Bitcoin is NOT the future of money!
By: Edul Patel
Tags: Startup, Bitcoin, Cryptocurrency, Blockchain, Technology

Fraud! Digital Gold! Bubble! Saviour! Scam! Currency of the future!

These are just some of the things people have called Bitcoin. You love it or hate it, understand it or not, have bought it or just watched others go through the cycles of happiness and joy, everyone has an opinion about Bitcoin. Is Bitcoin truly the future or just a ponzi scheme?

What is the Future of money?

“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.” — Professor Milton Friedman

In a previous post we discussed how money and monetary systems have evolved over the ages. The increasing internet penetration, globalization of trade, rise of machines and availability of data, all have opened up new challenges and opportunities for money to grow and evolve. In the future, money will start to have some very unique properties we have never seen before like:

Not owned by a country: To pay someone in a currency that is not native to your country requires special permission and more often than not very high transaction fees.

Instantaneous settlement: When you are trading and exchanging value, you would want your payment to come to you instantaneously and not in ‘weeks’ as it happens now.

Security: Paper money in digital format is highly vulnerable to large-scale theft and dependent on multiple central organization to operate at the highest level of security. These overheads lead to inefficiencies and hamper growth and increase costs.

Programmable: Currently there are programs that can be run to send/receive payments from someone. However, the person who runs the program has control over what happens to the money. Programmable money solves this problem by enforcing the rules by itself. People that agree with these rules can be absolutely certain that they will receive it if they do the thing the rules demand.

Money for machines: With the rise of data and machines, exchange of value will not only be amongst mankind but also across machines. We will need to build a monetary system which enables machines to equally participate in the economy.

Money is changing already. With the rise of internet we have already moved money from paper to bits. However that is where money is limited to.

Bitcoin: Future Money v1?

“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative. But I am not familiar with the specific product to assert whether it is the best potential setup. And we need a long time to establish confidence.” — Nassim Taleb

Bitcoin was created to work outside national currencies, which is a draw to people who don’t trust central banks. It was the first proof-of-concept of blockchain coupled with economic incentives to make the system scale and grow inherently. There are a lot of ways in which Bitcoin is revolutionary like:

Creation not in the control of a government: Free from the clutches of a central bank, Bitcoin could be exchanged without regulation, ramping up the pace at which it grew.

Allowing fast global trade: Bitcoin brought a 50x improvement in time to settle. This meant that exchange of fees for services could now happen globally and quickly.

Secure and unchangeable: Blockchain and proof-of-work consensus makes the core blockchain extremely secure. This ensures that you don’t need to trust a third party to guarantee the safety of your money. Blockchain does that for you.

Having said that, Bitcoin is not without its flaws. As a consumer technology, cryptocurrencies are a hot mess. They’re extremely difficult to purchase, the networks are slow, the transaction fees are high, the community is full of trolls, hackers, and scammers, it’s far too easy to lose your funds or have them stolen, and even if you win the battle to secure your funds or use a custodial service, merchant acceptance is scarce. Breaking this down, Bitcoin is:

Confusing: Bitcoin’s purely digital existence, newness, and technical complexity are large hurdles for most people. A lot of people (especially older generations) struggle with the fact that you can’t hold a Bitcoin in your hands. Or that it doesn’t come from a bank, company, or government.

Not fast enough: Transaction on bitcoin still take ~3 hours to settle. Although a great improvement for overseas transactions, this is a big impediment if we want to do local transactions fast. On top of that at times of network congestion, the transaction can sometimes take days to settle. For us to be able to use the digital money, the transaction needs to be instantaneous.

Bitcoin Mempool Size. Large mempool increases the time it takes for transactions to settle on chain. Source

Expensive and erratic: Because of the issues around scaling bitcoin, during peak loads, transaction fees see a massive spike. This erratic behavior makes bitcoin transaction unreliable and impedes the usage of the currency as a global standard.

Average bitcoin transaction fees have oscillated between 60$ at peak to 0.3$ in Jan 2017. Source

Not programmable: Although Bitcoin protocol can be used to write some simple programs, it is by design not extendable to writing programs of high complexity. As a result, it cannot be used to automate the transfer of money and central entities are still required to create and moderate code for bitcoin transfers. Contracts on the Bitcoin protocol are still ‘Dumb’.

Volatile: Prices of bitcoin are not stable. for it to be used as a ‘store of value’ volatility of bitcoin price needs to reduce significantly. there needs to be a ~10x reduction in vol, which will probably require the market cap of bitcoin to grow by 10x.

What does the future hold for cryptocurrencies?

Bitcoin protocol still has to go through a lot before the jury gets out on its usage as the future of money. There are, however, multiple other currencies trying to overcome problems with Bitcoin.

Instantaneous transfer: Bitcoin is slow because of the inherent consensus algorithm used for verifying the transaction. However, there are other currencies that are instantaneous to transfer like

Stellar: ~<1 sec transfer time

Ripple: ~<2 min transfer time

IOTA: ~<1 sec transfer time

Programmability: Nick Szabo first coined the term “smart contract” in 1996. It would be 19 years later in Ethereum, the first Turing-complete programmable smart contracts platform, that smart contracts would reach their potential. Since Ethereum, the smart contract space has exploded. EOS, Qtum, Cardano, Neo are just a few examples of

Price stability: Price-stable cryptocurrencies, meaning the market price of a coin is pegged to another stable asset, like the US dollar are critical for adoption. Businesses and consumers don’t want to be exposed to unnecessary currency risk when transacting in cryptocurrencies. You can’t pay someone a salary in Bitcoin if the purchasing power of their wages keeps fluctuating. Fortunately, some coins like Tether, TrueUSD, BitUSD, etc are experimenting with creating smart contracts which are clear of volatility.

The future is coming

Bitcoin has kick-started a revolution and there are significant challenges that it needs to pass before we can accept it. There is strong competition from various other protocols which is driving their usage and adoption. We are on the cusp of a major shift in how money functions. The future seems bright for cryptocurrencies! What are you waiting for, start trading now!

Links

A few quick references below: