- June 19, 2018
- Posted by: Jessica Lee Walker
- Category: About Crypto
The sharp rise of Bitcoin, which took place in the fall of 2017 and reached the heights of $20.000 per coin, brought this cryptocurrency out of the shadow into the limelight of global media and the general public. Some people, like famous twin brothers Winklevoss, became dollar billionaires because they were farsighted enough to invest in Bitcoin at the early stages, while others still dream of getting rich by exploiting its high volatility. Those who take even the slightest interest in cryptocurrencies, often come across the “Bitcoin witnesses” who vigorously persuade others that this coin will soon become a universal payment option and make all banks and governments obsolete. It is obvious, however, that such thoughts could emerge only in the head of a radical anarchist, though it is still necessary to substantiate why such predictions are sci-fi-esque, to say the least.
There is a high probability that some form of digital currency will eventually replace paper money and become a global reserve currency, but it certainly won’t be Bitcoin since the technology itself contains critical flaws.
Flaws of Bitcoin that prevent it from turning into a global mean of payment
The first major issue is the legal status of Bitcoin and whether it should be considered as a currency or as an asset. Currently, not a single government in the world has managed to develop the legal base not only for Bitcoin but for all operations with cryptocurrencies in general. Most progressive countries, like the United States, Japan, Great Britain, South Korea, are actively working on developing the regulatory framework for cryptocurrencies, while others (Russia, China, Indonesia) are putting up roadblocks for the blockchain industry. It is important to note that even in countries where Bitcoin is legal or stays in the “gray zone”, it is not perceived by the authorities as currency but rather as a valuable asset or as a payment service. It is quite obvious that Bitcoin, as the payment option, in its current form is a threat to the governments, mainly because it is built on the principle of decentralization and absence of regulation which contradicts the very nature of the state economic system. Since the introduction of any global payment method must be approved and accepted by the state financial institutions, it is highly unlikely that any state machine will deprive itself of even the slightest bit of power. For the legal point of view, Bitcoin is likely to retain the status of a valuable asset that will be traded on all major exchanges but will not become a global currency simply because it doesn’t have the capacity to overcome the governments’ resistance.
The second problem is related to the previous one. Being an asset, it is mostly traded on special crypto exchanges. There two types of such exchanges: decentralized and centralized. The decentralized exchanges are prone to various cyber-attacks and bankruptcies. Youbit, the crypto exchange registered in South Korea, is one of the latest examples. On December 19, 2017, Youbit experienced a major cyber-attack and lost 17% of its crypto assets. After these unfortunate events, the management of Youbit had to file for bankruptcy and their customers lost a significant part of their crypto portfolio. Similar things happen to decentralized platforms and they always exert a significant impact on the price of not only Bitcoin but almost all altcoins. Besides, the news about the intentions of Asian governments (mostly China’s or South Korean’s) to regulate or even ban cryptocurrency exchanges or mining always result in major panic in the crypto community as well as on the crypto market. In January, right after the emergence of the rumor that China plans to ban the mining of all cryptocurrencies, the market had plunged and still tries to recover.
The China factor also plays a great role in Bitcoins inability to become a global paying option. It is a known fact that over 50% of all computing nodes that generate bitcoins and other altcoins, such as NEO, TRON, BNB, are located in China, so the government of this country may have a notable influence on the price of Bitcoin. It makes Bitcoin too depended on the vagaries of one autocratic government, thus unsuitable for the role of the worldwide accepted payment option.
Other Bitcoin Disadvantages
The next three disadvantages of Bitcoin: scalability, the speed of transactions, and energy consumption are interconnected in a certain way. In the usual work mode, the speed of the Bitcoin network is quite acceptable, but at peak times, when the number of transactions reaches its maximum, the execution of payments can take hours if not days. Moreover, the issue regarding the size of commissions becomes more pressing because it depends on the speed of verification of each transaction. The miners tend to verify “more profitable” transactions much faster, while the cheaper ones can be left hanging for weeks. For instance, at the beginning of this year, the average commission for Bitcoin transaction amounted to $30 which is obviously unjustifiably expensive, especially in the case of microtransactions. Thus, poor scalability and high commissions can lead to a drop in interest to this currency on the part of users. Given that the cap for Bitcoin issuance is at 21 million and the volume of the global economy is around $600 trillion, the hypothetical Bitcoin global payment system would conduct only microtransactions with high commissions. By the way, the conventional banking systems are able to carry out millions of payments with a minute-long delay, at the same time their commissions remain relatively inflexible.
As for the energy consumption, it is increasing proportionately with the development of the Bitcoin network. Sebastien Deetman, an ecologist from the University of Leiden, arrived at the conclusion that by the year 2020, the processes of mining will consume as much electricity as the entire country of Denmark. It is hard to even imagine, how much electricity would be required to create and maintain the global Bitcoin payment system and how harmful it would be for the global environment.
Lastly, there is a technology in development that can make Bitcoin obsolete. It is called the quantum computer. The majority of contemporary cryptographic protocols, which ensure the safety of all financial online transactions, are potentially vulnerable to the computing capacities of this computer. Once built, the quantum computer may swiftly mine all of the remaining bitcoins and compromise every transaction, which would be a grave threat even to the entire blockchain system.
Bitcoin is based on a promising technology, though its capabilities are highly overestimated. It may be a reliable asset and an interesting financial instrument but it has little to no chances of turning into a global payment system.