarce blockchains, which is what BTC should excel at.

The times have changed, and technology has developed to such an extent: compared to its competitors, the token economy of Bitcoin now appears very weak.

5. Lack of Turing Completeness (Programmability)

It has been proven that programmability is a key feature for any new blockchain, as it has already enabled a wide range of proven new use cases.

The best decentralized currencies need decentralized finance to support them, and this makes sense. Otherwise, everyone would still rely on custodial services to support these more complex financial products, contradicting the original intention of using decentralized cryptocurrencies. That’s why the number of BTC on the Ethereum network is currently several orders of magnitude higher than on the Lightning Network.

I believe programmability is a necessary condition for long-term competitiveness because, compared to purely speculative narratives and monetary narratives, it provides a more attractive stepping stone to attract new users, who require a certain level of ideological motivation, at least in developed countries.

6. No DeFi (No Programmability)

The lack of programmability explains why BTC cannot support DeFi. As a result, countless Bitcoin holders continue to suffer losses on centralized exchanges and fraudulent centralized lending platforms. This situation will continue indefinitely, as BTC cannot develop its own DeFi and instead relies on user trust in centralized institutions, which goes against the original argument for Bitcoin.

This extreme lack of functionality also further impairs BTC’s competitiveness in terms of security and economy, as utility remains a critical aspect of a sustainable and highly attractive token economy. Bitcoin simply cannot achieve this on a large scale.

7. No Privacy (No Scalability and Programmability)

The block size limit also greatly reduces the anonymity set, as conducting chain analysis becomes much easier when there is much less transaction volume. The availability of mixers is also significantly reduced due to the capacity constraints, and they become even more expensive during congestion.

There is also a complete lack of important privacy-enhancing technologies, primarily due to Bitcoin’s lack of programmability.

Otherwise, solutions such as zero-knowledge proofs could be implemented to make BTC more private for users who require such functionality. Although the native implementation of any privacy feature remains challenging, I will discuss this further considering the state of BTC governance.

Privacy is a key characteristic of any financial or payment system. In fact, Bitcoin cannot achieve strong privacy features, which also makes it unsuitable to be used as currency, even though it has the capability.

8. PoW Is Inefficient and Wasteful Compared to PoS

Proof of Work brings significant costs in terms of computation, almost non-existent in Proof of Stake. This cost must be reflected in fees or inflation to ensure its long-term security.

PoW requires a large amount of hardware and electricity to protect the network, thus externalizing the cost of verification, all in order to solve arbitrary mathematical equations that do not directly benefit the network itself. On the other hand, PoS uses the value of the tokens themselves to secure the network, thus achieving higher blockchain security in a more efficient way.

PoS is economically superior because it doesn’t have this huge arbitrary computational cost. Due to increased efficiency, the token economics of PoS can have much lower costs and/or inflation in all design variants. In terms of “attack cost”, assuming similar properties other than the consensus algorithm, comparing PoS and PoW; the attack cost of PoS is 20 to 50 times higher than that of PoW.

As mentioned above, since the cost of PoS is much lower, this means that if other conditions are the same, from an economic standpoint, PoS is safer and more robust.

9. PoW is less decentralized compared to PoS

Compared to PoW, PoS is more decentralized because PoW requires warehouses full of hardware that can be seen from space! It is centered around economies of scale and requires special agreements with governments for electricity. PoW is reserved for the industrialists.

In contrast, PoS block production can run on a Raspberry Pi in an ordinary household, and rewards are distributed based on stake averaging rather than industrial-scale competition. This lowers the entry barrier, thereby expanding power distribution (decentralization).

The degree of decentralization of most PoS cryptocurrencies operating at the scale of BTC will be several orders of magnitude higher. PoW doesn’t stand a chance; PoS is an evolution.

All of this makes PoS superior to PoW in every aspect, from economic, security, and decentralization perspectives, even according to widely accepted principles of fairness and equality.

10. Dysfunction of governance

The BTC investment paper I originally wrote in 2013 was destroyed by the people we trusted to maintain it. This also planted the seeds of a problem. I believe that what we are witnessing is a failure of governance. The power struggles and historical civil wars of BTC are symptoms of this failure.

The fact is, the main client implementation, “Bitcoin Core,” has effectively achieved centralized control over BTC development. BTC has been turned into a one-party system, with Core being the effective gatekeeper for all changes.

Currently, over 98% of full nodes are using Bitcoin Core, which is an extreme level of centralization. In fact, only one chief maintainer has the final say on all decisions within Core, making it a dictatorship. And like all dictatorships, there are limits to their ability to escape punishment. However, this is a complete distortion of the decentralization ideals that BTC represents.

This is another cultural consequence of the block size debate, explaining why truly competitive clients are viewed as “enemies of Bitcoin” today.

The myth of Bitcoin; that it is a decentralized elite politics. This is far from the truth. Bitcoin Core has disproportionate power to make any changes to the protocol, including controversial ones like RBF, while simply kicking out anyone who disagrees with them, such as Gavin Andresen, Mike Hearn, and Jeff Garzik.

This is why diverse competing client implementations are so important for true decentralization. Due to the block size debate, Bitcoin has lost diversity in clients, which means it has effectively been captured, a clear failure of decentralized governance.

11. Toxic Culture

From Bitcoin extremists to laser eyes, Bitcoin is notorious for its toxic and insular culture. Understanding this is important given the lack of any formal governance, which makes Core the de facto dictator of the protocol. All of this means that the only hope for reform lies in culture, or rather the social level.

Unfortunately, today this social layer is severely dysfunctional, partly as a result of the previous points; because these flaws lead to a deep unconscious sense of insecurity.

Because BTC’s culture is a byproduct of its history and anthropological evolution. The most noteworthy part of this evolution is the period of the block size debate, accompanied by a massive censorship campaign. Resulting in the exodus of nearly all opposing voices.

To create an echo chamber with self-reinforcing confirmation bias for leading figures, further enforcing BTC’s homogenous demographic characteristics. Toxicity, insularity, and hostility are their defense mechanisms, used to defend fatal flaws in BTC’s design. This is why they lack security, which requires their supporters to engage in fictional narratives, as lies, fantasies, and wishful thinking are the only ways to continue selling Bitcoin to bigger fools, even resorting to strategies directly taken from Ponzi schemes.

The dominant personality types now are completely different from when I first joined in 2013. The collective psyche that I cherished is now thriving in BTC’s competitors. Despite Bitcoin proponents selfishly pretending that Bitcoin still supports its original noble goals, the facts clearly don’t support it.

12. Conflict of Interest

Most of the prominent BTC developers are financially supported by for-profit companies whose goal is to develop L2 solutions for BTC. This creates an obvious conflict of interest with scaling BTC L1.

Prominent members of Bitcoin Core have received significant funding and equity from companies building L2 solutions like Lightning Network and Liquid. Companies like Blockstream and Chaincode Labs have been sponsoring core developers for years. The conflict arises from the fact that these companies benefit from not scaling BTC’s L1. At least in the medium term, these companies are able to raise hundreds of millions of dollars by selling solutions (L2) to solve the problems they have created and are able to maintain (L1 scaling).

We must look at the incentive mechanism of the system as a whole, rather than as individuals. Because we can predict the results of a large group of people based on incentives, rather than individual behavior. This means that over a sufficiently long period of time and scale, this particular incentive misalignment will lead to these conflicts of interest recurring. This makes it a significant systemic flaw in blockchain governance, which I discuss more extensively in “Bitcoin Governance Theory”. Three-stage model.”

13. Deep-rooted and collusive authoritarian figures

On average, power always corrupts, and we should not expect those in power to go against their own interests and give up their positions. Because this only happens in the rarest of cases in history.

The leadership responsible for these failures and deviations from the initial goals actually still holds power. From this perspective, BTC is still effectively occupied by parties with direct conflicts of interest.

The need to overthrow Bitcoin’s current leadership is a huge obstacle to positive change and is unlikely to be overcome quickly. Especially considering the lack of any formal governance and the fanatical following of incumbents.

14. Unable to solve all these problems

BTC cannot solve all these problems through change, largely due to its dysfunctional governance and toxic culture. BTC’s governance is undermined by denying its existence; “The greatest trick the devil ever pulled was convincing the world he didn’t exist”.

Support for BTC based on its potential for change cannot be divorced from politics; any sufficiently thorough investigation would expose its flaws and highlight its inability to change, even in the face of significant existential threats outlined earlier. BTC is riding a train directly into a brick wall of its own technological limitations, and the hopes and dreams of Bitcoin holders do not change this undeniable fact.

Conclusion

Fundamentally, Bitcoin is one of the worst cryptocurrency assets in the market today. Its only real advantage is its first-mover advantage, which still gives it the top market cap. However, once it inevitably loses this dominant position, it has nothing to prove its prominent status. We have witnessed the failure of BTC’s experiment. It was a magnificent experiment that brought about the explosion of Cambrian innovation and ensured the initial success of Bitcoin’s vision.

You can project any belief you want onto Bitcoin, but that does not change the technological fact of its inferiority, leading to its inevitable downfall. You can speculate on it, you can trade it, and you can even build a quasi-religious belief system around it. However, one thing you cannot do is build a coherent, fundamentals-based long-term investment case around it without ignoring the wider competitive landscape of the cryptocurrency market.

Bitcoin has come to the borrowed time and is waving goodbye to its seriously flawed design. Bitcoin failed to keep up with the times and is deeply rooted in outdated technology ideologically; Bitcoin is also not immune to the influence of free market competition. The dream of Bitcoin is now flourishing in its offspring, while Bitcoin is left behind, downgraded in future history books for starting this movement but not following through. It is a great and inevitable failure, and I believe future generations will wonder why so many people made such a mistake when looking back at 2023.

It is the same when we look back on the past; hindsight makes it seem obvious, but for those deeply entrenched in their era’s culture, the reality may be quite the opposite. Ultimately, all currency value is based on belief, however, the vast majority of value in the world is tied to practical assets for a reason. Because value investors like myself believe that utility is far more valuable than pure speculation. That’s why Cyber Capital has not invested in BTC since 2017 and has never regretted this decision.

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