Why Bitcoin is doomed to fail

Bitcoin will never become what its creator had dreamed of: a real currency.

I was born in The Netherlands, from a Dutch father and a German mother. In my childhood we would often go to visit my mother’s family in Germany, a five-hour drive over boring highways that always seemed like an eternity. However, on each drive there would be one little moment of joy: the border. In a seemingly random place, surrounded by forest, the highway would turn into a gigantic parking lot filled with cars eager to cross. Passing the border felt like an achievement: being granted into another world.

It’s 2014 and the borders have longsince disappeared — only a little bump in the road reminds us of the old days. Europe is being united, only language and culture demark fuzzy country lines. The Euro allows us to drive for thousands of kilometers, passing many countries, and still pay with the coins that where in our wallet when we left home.

The Euro — pinnacle of a united Europe — seemed like such a great idea: Breaking down trade barriers, boosting intra-European tourism, allowing for one single banking system. Now, depending on where in Europe you live, you might consider it a handy tool at best or a complete disaster at worst. The sad status quo is that many Europeans feel being cheated, powerless against the ruling economic and political forces.

In this respect, it’s hardly surprising that people are seeking for alternative systems in which they have control, or which at least cannot be manipulated like the Euro. Cryptocurrencies like Bitcoin seem to be an excellent alternative. After all, their distributed nature makes it very hard (although not completely impossible) for a single entity (or person) to control the currency.

There’s one problem though: who can you pay with Bitcoin? Sure, there are some online and offline shops that accept Bitcoins — but salaries are still paid in Euros, and my local baker would probably rather give me a bread for free than accept a Bitcoin payment. This raises the question: what makes a successful currency?

Obviously, a successful currency should be a more or less reliable tool for handling the exchange of goods and services. The difficulty of a currency is in its deployment — and that’s exactly what made Bitcoin doomed as a currency. To understand this, we need to take a little trip back in history.

When Bitcoins were introduced in 2009 by Satoshi Nakamoto, only very few people knew of its existence. The few early adopters who spend their computing power (‘mining’) on the creation of Bitcoins quickly gathered a large pile of relatively worthless virtual money. Worthless, because the system was disjunct from the physical world and there were no ways to spend Bitcoins. That all changed when exchanges started to convert Bitcoins into ‘real’ money — suddenly they had value.

Nowadays, over 12.000.000 Bitcoins have been mined, and the number is slowly growing until it reaches its artificial 21.000.000 cap in about 100 years. The exchange rate of Bitcoins is still very volatile, but usually amounts to a couple of hundred dollars per Bitcoin. Now think again about the early adopters, who were sitting on large piles of (back then) virtually worthless money. Within a couple of years, the worthless money has literally turned into an estimated $7.000.000.000 market.

Given their early presence, many of these early-adopters are now amongst the richest Bitcoin owners — already dollar millionaires. Unfortunately for the rest of us, the top-100 richest Bitcoin owners posses about 20% of all Bitcoins. Even when compared highly unequal wealth distributions like in the US, that’s pretty skewed.

The fun really starts in the highly unlikely scenario in which everybody would switch to Bitcoins. Since Bitcoin are a scarce resource (due to the artificial cap), an increase in demand will result in an increase of their ‘price’. The top-100 rejoices: their wealth increases while they needn’t do a thing. Now imagine being a current-day billionaire (say Bill Gates) trying to convert your dollars into Bitcoins. Since the demand is enormous (the whole world wants Bitcoins), you will probably get just a handful of Bitcoins in exchange for your billions of dollars. Yet, there is this tiny group of 100 people that sit back and relax, owning 20% of all Bitcoins while having invested virtually nothing. How would that make you feel, Bill Gates?

Even if you wouldn’t mind being thrown back into relative poverty, there is still one little problem. Remember what the big Bitcoin promise was? Right: it’s very, very hard to influence its value, even for governments. But what about this top-100? Wouldn’t they have just a little bit of influence, possessing 20% of the world’s wealth?

There you have it: a great idea, flawed by its implementation. However much I’d like to have a government-free currency like Bitcoin, I prefer my Euros over a currency that creates a monstrous disbalance in power and wealth. End of story? Probably not. But our protagonist’d better come up with something good in the next chapter…