Ten years ago, the Bitcoin whitepaper set the scene for what many believed would be the future of online payments—or even the future of money itself. Since then, Bitcoin has evolved from a geeky, libertarian fad into a landscape of thousands of cryptocurrencies and hundreds of billions of dollars.
But Bitcoin still has a long way to go to fulfill the vision of becoming a mainstream method of payment and a major currency. As the cryptocurrency has grown in popularity and use, its inherent challenges, technical and legal, have become more pronounced. And unless it can overcome these challenges, Bitcoin will never become a real currency like the dollar or euro, as some experts believe.
Bitcoin’s Origin Created Big Expectations
The advent of Bitcoin coincided with the financial crisis of 2008, which was triggered by the collapse of several major banks and financial institutions. “It was obvious that the population cannot trust its financial leaders to keep their money safe. There was a strong sense of anxiety about the economy’s structure,” says Ilan Klein, founder of Blockchain Sensible, a blockchain-based art market.
Using blockchain, a distributed-ledger technology that lets users store and exchange data without going through a third-party service, Bitcoin enabled peer-to-peer payments across the world. With trust in banks and traditional financial institutions at a record low, it was easy to see Bitcoin as a solution to the woes of the world economy.
Bitcoin’s enthusiasts believed that cryptocurrencies would destroy the banking industry and reshape the financial landscape. But 10 years later, the economy has recovered, investment and banking are performing on a par or even better than they did before the financial crisis, and mistrust in the financial industry has mostly subsided.
“The anxiety seems to be mostly gone as the world’s economy continues to grow at a steady clip,” Klein says.
Naturally, with banks regaining their lost prestige and trust, investors and customers are less concerned with finding alternative methods to store their funds.
But let’s be clear: Even at the climax of the financial crisis, non-tech-savvy users found it hard to use Bitcoin, and it took several years’ worth of innovation and a huge spike in the value of the cryptocurrency to draw modest acceptance among the masses.
“Presently, there are over 228,932 active Bitcoin transactions per day, over 22 million wallets hold Bitcoin, 70 percent of people in America are aware of it, and 17.8 percent would consider buying it,” says Lisa Cheng, founder and chairman of the Vanbex Group, a blockchain consulting firm. “However, as a form of payment to replace credit cards, there still remain technical hurdles.”
Bitcoin’s Problematic User Experience
Even after 10 years, getting started with Bitcoin isn’t easy. “It takes quite a bit of effort to start using any cryptocurrency… You need to download a wallet, and some currencies require that you download and sync the wallet to the current blockchain status before you can validate a transaction. And depending on the size of the blockchain, this can take a while,” says Klein.
Users also must know how to handle the public and private cryptographic keys, bits of data that enable their owners to send and receive payments on Bitcoin addresses. If you lose your private keys, or if they get stolen, there’s no way you can recover your funds.
Some Bitcoin wallets, such as the popular Coinbase exchange, simplify the user experience by managing the keys for the users. But that pushes the burden of security onto those companies. And if they get breached, which has happened quite often, hackers will get access to the private keys and customers’ funds.
Users also must deal with the fact that very few merchants and retailers accept Bitcoin. That’s why they must convert their Bitcoins to fiat currency before they can spend them, which further adds to the friction of the experience. Enthusiasts and Bitcoin believers manage to live off Bitcoin, but for the average user, the technical hurdles are overwhelming.
Bitcoin Transactions Are Slow and Expensive
The Bitcoin blockchain generates a 1MB block of new transactions every 10 minutes, a constraint that has been set intentionally to prevent attacks on the network. But this also limits the number of transactions the network can process.
Currently, Bitcoin can handle seven transactions per second, which is far from thousands of transactions that payment networks such as Visa can process.
As Bitcoin has grown in popularity and payment load, it’s increasingly difficult for its network to keep up with the demand, and sometimes it becomes overloaded with unhandled transactions. This was especially true at the turn of the year, when cryptocurrency prices were at a record high. Users had to wait hours and sometimes days before their payments were processed.
The Bitcoin protocol allows holders to attach fees to their payments to encourage the “miners,” the computers that verify and process transactions, to prioritize their transactions over others. But this has caused a competition between users who want to push their payments ahead of others. Consequently, Bitcoin transaction fees have sometimes climbed higher than $50.
These high transaction fees make Bitcoin payments inefficient for small purchases (imagine paying more than $50 in fees to purchase a $10 pizza). Slow transactions and high fees go against Bitcoin’s vision to be an electronic cash system we can use for daily purposes.
Attempts have been made to improve the speed of Bitcoin transactions. Bitcoin Cash (BCH), an altered version of Bitcoin that went live last August, increased the block size from 1MB to 8MB to support more transactions. It later upgraded the block size to 32MB. While an improvement, that’s still a far cry from the thousands of transactions that other payment networks support. And because BCH is increasing the blockchain size at a such a fast pace, many developers have refused to support it.
Another effort to address the transaction speed issue is the Bitcoin Lightning Network, a technology that reduces congestion on the blockchain by allowing users to open side channels to conduct payments between each other without recording them on the blockchain—only the opening and closing transactions of a side chain are registered on the main blockchain. Lightning Network is still in the testing phase and has its own challenges. But if it succeeds, it could offer faster payments and lower fees.
Bitcoin Price Is Volatile
In 2017, the price of a bitcoin rose from around $1,000 to $20,000, then lost two-thirds of its value in the first half of 2018. These violent fluctuations make Bitcoin unsuitable for day-to-day payments. This is partly why very few merchants and retailers accept it as a method of payment. But that makes Bitcoin attractive for speculators and investors who want to profit off the price changes.
“We have witnessed that Bitcoin was first envisioned as a digital currency. But lately, with volatility in markets, people start looking at it as a store of value more than an actual currency,” says Vitomir Jevremovic, Founder of VR All Art, a marketplace for virtual-reality assets powered by a cryptocurrency.
“This is logical not only in the case of Bitcoin but with many other cryptocurrencies or so-called coins. If a coin is volatile, there is a little use-case for them in the real-life applications. Speculation in the market is from one side bringing more interested parties at the table, which is good, but it also works against the adoption. User experiences in crypto space are difficult, and the whole sector needs to understand that regular people don’t care about crypto; they care about usability and stability.”
“Most of the new coins launched via ICOs [initial coin offerings] and otherwise were used to generate quick profits and did not have specific uses,” says Klein from Blockchain Sensible.
An ICO is a process in which a company issues its own cryptocurrency to fund projects development and operations. Most of these cryptocurrencies, also referred to as “altcoins,” have very small trading volumes, which makes them prone to price manipulation, Klein adds. “A few miners joining forces can have a large effect on the price of a small coin.”
In January, The Outline ran a story in which it described the inner workings of cryptocurrency “pump-and-dumps,” where groups of people engaged in coordinated schemes to suddenly start buying a specific coin to create artificial appreciation (the pump phase). The price rise would draw other users who were interested in making profits off the coin, oblivious to the fact that they were walking into a trap. When the coin’s price reached their targeted value, the scammers would suddenly sell all their coins (the dump phase), taking away huge profits and leaving unsuspecting investors in the cold.
As the largest and most popular cryptocurrency, Bitcoin is more resistant to pump-and-dump schemes, but it isn’t immune. In December, Bloomberg reported how the “whales,” the 1,000 or so people who hold 40 percent of all bitcoins, can easily manipulate the cryptocurrency’s price.
Bitcoin’s Legal Hurdles
Users can create their own Bitcoin wallets and obtain cryptocurrencies without presenting any form of identification or going through government institutions. Governments are understandably reluctant to endorse a currency that is beyond their control, especially since it has become a favorite among cybercriminals, online black markets, and scammers.
Although they can’t control Bitcoin, governments can heavily regulate and control the companies, exchanges, and institutions that want to become engaged in cryptocurrencies and ICOs. In December, the US Securities and Exchange Commission (SEC) warned against the legality of ICOs and their conformance to SEC security rules. A few months earlier, China banned ICOs altogether.
More recently, the SEC rejected 9 proposals for Bitcoin exchange-traded funds (ETFs). Bitcoin ETFs would remove many of the technical hurdles of investing in Bitcoin and make them more understandable and available to the traditional investment markets.
Legal hurdles add to the frustration and hurdles of investors and merchants who want to offer cryptocurrency payment options to their customers. This, in turn, slows down Bitcoin’s adoption as a mainstream currency.
The Future of Bitcoin
All these challenges don’t mean Bitcoin is doomed to fail. But its adoption might not happen as fast as initially expected. After all, it’s trying to disrupt a market and institutions that have been standing for millennia.
After a decade of ups and downs, Bitcoin has seen some tremendous progress and recognition as a resilient currency, regardless of political and economic upheavals. Companies that previously shunned or ignored Bitcoin are becoming interested in the opportunities that cryptocurrencies can provide. Blockchain, Bitcoin’s infrastructure, is also finding its way into many other domains beyond payments, thanks to its immutable and transparent nature, and it is introducing entirely new ways to run organizations and economies. And engineers and developers are busy fixing bugs, adding features and improving the experience.
“As long as people believe in Bitcoin and there is an incentive for miners to keep the network operational, it will exist. That is the real power of bitcoin,” says Jevremovic from VR All Art. “What is certain is that crypto is here to stay, because crypto is mostly a computer code, and code gets improved.”