
Bitcoin Limitations: What are the Major Disadvantages of Bitcoin?
Bitcoin is the first and most famous cryptocurrency available in the world today. Its market cap is the highest of all the different currencies out there. Though Ethereum is creeping up and might, according to some, depose Bitcoin in the future since the oldest crypto coin has some flaws.
In exploring how it isn’t the ideal cryptocurrency — given its block size and governance issues — we must also understand what exactly a bitcoin is and how most cryptocurrencies work.
The History of Bitcoin
Bitcoin was founded by Satoshi Nakamoto in early January 2009. Nakamoto wanted to start an online digital cash system. Most attempts to make an online cash system had failed. One of the large points of failure for digital cash systems was the problem of double spending. Double spending is when one entity or person spends the digital cash twice. In order to keep account of balances and transactions, most systems have a centralized server, bank, or institution that maintains a record of all the information.
In the decentralized world of the internet that isn’t possible nor wanted so Nakamoto, the Japanese innovator, created a way for peer to peer payments to work by having “miners” legitimate the transactions. Once a transaction is confirmed, it can not be changed and every point in the system must acknowledge what the miner has confirmed. The transaction then becomes part of the “blockchain.” After the operation has been added to the blockchain, it can not be reversed. The miners get a token payment for their confirmation usually in the form of the cryptocurrency of that specific blockchain.
Cryptocurrencies, such as Bitcoin, are called such because the funds are locked in a public key cryptography system. Only the owner of the key can send a bitcoin. This allows funds to be sent to others without the need of regulatory bodies, such as banks or the state.
Bitcoin the imperfect currency
While bitcoin has shown to be useful on the world market there is a lack of fungibility to the cryptocurrency. Fungibility, in this case, refers to a currency having and keeping the same value regardless of how the money is used. The constant fluctuation of value makes the currency hard to measure.
Also, the system has decided to cap the number of bitcoins produced. This leads to massive deflation. Each unit will be worth more and more as time moves on slowly increasing in value. This can lead to hoarding and also rewards early adherents. If these early acolytes go on a spending spree, the market can become volatile in no time.
Size does matter — Block size limitations
When Nakamoto began Bitcoin, he prescribed a size to each block. Each block could only store 1MB of data. Nakamoto set this standard early in 2009 and 2010 to forestall hackers from attacking the system by creating uneven or oversized blocks. Blocks that exceed the 1MB limit will automatically be rejected. This means that the system is finite. Not only is there a cap on the number of bitcoins created but there is also a cap on the amount of data the system can store.
Governing the unseen- Issues of regulation
Bitcoin is an unregulated system of exchange since it operates on a decentralized system without the oversight of a sanctioning body. The lawless nature of Bitcoin was most infamously seen in 2013 when the FBI closed down the anonymous marketplace, Silk Road. The online center offered customers and merchants a way to sell illegal goods, drugs, and perform activities that were criminal and morally ambiguous at best.
The lack of sanctioning to Bitcoin has each country attempting to regulate the currency in different ways. Even in the United States, each state deals with Bitcoin operations differently. Some states such as California and New York are particularly harsh on bitcoin businesses while New Mexico and Montana are lax. This lack of oversight creates a fluctuating market for the currency, and its inability to cooperate with major sanctioning bodies does not help stabilize the currency.
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