Leaving aside all the hype and hyperventilating, the personalities and poison, the shills and snake-oil, what might be The Future of Bitcoin? Or even just A Future of Bitcoin?…
First a quick and cursory glance at its past — just to give a little context. The original Bitcoin paper starts out forthrightly:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Satoshi’s stated intent was to implement a trust-free system of payments. So far Bitcoin has failed to be this. Instead it has become primarily a vehicle for speculation. Yes, a few hardy evangelists do trade using BTC, but they’re few and far between. Certainly every time I have asked someone to pay me using Bitcoin I was met with something between blank incomprehension and outright hostility.
The reasons are myriad and intertwined, and not particularly interesting to me here and now, save that it helps us to place where Bitcoin is in the landscape of status-quo-challenging innovations. At present — and this implies directly that things may well change in the future, perhaps even the quite near future — at present Bitcoin largely fails to serve as a Medium Of Exchange.
Generally we want a currency to provide, in some measure, the following three functions:
- Medium of Exchange — a means to facilitate the barter of goods and services while eliminating the disadvantages of direct barter,
- Store of Value — a way to hoard our wealth while we wait for something to spend it on, and
- Unit of Account — a measure of how much value we’re storing or exchanging.
Bitcoin also fails as a Store Of Value due to its wild volatility — the very attribute that speculators love so much.
And I certainly know of nobody who uses Bitcoin — or any other cryptocurrency — as a Unit Of Account.
It is these latter two failings that drive the first. If I were a merchant, pricing goods in BTC is problematic. Adoption is not wide enough that I can in turn pay my suppliers, my landlord or my taxes in BTC, so I am tethered to the fiat world, no matter how firmly I may be a crypto-future true believer. Even if I advertise pricing and accept payment in BTC, the real price of my wares is constantly referenced back to fiat — the BTC/fiat exchange rate. And that, as we’ve observed, fluctuates wildly — that damned volatility at work. I suspect this is the main reason we’ve seen a number of vendors exit from BTC pricing and payment rails. Indeed the volatility is such that you’d have to reprice on a minute-by-minute basis, and even then, if a transaction takes more than a second or two to be confirmed, as happens during periods when the Bitcoin network is congested, you’re unlikely to receive the same value you invoiced.
Even assuming I do sell some stuff and get paid for it in BTC, there is every reason to believe that the value of BTC I hold will bear little relation at all to the value I exchanged when it comes time for me to spend those BTC. So, because it is not a very stable way for me to store wealth, I am less inclined to accept Bitcoin in exchange for the value I sell. Catch 22.
Being “not a good store of value” discourages all but the most ideologically-committed vendors from adopting Bitcoin. Low adoption means that the pool of Bitcoin-enabled trade partners ends up being a very small pond indeed. And a lack of trade partners diminishes the usefulness and usability of the currency. In econospeak, there is a lack of liquidity in the Bitcoin economy, resulting in thin value underpinning the coin, and because there is a low volume of trade using the currency, even relatively small exchanges of Bitcoin can significantly alter its perceived value. Small transactions causing large changes in value is the very definition of volatility, and it is hurting Bitcoin adoption badly.
But are we stuck in this vicious cycle forever? I doubt it.
I can see three possible futures for Bitcoin…
The technical difficulties with Bitcoin get solved, and hopefully quite soon, otherwise other projects are likely to close the still-open window of opportunity that Bitcoin has due to its primacy as the First Comer.
The problems are primarily:
- fluctuating and sometimes excessive transaction costs — ideally users should never be confronted with the question of seemingly-arbitrary and capricious transaction costs at all,
- at times unacceptable transaction confirmation times, and
- abysmal user-interfaces that make transactions error-prone and needlessly difficult.
Solve these and there’s a very good chance that Bitcoin finally begins to take off as a Medium Of Exchange.
Solve these and Bitcoin stands by far the best chance of occupying the core (though certainly not all) of the Electronic Cash space, simply because of brand awareness, primacy and market dominance. And we can thank the “bubble” of late 2017 for much of that…
The technical difficulties don’t get solved, the Bitcoin identity gets fragmented by all the forks, things remain messy and in the meanwhile some other, newer-generation coin quietly and steadily gains acceptance as a means of payment. Litecoin? Zcash? Monero? And slowly but with a dreadful inevitability, Bitcoin’s dominance slowly wanes into irrelevance and ultimate extinction.
This might be the best outcome — not for Bitcoin or its adherents and believers, but for society at large. Let’s at least acknowledge that Bitcoin is the zeroth-generation of cryptographically-enabled distributed ledger (with all the good things that arise from that). But seldom is Version 0, the Proof-of-Concept, the best solution. Usually it takes us a few iterations to get something right. Just look at the evolution of conventional money for an instructive example!
The last possibility is that the technical difficulties don’t get solved, Bitcoin never becomes a mass Medium Of Exchange, but instead becomes the internet’s primary Store Of Value: Crypto-Gold, in other words. This is a world in which transaction costs and confirmation times don’t matter. After all, look how much hassle and friction is involved in trading, moving and storing a tonne of physical, real-world Gold!
Bitcoin-as-Gold could easily happen. All it takes is for one or two of the world’s Central Banks to start openly using Bitcoin as part of their toolchest in hedging challenges to their national fiat. Using it as a tool in conducting their core business, in other words. Indeed, I would be surprised if any Central Bank in the world has failed to dabble in Bitcoin at this point, but so far it has only been sticking a toe in the water as a way of understanding this mysterious beast, and we have yet to see any Central Bank openly commit to using Bitcoin as a strategic vehicle. I am not speaking here of those few Central Banks that implementing their own in-house crypto-currency. Those are not true crypto-currencies, though they may derive some strength and advantage from being transacted on an open, unpermissioned and (hopefully) immutable distributed store. No. If it’s issued by a single Authority, then it’s fiat, not crypto-currency, whether the authority is a Central Bank, an airline, or a startup issuing dodgy tokens.
If/when Bitcoin starts getting openly used as a hedging instrument by central banks I would bet on four things following really quickly:
- All — or almost all — other Central Banks following suit.
- Fiat price of Bitcoin rises enormously due to the large demand. A million dollars per BTC? Who can say.
- Bitcoin’s volatility evaporates overnight, driving the speculators (mostly) out of the market (though not until after they take profit, of course).
- Bitcoin mining gains a new and very substantial set of players — the Central Banks and the BIS of course, because these suddenly have an asset and transaction records to protect.
I part ways with a number of BitCoin’s True Believers in thinking that Bitcoin As Gold is not the worst outcome in the world. Yes, it departs from Satoshi’s Original Vision, but… for many, many reasons, the world needs safe and reliable stores of value.
What’s it to be? Cash? Gold? Or oblivion and a short paragraph in the history books?
Refusing to choose is a choice, too.