Bitcoin is NOT the future of currency.
We have to accept that and move on!
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Since 2017, Bitcoin has conquered the global news, and not without a reason. Its price roared from a few dollars to 20.000$, back down to 7.000$ and now back up to about 50.000$. To some, this may feel normal, because “Bitcoin is the future of currency.”, but I think that everyone will agree that Bitcoin is not 5.000.000% more valuable than the USD. (Yep, that is five million percent)
That’s why it’s important to see how Bitcoin and blockchain currencies in general work, what are their inefficiencies, and lastly, why they are not the future of currencies.
− How does blockchain work?
− The benefits of cryptocurrencies.
−− Immune to Inflation
−− Anonymity
−− No Chargebacks
− The Drawbacks and Dangers
−− Security Concerns
−− Higher Fees
−− Price Volatility
−− New Cryptocurrencies being created
−− Environmental Concerns
− The aftermathHow does blockchain work?
To understand why Bitcoin does not have many future prospects, we need to comprehend how the blockchain exactly works.
What is blockchain? In simple terms, it is a public list of all transactions to date. Every transaction is saved in the blockchain and your account balance is calculated by summing all the transactions related to this account.
Why is it called blockchain? That’s because it’s literally a chain of blocks. Every block is a small sub-list of transactions, in the case of Bitcoin, that is 2400. This number may be larger or smaller, depending on the coin. The blocks are chained together to essentially create the complete ledger.
How is a new block created? Any computer can broadcast a new block to the network, which will cause other computers to add it to their own copy of the blockchain. When this happens, all transactions that were included in the block will be executed and the blockchain will be updated.
How is every transaction validated? Every crypto wallet has a unique private key. With it, you can sign every single transaction you send to verify it’s yours. Every time a transaction is sent by your wallet, a new public key is generated that is both linked to your private key and the content of the transaction. As a result, if someone tries to change the details of a transaction, the public key would not validate it.
How is every block validated? That is actually the problem that Satoshi Nakamoto solved with Bitcoin. The answer was using cryptography. Every block has a unique identifier, or a hash, that is produced using a cryptographic hash function that, just like transactions, is related to the contents of the blocks. Each block also contains another key that is linked to its hash and the previous block’s hash, so no one can switch the order.
What if there are conflicting blocks? It is very likely that two blocks are created for the same blockchain. This may be a result of fraudulent activity or just pure luck. The problem that arises now is the following. How do we determine which block to keep and which block to throw? It’s actually very straightforward. You keep the instance of the blockchain with the highest computational power put into it (aka the one with the most blocks.). If the two instances are equal in that matter, the computer waits to see which one will get another block added to it, which will make it larger than the other.
What is mining? Mining is the process when your computer has to verify that each and every one of the 2400 transactions is legitimate. In other words, it checks to see if the public key that is associated with it, is actually the correct one. It is a process that requires extreme computational power because cryptographic keys are very easy to generate but VERY hard to verify. In return, the miner who verifies every transaction first is awarded free coins. In the case of Bitcoin, the miner gets 6.25 Bitcoin but that’s a figure that’ll go down in the future. Miners also earn bitcoin when users tip them to include their transactions in the current block. This happens because the number of transactions in each block is limited, and people want their Bitcoin to be sent ASAP.
The benefits of cryptocurrencies.
Now that we know what blockchain is, we can learn about its benefits against fiat currencies.
Immune to Inflation
Bitcoin is limited! There are currently 18.5 million Bitcoins in existence, and it is estimated that there will be 21 million in existence. As mentioned, miners currently earn 6.25 Bitcoin for every block they push to the blockchain. In 2009, this figure was at 50. This means that Bitcoin has a limited supply, which economics tells us is both good and bad.
In this regard, Bitcoin can’t go down in value indefinitely, like fiat currencies as the USD can. On the other hand, this could mean that it could be subject to market manipulation by enterprises or individuals who buy massive amounts of the coin, driving up the price, ultimately releasing it into the market, for the price to crash. Although this scenario is technically possible, it’s unlikely to happen, especially as the value of Bitcoin rises.
Anonymity
Bitcoin offers an outstanding amount of anonymity. There is no relation between bitcoin wallet addresses and physical people. This has made it almost impossible to track the sender and recipient of a transaction in the blockchain. To people who are skeptical about where their personal data ends up, this may be heaven. However, this has caused it to be the currency of choice in shady businesses, especially on the dark web, which could damage its reputation.
No Chargebacks
Depending on who you ask, this could be either a benefit or drawback. I personally think that this is a benefit, as it saves people who sell stuff on the internet, a lot of hassle.
When people pay with a credit card, they have the ability to ask for a refund at any time. In most cases, even if you try to combat this, they will probably win and you will have to give them their money back. On the other hand, the buyers are at a disadvantage. This is because if someone were to make a fraudulent transaction with their crypto wallet, or if a retailer took their money and never delivered what they were paid for, they can’t possibly get their money back.
The Drawbacks and Dangers
Bitcoin may have some advantages, but it also has some drawbacks, as well as some dangers compared to regular currencies.
Security Concerns
Although cryptocurrencies offer great anonymity, they are not the greatest at security. This is because a substantial amount of crypto is stored in huge enterprises like Coinbase, add it with the fact that crypto transactions are non-refundable, and you have a recipe for destruction. In the possibility that a crypto management company gets hacked, all of the coins would be emptied out of every account. You can see the problem now.
It is very likely that big corporations will be subject to cyberattacks in the future. Something like that happened in 2014 with a company named Mt. Gox. At its peak, it was responsible for 70% of the total Bitcoin transactions per day. The total value of Bitcoin stolen is estimated to be around $1.1 Billion. As you can guess, the company filed for bankruptcy after that.
Higher Fees
At the moment, Bitcoin offers lower fees per transaction than any other currency or bank, but this is soon to change.
There are two types of fees. The first one is ‘broker fees’. Companies like Coinbase take a fee for every transaction you make through their service. The second one is ‘miner fees’. As mentioned, crypto users often tip the miners to include their transactions in the current block. At the moment, those fees are minor compared to large financial institutions like banks.
In the future though, this is likely to change, as crypto gets more and more mainstream. More people are going to use alternative currencies for the daily lives and this is going to add a lot more load into the system. We may reach a point where for a 10$ purchase, you could pay 25$ in fees.
Price Volatility
It is no secret that the value of crypto is always fluctuating. This is not a problem right now, and in my opinion, it is a big part of the attractiveness of crypto. Its future prospects though are rather concerning.
A world where the money in your wallet is worth double the next day and a quarter the day after is just not viable. An economy can only operate on the requirement that there is a stable currency to fall back on. Unsureness about where the value of a currency will go causes people to halt their spending and save more money, which is at the very least counter-productive for an economy’s growth.
New Cryptocurrencies being created
We live in a world where competition is everywhere. The same thing happens with crypto. In the past year, we have seen countless new coins flooding the market. This is not a problem as long as the whole market is growing and more money is being poured into it.
However, when the money stops flowing, we are going to see millions of coins worth a few millionths of a penny and a few who managed to go past that. This is also a major threat for established coins like Bitcoin or Ethereum because it’s very likely that their market cap is going to drop, in favor of smaller and lesser-known coins.
It is very likely that we are heading into a market where money is dispersed all over different currencies.
Environmental Concerns
Lastly, if you haven’t heard it already, crypto mining is not very efficient. We have seen claims like ‘Bitcoin burns more electricity than Cuba.’ which actually seem to be true.
In a world where environmental damage and energy consumption become more and more of a problem, there is no possible way that crypto mining will not be regulated at the very least. Another solution would be to require crypto mining to be done only using renewable sources of power. This will definitely benefit everyone, as more focus and investments will be driven to renewable sources.
The aftermath
Alternative currencies are a new technology and as in everything new, there is a novelty factor and appeal. The recent price changes have also caused FOMO (fear of missing out) in a lot of people. These two reasons have cause crypto to skyrocket.
That’s why the most probable scenario is that in the next few years, we are probably going to see a rise in the value and market cap of many, if not all, cryptocurrencies. In the long-term though, crypto is not going to be a viable investment, as there are some fundamentals flaws in this market.
In the article, I mention Coinbase a lot. I did this because it’s the largest and most popular crypto broker. I am not affiliated in any way with the company.
