Bitcoin, the first cryptocurrency Icarus
Bitcoin started out as a peer-to-peer electronic payment system using cryptography. Potentially to replace official money from the central banks and also make banks and other intermediators obsolete when transferring money.
That was quite a revolutionary approach towards central banks, commercial banks and the whole finance industry, where you no longer need an instance, neither to the currency nor for the control. Even Paypal and credit cards could be replaced. A great new platform where you can transfer money directly from one person to another person.
The idea using a worldwide, decentralized and transparent platform, which keeps privacy and has no restrictions seems alluring.
A real revolution, right? Not only the millennials are praising cryptocurrencies as the alternative to an unequal and corrupted traditional banking system.
The reality, though, looks quite different.
Small anticipation: as everyone perceives reality according to his or her belief system, let us stay open and leave our preconceptions behind. Bashing and disabusing each other doesn’t take us further and doesn’t help raising our awareness.
Have we not seen this before in the 18th century during the French Revolution? When in the course of events, their initiators are easily left on the track and the original idea turns negative after the positive approaches, suspends or destroys itself? The revolution devours all its children.
Let’s have some practical look. In theory, the transaction fees should be small, but since you can only buy Bitcoin via regulated partners, the fees today are often more than 10% of the transfer amount but will decrease in the long run. For one reason, the transaction fees have risen because of the block size. The participants who paid the highest fee are put into the fast track like when you go through security at the airport. The current fees are problematic and make Bitcoin useless as a currency. However, there are a couple of hundred other cryptocurrencies that have no transaction fees and do not require any financial institution in between.
With an increasing participation of users and when the adoption spreads, the blockchain will not only get longer but also the handling will get slower. To confirm a single transaction can take more than 2 hours. That is the situation today and will improve in the future.
These transfers should be fast and free – that is what we think about peer to peer, right? Why using a cryptocurrency when it works worse than transferring cash?
The speed and transaction fees problem is with Bitcoin, not so much with Bitcoin cash. The mass media is an expert on mixing those two different cryptocurrencies to put Bitcoin in a bad light. Apropos light, the answer we hear to fix the speed problem is the Lightning Network. This should make the transactions faster in the future. But will the transactions then no longer be confirmed on the blockchain, opening another door for manipulation?
There are other cryptocurrencies, which have resolved the speed and can be used feeless. Those Fintech 2.0’s etc. have learnt from early adaptors such as Bitcoin.
Apart from speculation, which is the major use of Bitcoin today, how many participants are really using Bitcoin as a payment system instead of old money? Would you accept Bitcoin? We should avoid mixing up the concept of cryptocurrency per se and Bitcoin.
How will technology adapt and make transaction low cost and fast? Today the Bitcoin network is restricted to a sustained rate of 7 tps due to the bitcoin protocol restricting block sizes to 1MB. Will the problems be solved if we just increase the block size to 8 MB?
How about cybercrime, tax evasion, money laundering and the ups and downs of the Bitcoin price? The higher volatile price is due to the fact that there are no restrictions and therefore things are happening much faster, whether it is an up or down.
Where do you store your Bitcoins? You can’t even touch them, right? How about the security of your digital wallet? How about lost passwords and someone else using your private key to get the authority to receive the Bitcoins unlocked? Today, public key encryption and passwords are also used in online banking, it’s not new and could be hacked too. There is no refund unless you can retrieve the value from a different source in a wallet you control.
Will the address format change help to reduce the confusion between Bitcoin and Bitcoin cash?
It is also obscure, that we do now know who or which group is behind the inventor of Bitcoin, Satoshi Nakamoto, which is only a pseudonym. Why hiding? Is there something we should not know about?
When Satoshi left in 2010, the main developers became part of an institutional environment. The company Blockstream became the main provider for the development of Bitcoin Core, the software which eventually validates transactions in the blockchain.
Did you know that almost half of the Bitcoins are held by the founders? Have you thought about what happens when they decide to cash in?
Bitcoin Cash
Let’s assume the temporary problems have been solved and a transaction is confirmed within a second with (almost) no fees. So how does it really work?
To demonstrate how Bitcoin can be used, take your phone and transfer Bitcoin to the other phone where you want to send the money to. The receiver can be next to you or anywhere in the world as long as you have access to the internet. There is no bank or intermediate to process this transaction and it is instant. For example, Bitcoin cash can be used as an alternative and convenient payment system. The potential for Bitcoin is in Bitcoin cash, which is for easy, almost free, almost unstoppable usage of transactions. Other cryptocurrencies in this area are Dash, Zscash and Monero which specialize in privacy and are also under attack from governments for supposedly enabling crime and money laundering.
In order to insecure the investors, politics and central banks are mixing up Bitcoin and Bitcoin Cash, which is not the same and has currently different objectives. In this context, Bitcoin is a social experiment and is mostly used for hoarding digital gold and speculation.
The higher the price is rising, the louder the admonishing voices we hear from politicians and central banks, calling for a regulation of Bitcoin. They call the term “digital currency” misleading: A means of payment should indeed have a stable value. That value is based on what people are willing to pay for it, but how can we see a stable value when the price goes up and down? These properties are missing from the Bitcoin. Are they also missing for Bitcoin Cash or just Bitcoin? Because of speculation, Bitcoin Cash is influenced by Bitcoin. The currency is extremely volatile and therefore it is difficult to price a value in Bitcoin, making the currency useless today for peer-to-peer transfers.
Cryptocurrency usages
Some people store cryptocurrencies like virtual gold. The more practical approach is to use cryptocurrencies as an alternative payment system. You can use it both for storing and exchanging values. Something has value when it is useful and not infinite in amount. For example gold. Cryptocurrencies are useful when you can transfer value. Whether it will be Bitcoin or another cryptocurrency dominating in the future, we don’t know. To remain successful, people have to use it and need to have trust in it. If you have instant reliable transactions available across the globe with nobody able to prevent them, it has more usability. It also needs the network of the community to use the cryptocurrencies. As long the community agrees on a secure network such as the blockchain, every transaction is recorded in a public ledger. This supports the idea of carrying out payment transfers across borders.
In 2017, two major US exchanges have launched futures on the Bitcoin. Venture capital firms such as Founders Fund invest in the digital currency. Investment banks are opening trading floors for digital currencies.
What does this mean?
The cryptocurrency has arrived in the classic financial world. The original idea is currently undergoing a perverted phase until things will be back to normal.
The majority of people perceive Bitcoin as an investment and trading vehicle and less as a payment system. Many have started just to buy and hold Bitcoin coins. They are just waiting to get rich. If you invest now, you are still buying in on the ground floor, right?
The current ups and downs in the price makes Bitcoin the perfect object of investment, although a very risky one. In terms of payment system, cryptocurrencies are also a victim to extreme fluctuations due to speculation and with a still high portion of fees and speed issues that makes the concept quite useless in everyday life.
Bitcoin – do you see the nice Tulips in your head?
Unfortunately, Bitcoin became a speculative object and reminds of the Tulip mania, where over 300 years ago, the speculative bubble produced flowers that cost more than a house. Bitcoin and tulips are like twins. You wouldn’t blame the tulips, right? Nor you should blame the Bitcoin. With the limit of 21 million issuable coins, the supply is fixed and also reflected somehow psychologically in the increased price. Of course you can break down Bitcoins in smaller units and argue the supply issue is irrelevant. Let’s see whether your smartphone screen has enough space for the zeros before and after the comma to show your Bitcoin amount even in Satoshi. Same happened in the opposite direction to the German hyperinflation one hundred years ago, where you paid over 100 billions for a piece of bread. Daily handling becomes difficult when struggling with all those zeros in an amount.
People use Bitcoin like a hoard of coins which is poison to a floating and liquid currency. But so do the gold lovers. I cannot go to the supermarket and pay with gold coins. I may do so after the crash for a limited time until gold permission will become illegal by emergency laws. I am just hoarding gold because I am Swiss…
Will the other one thousand cryptocurrencies become the same or different from Bitcoin? We will find out after the crash of Bitcoin whether speculative-free libertarian “peer-to-peer” payment system will succeed in the post Bitcoin era.
What is your opinion on Bitcoin and cryptocurrencies?
In the next posting, I will give you my thoughts about the role of the central banks, the blockchain, the anarcho capitalists, the role of the government, the hysteria, the impact on the environment and whether cash will survive.