Bitcoin is a terrible currency (but a fabulous store of wealth)

I made a terrible mistake a few years ago.

I was lucky enough to stumble across Bitcoin in it’s (relatively) early days, somewhere around late 2013 after an article I’d found on some obscure financial website. I was hooked immediately and decided to follow the story, dipping in now and again to see what was happening. I decided to buy a few, but even though I am reasonably geeky, I simply couldn’t work out how the early exchanges worked and eventually gave up. It was a very, very expensive mistake. My meagre £500 investment (which is all I was prepared to risk at the time) would now have been worth £46,000. And rising daily.

By the time I actually bought, BTC had already reached £3000 and it cost me far, far more than £500 to get into the game. Like many people, I’d put it off thinking it couldn’t go any higher. But I was very, very wrong. And the more I researched and the more maths I did, the more I realized we haven’t even started yet. But there was another realization. Bitcoin, as a currency, is absolute rubbish.

There, I said it. I have just upset the Bitcoin Believers big time and they’re not going to be happy with me. But it’s a fact.

Back when no-one was using it, it was great. Transactions were quick, cheap and instant. The blockchain was properly decentralized and all the little guys who were contributing to the network by mining on their home PCs were as happy as the guys doing the transferring. And it was cool to be different and use something edgy and different. Not that I’d actually know, I didn’t buy any, remember?! That said, I was right in the thick of it in the 90’s and early 00’s as the dot.com tech forced it’s way into our lives and I’ll bet you anything it felt the same as being one of those weird guys who used this thing called the internet whilst all around looked in wonder, confusion or complete “it’ll-never-catch-on”-ness.

But Bitcoin has a flaw, or even several flaws. Yes, it’s very secure and very cool how it all works and it’s the undisputed grand daddy of them all, but it no longer really works as a currency. In fact, it’s terrible.

You see, without getting too technical, the blockchain is, essentially, too small. There’s only 1MB of data allowed very 10 minutes, which is, of course, ridiculous in this day and age. The trouble is, this is set in stone, effectively the DNA of Bitcoin’s blockchain, and can never change. Yes, I know there’s talk of “layer 2 solutions”, “non bandwidth scaling solutions” and that lovely term “SegWit” but I’m not going to cover it here and it arguably means we’re no longer talking about Bitcoin in it’s proper sense anyway. The fact is, for now at least, we’re stuck at 1MB. And that means S – L – O – W. And if there’s lots of people trying to make transactions at the same time (there are) then it also means expensive. Effectively, you’re bidding against other people for the network operators to process your transaction first. Processing fees have rocketed in recent months as a result.

We can only speculate the reasons for this low limit being set at the creation stage. Yes, there’s an economic element which is important for Bitcoin to create and retain value rather than being purely market driven thereby requiring a data limit of sorts, but it does seem to say, well, “we didn’t think it would get this big” doesn’t it? Who knows, I wasn’t there, and nor, most likely, were you. But it is what it is.

The good thing is, the next generation of blockchain based currencies took this on board and dealt with the problem up front. Litecoin, Vertcoin, Dash, Monero – you name it, they’re all faster and cheaper to use and will remain so as they scale up in use. Bitcoin, it seems, will be surpassed.

But then I’m not so sure about that either. Bitcoin has simply enormous ‘brand’ value and it’s a sort of status symbol to own some. Not only that, it’s the de-facto baseline currency against which all others are measured. Some traders actually only use the Bitcoin price, rather than their local fiat currency, to measure or decide on their investments. Many coins cannot even be bought without going via Bitcoin first. And Bitcoin still commands over 50% of the entire cryptocurrency market on it’s own – that means the other (over one thousand) coins get less than 50% between them. It really is a monster that is utterly embedded into the system. Scratch that, it many ways it IS the system.

But what’s the point of it if these, ostensibly ‘better’ currencies, exist. Well, here I believe there is a golden (pun intended) opportunity for Bitcoin.

Think of Litecoin, Monero, Dash etc as your ‘current account’. These are the guys you use for your skinny latte in the morning after global acceptance has happened. Bitcoin? Well he’s your savings account. You don’t need to move him around very much and you add to it whenever you can to gain from the natural increase in value that comes from being a truly scarce resource. And it really is. Let me explain thus: Gold is a scarce resource. We have a bit of an idea of how much there is in total, but don’t know for sure and the price could be affected as a result. Bitcoin, however, is absolute at 21,000,000 units for all the people in the world. There will never, ever be more. It’s a mathematical certainty. And it’ll take at least another 100 years to get them all in circulation, with each passing year getting harder and harder to mine them. The system is genius, and it’s the perfect mathematical model of a scarce resource. And like any resource, it’s value is only truly derived from the value we place on it. Which seems to be quite a lot.

But Bitcoin could also well become the ‘hard currency’ of the crypto world in the same way as the dollar, yen or Euro in the ‘real’ world, effectively the ‘go to’ currency in uncertain times. In fact, there’s already a blurring between the ‘crypto world’ and the ‘real world’ in terms of thinking of bitcoin as a hard currency. Take Zimbabwe, for example, where collapsing fiat currency has always been redirected into something more valuable, such as USD, often at enormous premiums. But recently, Bitcoin has seen a significant share of the action, the new ‘safe haven’ for a worthless currency. And of course that Bitcoin could be transferred anywhere instantly, thus making assets immediately movable out of a collapsing economy. It’s interesting to note that most of the handful of countries that have outlawed Bitcoin to date have issues with their economies or crime rates – Bolivia, Columbia, Nigeria, Ecuador, Vietnam, Bangladesh – and the final few – China, Taiwan and Russia – clearly have their own agendas and, eventually I suspect, some form of state controlled cryptocurrency on the cards.

But for me, the final part of jigsaw is the way I suspect I’ll think of Bitcoin in the future – being the equivalent of the Gold Reserve or Central Bank for crypto currency. I don’t mean that literally of course, but the analogy is not as far off as you might think. The price of altcoins is often affected by Bitcoin, sometimes directly, sometimes inversely, but there’s clearly an effect, a bit like an interest rate change from a central bank. In times of turmoil, of which there are many currently, Bitcoin is often seen as a ‘safe haven’ – a bit like gold. It’s only as safe as the market says it is of course, and let’s not forget it’s collapsed before. I think it’s inevitable it’ll collapse again, and I think it’s just an inevitable it will rise again, bigger and more valuable than previously.

In reality we have no idea how this will play out. I think it’s very likely it’s here to stay, and it’s almost certain we haven’t even begun yet in terms of values and growth (or set backs and disasters for that matter) but one thing’s for sure: this is a very, very exciting time. This will be one to tell your grandkids about, probably around the time when you put a few Satoshi aside for their birthday presents. “I was there” you’ll say, “yeah, yeah, granddad” they’ll reply “and I bet you’ll be telling me next you had to drive your car yourself too”

I did, actually. And I even bought it with real, paper cash you could hold in your hand. On second thoughts they’d probably never believe me on THAT part …

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