Bitcoin is a cryptocurrency that is now about five years old and there are more than a few experts speculating whether or not Bitcoin is ready for the Big Leagues or whether Bitcoin is robust enough to handle the workload of an entire national or global economy. But before we can answer that question we must first determine the hurdles still in front of the nascent digital currency. If Bitcoin has what it takes to overcome these challenges, then it could very well be ready for the spotlight.
Meeting the Challenges
There are a couple of important points that we need to remember. If Bitcoin is ever to become a mainstream currency at least one of the major economic nations will have to accept it as such and the truth is that this is not going to happen without regulations being attached to that recognition. There are several reasons for this:
- The government has a duty to protect consumers
- The government has a duty to prevent crime or criminal activity
- The government has a need to track money for tax purposes
But there is another reason as well. Regulations, especially in the financial industry, are often a matter of who has the best lobbyist. Laws are passed almost daily that favor one part of an industry over another or one industry over another. One of the main reasons for the 2008 economic crisis was the US deregulation of the banking industry, a problem that still has not been fixed.
The financial industry might see a way to make money with Bitcoin, but on the other hand if allowed to remain as is, Bitcoin could cost supplant the industry costing it tens of billions annually in transfer and account fees.
The Propaganda Wars
If you want news about Bitcoin you have to search for virtual currency focused media outlets. While the mainstream media certainly dabbles in Bitcoin, their coverage usually focuses on the negative aspects of Bitcoin’s growth such as criminal activity or a big loss by customers from a failed exchange.
A March poll by an online survey taken by Harris Interactive on behalf of California-based Yodlee, a self-described personal finance data platform, revealed that only 48% of American adults know about Bitcoin. And it is no secret that most of them get their news only from the major news outlets. Bitcoin’s public image will certainly suffer if this trend continues with only one side of the story is being reported.
A recent article in Bitcoin magazine illustrates the point perfectly:
“[…] We are distracted. Of 100 people personally polled, most people could not actually explain or define Bitcoin to me, but they could tell me all about how it “went bankrupt in Japan,” how “Bitcoin’s CEO committed suicide,” and how “the bank got robbed and they went under.” Like it or not, the majority of people are still convinced by 30-second television bits that focus on the 1% of “bad” news. And why would these news clips focus on anything else?”
But many Bitcoin startups are engaging with their communities. The Bitcoin Cup for instance is a charity centered at the 2014 World Cup that raises money for local communities by taking Bitcoin donations. Bitcoin clubs are springing up at universities all over the world, as are Bitcoin ATMs and this is before any countries have backed Bitcoin officially.
As Bitcoin gains in popularity, the corresponding news will also shift towards a more positive tone, which we are already seeing with headlines announcing major companies accepting Bitcoin and venture capitalists pumping money into the new economy.
The Legal Battlefield
There are currently four US Congressional committees that are investigating the various ramifications of Bitcoin:
- The Regulatory Affairs Committee - Marco Santori, Chair
- Legal Defense Committee - Brian Klein, Chair
- Law and Policy Steering Committee - Mike Hearn, Chair
- Senate Committee on Banking, Housing, and Urban Affairs hearing on virtual currency (Video Link of Hearing) (Hearing Questions)
These three committees will be taking testimony from experts across the spectrum and it is important to have some Bitcoin representation, as much as possible, at these hearings. Some hearings have already been held, more are scheduled.
The good news is that the government’s attention does not seem to be focused at individuals who trade Bitcoins among themselves as they are the businesses that act as platforms. This area will most assuredly be regulated and exchanges and money transfer services will have to register and follow regulations, which include regular reporting, trusted verification processes, guaranteed capital, and many other requirements.
A Bright Future
The Bitcoin movement seems to be moving ahead quickly despite dire warnings and lack of recognizable regulation on Bitcoin and other cryptocurrencies. The list of business is growing and even Fortune 500 companies are embracing Bitcoin such as Dish Network, the largest company to accept Bitcoin at the time.
The appearance of Bitcoin ATMs and now even a Bitcoin debit card that allows you to spend your Bitcoins nearly anywhere that accepts credit cards. Governments seem more concerned with regulating businesses than individuals and the propaganda machine can only work for so long. It seems, at least for the present, that Bitcoin can indeed step up to the plate with the above challenges. But I would like to propose a final challenge that Bitcoin must meet that might raise a few eyebrows.
A Built-in Problem?
There are only about 500,000 people who currently own Bitcoin. The total number of bitcoins that will ever be produced is 21 million and, to date, more than 13 million of those have already been mined with the rate gradually decreasing to a halt at around 2140 AD. The reason for the seeming disparity is that the closer those miners get to asymptotic growth, the mining difficulty will significantly increase and small-scale mining operations will cease to exist.
When mining began in 2009, a single-core Celeron® processor and only a few dollars each month in electricity would yield you bitcoins. But now it takes heavy duty ASICS processors and gobs of power. It is becoming so difficult that many individuals are dropping out and are quickly replaced by mining pools and industrial scale mining operations.
This leads to two very important questions.
- Scalability: How can 21 million Bitcoin be divided between 7 billion people?
- How can market manipulation by people who have many bitcoins be prevented?
Coincidentally, I had the pleasure of interviewing Edmund Moy, the 38th Director of the US Mint, who also provided us with his own personal thoughts on the questions above:
Cointelegraph: Cryptocurrencies need a common language. With less than half a million Bitcoin owners using the decimal system when dividing Bitcoin is not an issue. But how does the guy in Mississippi who only wants to know how many nickels in a quarter going to figure it out. Bitcoin must be understandable and easy to use for everyone.
Edmund Moy: Most people are used to the decimal system, which is reinforced with digital cash registers and calculators. Even the stock exchanges went off the fractional system to the decimal system, which in their world goes several decimal places beyond what most people work with. I do think there will be a new language but that will arise from the market place.
If a BTC is divisible to 9 decimal places, there might have to be a corresponding punctuation similar to commas making it easier to distinguish between thousands, millions, and billions.
CT: Because of the limited production of Bitcoin to 21 million coins, is there a potential for a group with significant resources to buy enough Bitcoin to affect the market? If so how can this be prevented?
EM: Yes, there is the potential but if the market doesn’t like it, it will find another cryptocurrency to coalesce around. That would force the group who’s cornered the market to sell. The market is the most efficient allocator of resources.
- Edmund Moy, the 38th Director of the US Mint
If a currency is to become a mainstay, it must be accessible and use a language that anyone can understand. If you go to Starbucks and order a cup of coffee, there is a range of prices on the menu. How do you describe those prices to your customers? A cup of plain latte costs 0.004801 BTC or US$3?
People need to be able to relate to their money and the fact is that decimals are not convenient units for most people to use on a daily basis.
Bitcoin is, however, divisible down to eight decimal places while the fiat currencies are only divisible down to two decimal places. Therefore, this “unit bias” needs to be addressed and some interface for seamless and real-time currency conversion must be developed in order for Bitcoin to be market ready and user-friendly. The multi-coin wallets currently being rolled out by many startups could be the first step towards solving this problem.
It is also not hard to imagine conglomerates trying to corner the Bitcoin markets in much the same way that they do in traditional markets. Fifty years ago, 90% of US farms were family owned. Now most of them are owned by huge farming combines like Cargill and Monsanto. While one person, even a billionaire, could not make a large dent in Bitcoin, a concerted effort by a group or a cartel may potentially subvert the decentralized nature of Bitcoin.
We have already seen examples of this with cloud mining. Large groups begin to control large amounts of the available finite resource and everyone else is excluded. We can also see examples of this every day in the commodities market, where one interest tries to corner the market. One of the largest threats comes from the American Federal Reserve Bank.
This bank is not a government agency but instead is a conglomeration of private banks. These banks not only have their own resources to use in this manner but they potentially have the financial resources of the American tax payer as well, which is an enormous amount of money and certainly enough to corner the Bitcoin market should they choose to do so at any time in the future.
The bank’s recent report said that Bitcoin was not currently a threat but this could easily change in the future. Therefore, since this is common practice with most other commodities, there is no reason why Bitcoin would be immune.
A Death by Trading
One of the primary causes for price instability in commodities is the amount of trading and speculation that goes on. Particular groups try to corner certain markets by buying a great deal of the commodity, thereby driving up the price that consumers pay at the market. There is no real reason why Bitcoin cannot fall into the same trap as we get closer to the last mined coin. The above examples of people trying to corner the market are extreme examples. But even regular trading has a sometimes horrid effect on commodities as is evidenced by speculation in the energy industry.
The only way to prevent this from happening is to keep Bitcoin as decentralized as possible and as much of the currency as possible out of the exchanges and in the economy. Money on the trading floor enriches only the traders and owners of the commodity, not the end-consumers or people who buy the final product. Meanwhile, money that continually flows through the economy keeps it healthy and liquid.
If Bitcoin can resolve the issue of scalability, unit bias, security, user-friendliness, and the people can keep Bitcoin flowing within the economy then Bitcoin has an excellent chance of becoming a global currency with greater reach and less friction than any fiat currency. Getting to the top should be no problem for Bitcoin if recent events are any indication, but there are a number of traps in the future that developers need to begin thinking about in the present.
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