Why Bitcoin Failed
This article was written while working for T-Hub
In the aftermath of the 2008 Global Economic Crisis, Bitcoin started as a novel idea, to setup a new financial ecosystem that eliminates middlemen and gives transaction powers directly into the hands of the masses. Anonymous, instantaneous transactions with universal acceptability were the goals of Bitcoin.
As of 2018, Bitcoin has miserably failed at achieving those goals. Despite a socialist vision, the implementation has been exceedingly capitalist. Bitcoin in the modern world is a lucrative venture that rides media-hype to yield quick earnings in a very speculative market. It’s a not a currency that has been mass adopted, it’s not suitable for retail or everyday transactions by the common consumer owing to the patchy implementation and structural issues of Blockchain. One can argue that the democratisation of data via Blockchain is to a significant extent worse than the established traditional capital.
Although Blockchain is coined the most disruptive technological development since the advent of the internet, it has its own set of issues. Bitcoin, based on the blockchain technology, borrows many of those issues. The major problems in the current implementation, usage and model of Bitcoin is illustrated in the following points.
Scalability and the Size of Blockchain
Presently, the Blockchain network that supports Bitcoins is sized at 146 GBs for a transaction count of 350,000 per day and is projected to go up to 200 GBs by the end of 2018. By contrast, VISA handles 150 million transactions per day. If Bitcoin is to scale to that volume for mass adoption, alternatives need to be researched on in terms of Blockchain storage and possible compression, as a network of the current size of VISA would require 62.5 Terabytes of space.
Mining Energy Consumption and Environmental Hazards
The present daily consumption of electricity for Bitcoin mining is larger than the net energy consumption the country of Slovenia. This exorbitant usage statistic is well on course to get uglier, with predictions of mining energy requirements rising to a figure higher than the gross consumption of electricity in Denmark by 2020. A December, 2017 estimate projected the mining consumption at 30 Terawatt hours per annum. Alongside the annual consumption of countries such as Denmark and Qatar and higher than the annual consumption of Morocco and 19 other European nations.
Only 17 million Bitcoin wallets are presently active, if mass adoption of the technology occurs and that number increases exponentially, the effects of such a surge could have dire consequences for the environment.
Speculative Ecosystem - No Intrinsic Value
A widespread consensus in the global financial community is that Bitcoin is presently perceived primarily as an asset and has largely failed as a currency. It has not been adopted by the masses, is not used for retail or other general transactions, and despite recent surges, it maintains a very niche user-base. There is no intrinsic value attached to Bitcoin, no central authority or government that attaches values to it by promising payment on ownership of Bitcoin, its valuation is solely based on trust, the perception that currently owned Bitcoins will have a much higher value in future is the only driving factor behind Bitcoin ownership and usage.
The wide speculations in Bitcoin exchange rates also render it unfit for mass adoption. Bitcoin hit $10,000 in November, and was trading at $17,000 in December. The advent of 2018 saw rates come down to $8000-$9000. These speculations have resulted in Bitcoin being perceived as a money making venture for the enthusiast, rather than being a currency for mass adoption as was initially intended.
To quote the Wall Street Journal,
“Bitcoin is the world’s hottest currency, but no one is using it.”
Attacks on Platform and Stability
The underlying technology behind Bitcoins, blockchain is relatively new, and its implementation as one would expect out of a pioneering public release, is laden with security issues, bugs and vulnerabilities. Although major patches are periodically released and the codebase is well-maintained, exponential rise in cash-flow through Bitcoin trading has invariably opened massive opportunities for hackers to exploit.
The Mt. Gox Hack of March 2014 remains one of the largest robberies in human history. Bitcoin worth $473 million was stolen from the Mt. Gox Bitcoin exchange by the exploitation of a security vulnerability and never completely recovered. In aftermath of the hack, Mt. Gox were forced to shut shop and public faith was shaken in blockchain and Bitcoin security.
The alarming fact is that Mt. Gox Hack is actually just the tip of the iceberg. There have been at least 12 major hacks since 2010 and significant amounts have been stolen by exploiting bugs in implementation of the blockchain architecture. Recently, CoinCheck, a Japanese crypto-exchange reported a hack that is estimated to have stolen $530 million form CoinCheck’s users. This January 2018 report is still under investigation, but if confirmed, it will be the biggest theft in human history. All the more reason to doubt the present security of blockchain based cryptocurrencies such as Bitcoin.
The unregulated nature of Bitcoin is one of its primary attractions, as the vision for cryptocurrencies is to eliminate the middlemen, banks and governments, in the longer run. But in certain contexts, non-regulation is also its bane. The speculations of Bitcoin exchange rates are a direct outcome of its unregulated nature. There is no central authority to affix the value of Bitcoin, hence the currency is driven by its demand.
This leads to speculative pricing, which, as is further explained in following points, is a major roadblock in mass adoption of Bitcoin for retail and general transactions.
The average fee being paid for a transaction on digital currencies, primarily bitcoin, was $28 as of December, 2017. This has been advocated as the largest roadblock in the adoption of bitcoin as a currency. Transaction fee supports mining operations, and returns profits for exchanges such as CoinBase that ease and facilitate the introduction of new users to the cryptocurrency ecosystem.
Transaction fee are often perceived as a trade-off between convenience and security, but the average user is deterred nonetheless by such high amounts, and corporate entities follow the trend. On the 7th of December, 2017, gaming platform Steam responsible for massively popular games such as Counter Strike GO and PUBG revoked support for Bitcoin as a source of payment citing high transaction fee of $20 as the primary deterrent.
Blockchain Technology is notorious for exorbitant transaction times. The confirmation for a transaction takes an average of 78 minutes according to reports by blockchain.com. While, in the midst of high volume trading, this delay has been observed to be as high as 1,188 minutes. These delays have forced several changes in the original underlying blockchain architecture of Bitcoin, an outcome of which were hardforks that spawned off Bitcoin cash and Bitcoin Gold.
Such delays deter consumers as well as corporate entities, while also presenting logistical difficulties for bitcoin trading centres. Brad Garlinghouse, the CEO of Ripple, a major market player in cryptocurrencies, was quoted by CNBC saying “I don’t think bitcoin is well-positioned to solve the payments problem.” His words reflect the accepted notion of the industry and consumers alike.
Usability and Computer Security Know How
Bitcoin is new, technologically complex and its solely digital existence is a new experience for a majority of the consumers. Not everyone is comfortable with the idea of a currency that has no physical presence, and whose functioning the users do not fully understand. As a direct impact of this, ignorance, misinformation, distrust and rumours are widespread in the community of Bitcoin users.
Bitcoin also requires its users to be well versed in Computer Security. Terms like cold-storage, encrypted wallets, peer-to-peer transaction are more often than not jargons to the layman, and have been observed to be a deterrent in mass adoption of Bitcoins.
Impracticality for Retail Usage
Points have already been covered that illustrate the transaction delay and exorbitant transaction fee levied on each online transaction using Bitcoins. These factors render Bitcoins unfit for general retail transactions, where instant payment and minimum overhead charges are the end users priority.
Lack of Consumer Protection
The existing financial infrastructure provides layers for user protection. Fraudulent transactions when detected and reported on credit cards, are refunded to the consumer. No such protection is available on Bitcoin transactions. Payments made are irreversible and utmost care needs to be taken while structuring a transaction because of these reasons.
Transactions error is a major issue that is actively being addressed by cryptocurrency payment service providers. Presently, remediation for erroneous transactions largely depend on the magnanimity of the end user. In 2013, the CEO of AsicMiner ‘friedcat’ received laurels when he reimbursed an erroneous transaction of 200 BTC as an act of goodwill.
Although it has been 9 years since Bitcoin were first introduced to the world in 2009, there still exist gaping loopholes in laws and regulations around the world when it comes to taxing and accounting for payments done via cryptocurrencies. Governments all over the globe have been scrambling to institute legislations to govern Bitcoin and other cryptocurrencies that provide anonymous modes of payment that conveniently bypass existing financial infrastructure, but as is expected from bureaucracies, the transition is taking a lot of time which puts Bitcoin trading in an unregulated legal grey area.
Our economic system may eventually face a major overhaul owing to cryptocurrencies, but Bitcoin, in its present state, implementation and usage structure, is not the solution we are looking for.
Why Bitcoin Failed