Bitcoin’s biggest threats - Part 1

I would like to start by stating that this is not just a critique on Bitcoin because I don’t like it, on the contrary, I’ve been interested in the topic for over three years. I follow news and I’m part of the cryptocurrency and Bitcoin subreddits. I’m all for the values behind Bitcoin, but it is very easy to be affected by the echo chamber and I wanted to see the other side of the coin for a change, so I decided to make this post as an excuse to research on the topic. This first article will focus on less technical stuff such as adoption or competitors, and the second part will be mainly on security and scalability issues.

Technology Disruptions

There are two big scientific breakthroughs that really threaten Bitcoin if they would happen overnight and the system had no time to prepare for it since it challenges fundamental properties and features of the system.

Quantum Computing: One of the integral elements of this decentralized currency is cryptography, this tool allows for authentication of users and the verification of transactions, to make it short, it is what makes everything safe. Well, the issue is that the superior computing power of quantum physics will be able to break all these “passwords”, and the owner of such technology would be able to destroy the system from within.

Fusion Energy: Another key piece of the Bitcoin puzzle, is “proof of work”, this is the way that blocks (this is where the name of blockchain comes) of transactions are verified, and it also ensures that no entity is able to hack the system unless it has more than half the computer power of the whole network, also known as a “51% attack”. To obtain such computing power nowadays you need electricity, that’s the main resource being used, which is compensated with a reward (this is what “miners” do). What if a country like the US or China developed the technology needed for Fusion Energy? It would be pretty easy for them to overtake the network and control the system once this incredible power generation technology is discovered.

Adoption

For this cryptocurrency to work it needs for people to use it, and to fulfil its mission of liberating us from the control of governments and politicians, who decide our financial destiny and could make our life saving worthless in a couple of years through inflation, it should be adopted worldwide and used as a reliable method for interchanging value.

Ease of use: For a product to become widely adopted it needs to be convenient and as uncomplicated as possible, and right now Bitcoin is much more difficult to use than credit cards or cash, which makes it difficult for the regular person to join the system. Platforms like Coinbase make it much easier but it defeats one of the main purposes of Bitcoin, decentralization.

Regulation: Bitcoin is used to store and transfer value, and can be exchanged for regular money, which means that governments want to be aware of what you own and any profits you obtain from crypto-investments. Filing taxes is important if you don’t want to get in trouble and nowadays is not as straightforward as it should be. There is also uncertainty in terms of what other disincentives will politicians create to protect their control on monetary policy, and uncertainty is definitely not a positive feature of a product.

Banking issues: Related to the previous point, is that traditional organizations are not ready to implement themselves into the Bitcoin ecosystem, for example, if you cash out your investment and make a big deposit in your bank, that will probably be suspicious and they don’t have the procedures in place to trace back that transaction as easily as with regular stock investments.

Investment: The main use of Bitcoin right now is to store value or to speculate, which creates high volatility, that scares potential users, no one wants to lose 20% of their money in a day. This volatility issue is an important piece of the puzzle if we want to accelerate the adoption.

Competition 

We live in a very competitive world, which in my opinion is a very positive thing because it pushes us to become better versions of ourselves and provide more value to each other, and monetary systems are no different. It is true that not always the best alternative succeeds, but it sure has a better chance at it, this is why it is relevant to take a look at the possible alternatives to Bitcoin as a system for transferring and storing value.

Ethereum: a blockchain platform like this has the potential to create a Bitcoin competitor, since many Distributed Applications (dApps) may be built upon it, many of them focused on smart contracts. The benefit of these applications is that they run exactly as programmed without any chance for fraud, censorship, downtime, or third-party interference theoretically. Bitcoin has the first-mover advantage and a solid foundation, but only time will tell.

Innovation: There are over 3000 cryptocurrencies, and the number is only growing, there are new tools and technologies being developed every day, and there is increasing interest in the topic. All these factors indicate that a better system than Bitcoin could be developed, it is not certain obviously, and Bitcoin could keep being improved with solutions built on top of it, like the Lightning Network (which I will explain in Part 2), but innovation is crucial in this environment.