Why Bitcoin is not Currency
There’s been a lot of talk of people saying Bitcoin is maybe the next currency. Talks and rumors about Bitcoin becoming money and competing with existing fiat currencies are massively disrupting the system and have instilled a lot of fear in the market. I can say that Bitcoin is going be big and hit mainstream adoption, but not in a way that you might think. And this concept has given the masses a very wrong way of thinking and unnecessary fear of Bitcoin. It will not grow to be something that consumers would use from all sorts of angles, which I’ll be explaining later.
One thing is definite, based on what it is today, Bitcoin will never become a mainstream currency. However, it has been and is a great store of value.
Scalability Issues
Bitcoin attained vast interest because it was the first cryptocurrency that came out since 2008, after the crisis and after Satoshi Nakamoto wrote the whitepaper describing a new digital currency that is designed to promote transaction transparency. It was an experiment that turned out to be very successful. But despite its success, I think it would still be a very big challenge for Bitcoin to actually move to mainstream as a consumer currency.
The number one problem is the scalability issue. Right now, Bitcoin only allows seven transactions per second. Compared to PayPal or Visa operations, you will need at least a thousand Bitcoin transactions per second for it to become mainstream. Seven transactions per second definitely are not enough. As it is today, no number of upgrades to the blockchain can achieve the one thousand per second anytime soon for Bitcoin.
The Bitcoin fork of August 2017 spawned a competing Bitcoin called the Bitcoin Cash (BCH). The fork was intended to increase storage and to lower transaction fees. Developers were also aiming to improve, if not eliminate Bitcoin’s transaction limits and come out with a Bitcoin with unlimited transactions. But that is yet to be seen. Because, currently, transactions per second is still around the same.
Seven transactions per second are way too small for consumers, but quite good for business. A business enterprise would probably process seven transactions for 500 Bitcoins at one go. But, in the mainstream application where ordinary transactions are 0.5 BTC, 0.001 BTC, or 0.025 BTC, you will need to do a lot of transactions. But, because of the limits, it won’t happen. So, while batch processing is good for business, it is not for consumers at this stage.
The blockchain 1.0 startups first promoted Bitcoin payment processors. I really think this is the wrong to go. The technology scalability issue, i.e., the seven transactions per second limit, will preclude great products, business initiatives, and ideas. Unless it is resolved, even the most successful of startups that target consumers will always hit the technology scalability issue.
It Moons
Mooning in the crypto industry means something that is growing exponentially. Bitcoin moons. Less than two years ago, Bitcoin was worth less than a thousand US dollars. Now, it’s valued at $9,000 USD per Bitcoin. If you held a bitcoin two years ago at just a few hundred dollars and now it’s nine thousand dollars, do you think you would want to spend it? Of course, not. You want to hold it because of the hope that it will keep going up.
Because of Bitcoin’s exponential growth rate, consumers will not want to not spend or consume it to use it. A lot of pundits believe that Bitcoin volatility would become less over time. I disagree. We have had stock markets for over four hundred years. It started volatile and it still is volatile today. I don’t see the stock market becoming any less volatile in the future. In fact, it’s actually becoming more volatile than before.
As we have seen in the stock markets for a long time, prices will go up and go down. Bitcoin will be the same, as it is driven purely by public demand and supply.
Thus, Bitcoin cannot be currency because (1) it moons, it can grow exponentially and because of that the consumers don’t have the incentive to spend it, and (2) its persisting volatility.
Bitcoin does not fulfil the definition of money
Hellogold issued gold-backed tokens and did a token sale just recently. A few months ago, its founder said to me something that was quite interesting. He said, “Money is something that is low risk and low returns. Gold is low risk, high returns asset, and hence, gold cannot be money.”
Bitcoin itself is high-risk and high-returns. And it is because of this that, by definition, Bitcoin cannot be money. Until the point where Bitcoin becomes low-risk and low-returns, we cannot consider it as money.
If we really need something as money, Bitcoin is not it. We need some sort of a ‘stable coin’ where the valuation is just increasing a little bit, just past inflation, and stable enough for people to spend. Otherwise, again, pointing to the moon issue and now comparing to the definition of money, bitcoin cannot be money because it is not low-risk and does not have low-returns.
The low-risk, low-returns validation of money isn’t there. In fact, Bitcoin is just the opposite — high-risk, high-returns. What that means is that Bitcoin is actually a very good store of value, good medium of exchange, but is definitely not currency, not money.
UX is not Good
The user experience of Bitcoin is not applicable to a currency. Bitcoin has been around for seven years, yet until today, it is still very hard to use. I introduced Bitcoin to my mom and dad more than four years ago. They were dazzled by the returns, but until today, they still find it very hard to use and understand. This is true to common laymen who are not technology savvy.
1. Changing the behavior is not easy
While many places are already embracing cryptocurrency, like China where cashless transactions and QR codes are common, not all places are like that. Most countries still use cash. And changing the system and the behavior is not easy. Changing the behavior to cashless and understanding how Bitcoin works — the private and public key, the ugly bitcoin address, and getting lost in the technological gambits are not going to make things easier for a person to understand and use it
2. Bitcoin is too volatile
From the UX angle, Bitcoin is too volatile. As a user, I want my money to be stable. If I have $100 USD, I want to keep it $100. But, what is happening is that if you keep $100 dollars’ worth of Bitcoin, today it can be $100, the next day it can be $150, and $80 on the day after that. Bitcoin must have more stability if it is to be money.
3. Transactions are too slow
Bitcoin is too slow. A person processing a transaction through the Bitcoin blockchain would normally have to wait 10 minutes to get confirmation from the network and for the transaction to be verified and completed. However, when blockchain civil wars and ‘coup’ happen between the many different Bitcoins that’s come up now, processing can sometimes take over 24 hours to verify a transaction. This is very bad.
4. Fees are erratic and expensive
When the civil wars go on, the fees are very expensive. Last November 12th, Bitcoin Cash was in the midst of a ‘coup war’ with Bitcoin, where Bitcoin miners were moving to Bitcoin Cash. During the war, Bitcoin fees were jumping sky high. Transaction fees were at least $20 USD worth of Bitcoin. And for us to accelerate transactions, we must pay at least $100 USD to the miners to help accelerate a particular transaction. Fees need to be lowered and rates stabilized.
Bitcoin’s user experience is bad due to expensive and erratic fees, too volatile valuation, too slow transaction processing, and because changing behavior to adopt a cashless system is not easy. Unless these issues are resolved, Bitcoin cannot be money. Nobody will wait 10 minutes and pay $20 USD for simple daily transactions, like, buying a cup of coffee.
Good as a Macro Indicator
However, Bitcoin is good for one thing. It’s a good indicator of what’s going on in the world. Despite being considered a bubble by a lot of people, it is a great indicator of what’s going on with the national currencies in the world. By studying Bitcoin trends, one can also realize issues and problems in the fiat world.
There’s a lot of money printing going on and a lot of bailouts within the financial industry. To correct financial crises, the government can always intervene and come in to print more money. That is not the case for Bitcoin, as you can’t really print Bitcoin. Bitcoin has a set amount of coins to come out every single day. There is a strong monetary control in the Bitcoin world.
How you see the trends depends on which angle you’re seeing it from. If you’re standing from the US dollars’ side, you might simply perceive that Bitcoin is going up, missing any issues and implications from the dollar’s side. But if you’re looking from the Bitcoin angle, looking at the price going sky high against US dollars, you might think that the US dollar is actually having a problem. Bitcoin is the only cryptocurrency that is basically unregulated in terms of its price and valuation. So, if you’re standing from the Bitcoin angle, you might think that the US dollar is having a problem, thus, Bitcoin is going up in price so much against the US dollars.
We must remember that Bitcoin itself doesn’t know the price. Bitcoin is just data, it’s just block data on the blockchain. It’s us, the users, who are putting a price on it. Bitcoin doesn’t know if it’s valued at two dollars, ten dollars, or 10,000 dollars. It is us who are pricing it. There’s no one behind it, no one is backing it, it’s just what the market thinks it is priced at.
Bitcoin cannot get mainstream adoption as currency, only as a store of value or something that we store as an asset, and for businesses that use it for batch processing. Not as a coin or something that we spend with. On the other hand, we are seeing governments getting very interested in the blockchain technology. Many have started making their own cryptocurrencies, or blockchain-based national currencies.
I think this will be the trend.
But, if we have to make this work on the global scale, we need all governments to work together to form their own cryptocurrencies. Because if it’s only one country doing it, it will only be an experiment and there will be no ‘dialogue’ between two currencies. If government currencies cannot talk to one another, the blockchain is useless.
Singapore is now working with Canada, to try and connect their blockchain based cryptocurrencies. But this is also still a test. To accelerate the tests and get us to the point where governments can establish their own cryptocurrencies, private government blockchains and public blockchains must be able to communicate, hence strong sidechains will definitely be needed.
The public blockchains of today cannot support government-based cryptocurrencies because of the 230-billion-US dollar market cap on all these public blockchains. 230 Billion USD is still very small compared to the total market cap of existing fiat currencies. If Bitcoin and all these cryptocurrencies can lift the cap to over a trillion USD in the next couple of years’, then things might change. Only time will tell.