Bitcoin is the most recognizable and widely adopted cryptocurrency today. Many people think it is still the best crypto to invest in. Well, maybe it is. Unless you think of the things that might kill Bitcoin in the near future.
Bitcoin has some issues that might be a threat to its future.
Most of these problems can hardly be considered new. Skeptics have been talking about them since Bitcoin emerged.
But crypto enthusiasts just keep pretending everything is just fine.
We now have the first truly Bitcoin state El Salvador where you can (and are actually encouraged) to pay for your coffee in BTC.
We also have millions of people who invest in Bitcoin in confidence that its future is bright. They are not deterred even by the high volatility of bitcoin.
Oh, that volatility.
It is a beloved instrument of traders. If not for the high volatility of bitcoin, they simply would not have a job.
It is hated by long term investors. They know that after all Bitcoin will gain more and more value. But all these price fluctuations do not contribute to confidence in the future.
Let’s look at some of the things that can be considered the key issues of Bitcoin. They can determine the fate of the most popular cryptocurrency in the world. Or simply kill Bitcoin.
Some of these thoughts might sound harsh to Bitcoin but, you know, what doesn’t kill you makes you stronger.
Price instability might kill Bitcoin
Cryptocurrencies are often subject to quick and severe value changes. The surge in price can be triggered by a drop in the U.S. dollar and investors flocking to a seeming “safe haven” in the coronavirus pandemic. Or it might be a new US Presidential order. Or some tweet from Elon Musk about whether Tesla is finally going to accept Bitcoin or not.
It’s important to remember that Bitcoin is historically volatile.
Its price doubled amidst 2021 and then was sliced in more than half between November 2021 and February 2022. A slight shift from something like $43,000 to $45,000 has become something trivial. Nobody is even surprised.
Skeptics say volatility is something natural to Bitcoin simply because cryptocurrencies hold no intrinsic worth. Their value is purely speculative.
Real value of crypto?
So you can’t name Bitcoin the new gold simply because gold has a real value.
Gold is an asset, of course, but it has other uses such as material for electronic devices, medical equipment and jewelry.
Cryptocurrencies don’t serve any other purpose other than a store of value. As a result, there is no real connection between the price and longevity of cryptocurrencies.
Does it mean that the bubble around them could burst at any time?
Maybe. Because all that enormous computational power (and electricity, of course) that is used to mine Bitcoin and provide its transactions can’t be treated as the worth.
Crypto will be worth something only until there are people who put their faith in it.
And while five years ago or so it was really easy to see this happening, nowadays big investors treat cryptocurrencies as a financial instrument.
Yes, Bitcoin is just an instrument to them. While crypto activists find a lot of things to put their belief in, like free world, decentralization etc., the guys from The Wall Street are simply trading.
And they simply need Bitcoin and other cryptocurrencies to surge and fall regularly because otherwise they would have no job to do.
Let’s be clear. Those guys make money no matter what is going on. The make profits whenever Bitcoin falls or rises.
Are we using crypto?
There’s also the crypto paradox. People buy cryptocurrencies but don’t use them because they want their value to grow. But unless crypto is used as a currency, its value will fall.
That’s quite a conundrum, huh?
We are seeing early signs of Bitcoin being used for small payments, like in El Salvador where you can even pay for your coffee with a few Satoshis. But that’s only possible thanks to the Lightning network layer. Because Bitcoin itself is still too slow to allow for instant transactions.
Some other cryptocurrencies are much better at this, like Cardano or Solana. Maybe Ethereum is going to be one of them after switching to Proof-of-Stake later this year.
But unless this becomes a general rule that all the cryptocurrencies can be used for payments anywhere you want, they will simply gain no value but the one the traders from Wall Street give them.
In pursuit of speed we might disrupt Bitcoin security
So Bitcoin can’t get widely adopted unless it is suitable for casual payments. And to achieve that you need to make transactions much faster than what we have now. Only 10 operations per second is clearly not enough.
Nobody is going to wait for ten minutes until your few Satoshis will finally get transferred with all the necessary confirmations.
Bitcoin itself can’t be made faster. Just because of the way it is built.
So we need additional constructs like the Lightning network, which is an external layer on top of the cryptocurrency blockchain, to help achieve more speed in transactions.
But there is a bit of a problem.
Those off-chain transactions are particularly problematic for cryptocurrency users because they aren’t individually written to the blockchain.
That means you buy and sell crypto coins outside of the wider blockchain consensus. But by doing this you are essentially undermining the entire reason to use the blockchain technology in the first place.
Being an external layer on top of the Bitcoin blockchain, The Lightning Network allows for private payments to take place separately before being written back onto the main blockchain.
Here is the deal. Blockchain is widely praised for its security and for being a trustless environment. Every Bitcoin transaction requires the different nodes in the system to reach a consensus. So no single node is responsible for the record added to the block that is eventually added to the blockchain.
In theory, it is nearly impossible to manipulate those blockchain records.
That’s the crucial feature of blockchain.
Security issues with Bitcoin might kill it
But as soon as you allow for off-chain transactions to happen, you open the door for foul play, disrupting the whole idea of Bitcoin as the safe instrument.
Of course, the transactions in the Lightning Network are later added to the Bitcoin blockchain. But it is possible, at least in theory, to manipulate them.
During an off-chain transaction one party can suddenly stop cooperating. The transaction won’t be confirmed back into the blockchain. That will make it impossible for the other party to withdraw their money to redeem the transaction.
Fans of the Lightning Network – and there are lots of them – will surely say a lot is being done to provide security for off-chain transactions. They will also mention that there are no huge scandals with somebody losing money in this particular way.
And while this may be true, it is still unclear how adding an extra layer with potential vulnerabilities to the blockchain can be treated as absolutely safe.
So while trying to speed up Bitcoin we kind of have to make it less secure.
But security is what we all love Bitcoin for. Making Bitcoin vulnerable might just kill it.
Bitcoin is just not scalable for mass adoption
So speed is crucial for Bitcoin because of the transactions and mass usage adoption. And let me remind you of the thing we discussed a minute before – there will be price volatility forever unless Bitcoin goes to mass adoption.
We have also shown that the existing effort to make Bitcoin significantly faster – the Lightning Network on top of Bitcoin – is far from perfect. Because it compromises on security.
The slow speed cannot be improved without rebuilding the original framework of the Bitcoin blockchain.
Firstly, we don’t know if it is possible yet. Everybody thinks Satoshi Nakamoto was a genius, but was he really?
Maybe he didn’t think it through back in 2009?
Bitcoin is difficult to upgrade
Anyways, most of the possible changes to the blockchain that are discussed to date bring the augmentations that could mean that the blockchain wouldn’t have the same security as before.
And one more thing.
Blockchain also relies on the immutability of previous transactions. That’s the cornerstone of blockchain technology and the heart of its security. All the algorithms of the blockchain serve that purpose and the related algorithms that maintain the network.
But that also means that blockchains are intrinsically difficult to enhance. They can’t be simply upgraded from version to version like you do with Mac OS or Windows. Numerous nodes of the blockchain network must be upgraded simultaneously and carefully to maintain the integrity of the original system.
Simply put Bitcoin isn’t that scalable after all. We can use the network in the way it was intended to be used. But as soon as we are trying to make significant changes to tune Bitcoin to our new needs, we fail.
By new needs I mean, of course, scalability. There is only one way Bitcoin can be scaled to mass adoption. And that is through significant changes that might eventually kill Bitcoin as we know it.
Virtual finances can’t be as real as the real finances
We kind of get used to calling Bitcoin the new gold or a digital gold.
But this is a big exaggeration.
Bitcoin can’t be the digital gold because it doesn’t have the characteristics to make it a good store of value.
Gold has intrinsic value and is in finite supply. While we might not know exactly how much gold is out there, we do know it can’t simply be manufactured out of thin air. Scarcity is what makes gold a precious asset.
Of course, Bitcoin can be considered finite because there is a limited amount of it – just 21 million BTC to be mined ever – but there is one thing you can’t neglect.
Gold is gold. In a sense that there is nothing like gold out there. Other precious metals haven’t achieved such recognition.
But Bitcoin – though still the most popular of the cryptocurrencies – is not the only one of its kind.
Scarcity is the key
There is no cap on the number of other cryptocurrencies that can be created.
We do have an ability to continually reproduce cryptocurrencies. And that can dilute their value over time, which is why they’ll never be a place for people to safely store their money.
Just take a look at how many cryptocurrencies are out there now.
None of them is capable of achieving Bitcoin’s popularity. None of them can kill Bitcoin right now.
But there are so many of them biting Bitcoin’s field of play. While there are some that mimic Bitcoin – it’s philosophy and architecture – like Ravencoin, others are trying to find their own path.
And some of them succeed. Take a look at Ethereum that has grown into something much bigger than just a cryptocurrency blockchain. It is now widely used as a basis for other cryptocurrencies (like some of the most popular stablecoins) and NFTs. Smart contracts that were introduced by Ethereum blockchain have become a starting point for many DeFi projects.
Cardano, Solana, Polygon, Avalanche have made all kinds of breakthroughs that Bitcoin hasn’t ever dreamt of.
And there are more to come.
Competition is tough and could kill Bitcoin
What I am trying to say here is not that Bitcoin has become obsolete and will be replaced by more advanced cryptocurrencies.
I am trying to say that there is a different kind of threat there. None of those cryptocurrencies are perfect. While having some advantages over Bitcoin and, seemingly, a potential to kill it, they come with the drawbacks of their own.
Take ETH, the native token of the Ethereum blockchain. It’s the second most popular crypto out there. Often seen as the main rival of Bitcoin, ETH attracts investors and gets a lot of attention on the trading platforms.
But is ETH perfect? Actually, it isn’t. For example, it doesn’t have that cap on the number of tokens to be issued. Simply put, ETH has no inflation protection, that’s why they have to burn millions of tokens manually from time to time. It’s the only way to protect ETH from deflation.
So Bitcoin is not perfect. And its rivals are not perfect. And there are more and more of those rivals appearing each day. With no intrinsic value whatsoever and new features that only partially disguise their original drawbacks.
What about the value?
The speculative nature of cryptocurrencies also means that their purchasing power is unstable.
Most of the cryptocurrencies gain value at start but then keep losing it for years.
That means that anyone who buys crypto could find that when they need to buy services they have less money than at the beginning. Be it the following day or the following year, you are always more likely to lose some of your purchasing power.
That’s not the issue with those guys who mined Bitcoin in the first years of its existence. Or those who bought it a couple of years ago.
Yes, it is true that Bitcoin has been growing steadily in recent years. But will it keep doing so? And what about the rest of the popular cryptocurrencies?
Some experts say just as fiat currencies lose their value over time, so will Bitcoin and other cryptocurrencies. Maybe, even at a greater pace.
There is a growing list of dead coins. We can also call them failed currencies.
And those spikes in crypto prices should not be taken as a sign that they are digital gold.
There are so many unknowns surrounding virtual currencies that their price is most often defined by raw speculation. Every once in a while Bitcoin suddenly falls down and everybody is trying to justify it with all the possible reasons out there. Starting from the Federal Reserve’s actions and up to the weather in Japan.
Governments will finally try to kill Bitcoin and might succeed
There’s also great concern over cryptocurrencies in the banking sphere. In 2019, eight of the 10 major U.S. retail banks had dealings with illicit crypto money service businesses.
The U.S. Financial Crimes Enforcement Network has since emphasized the importance of anti-money-laundering schemes in relation to cryptocurrencies.
Of course, many banks still find themselves unsure of protocols when it comes to virtual currencies.
The White House has been pushing for wide adoption of crypto since Biden came to power. But if you take a look at what his administration is saying, you will clearly see they don’t want to accept the wild crypto world as it is.
All they want is to take all the merits of the cryptocurrencies and use them to create some kind of a digital dollar. Central bank digital currency might seem a separate topic that should have nothing in common with Bitcoin’s fate and as such should be discussed separately.
But let me get this straight. As soon as the US Government is ready to push you to the digital dollar they will declare a war on Bitcoin and all the altcoins.
Stablecoins will also be under threat. Because why would you need a cryptocurrency pegged to the US Dollar when you already have a digital US Dollar itself?
P.S. I was going to write a bit about ecology here too. But it is such a vast topic that it definitely requires a separate article.
The energy consumption associated with Bitcoin is breathtakingly high. Estimates show that Bitcoin uses around 110 TWh of electricity per year. It’s much more than many countries of the world, like Finland, Ukraine or Malaysia. Not the best feature for a thing that is claimed to be the next gold, right?
Sources: BuiltIn, Harward Business Review