Bitcoin, as with any new invention, has faced a number of challenges ranging from acceptability, adaptability, accessibility and usability within the financial business environment.
The Aspects of Bitcoin
According to Jonathan, Bitcoin is divided into three major aspects which are:
- Bitcoin as a currency
- Bitcoin as a payment rail
- Bitcoin as a ledger
He goes on to say that each of these aspects posses their individual peculiarities in terms of usage and inherent problems.
Bitcoin as a currency
As a currency, the problems of Bitcoin are in three major areas which includes:
Usability, i.e. how easy it is to use in everyday life;
Accessibility, i.e. how readily available it is for acquisition; and
Relative stability, i.e. how stable it is in comparison to other similar currencies.
Jonathan summarised the complications surrounding Bitcoin as a currency by saying:
“With usability, not only are there not many places to use bitcoin, but using bitcoin at point of sale terminals is a huge mess. This needs to change for people to even want to consider using bitcoin. As the bitcoin debit card markets mature, this is likely to change.
“With accessibility, no one really thinks about how they get their everyday currency. No one thinks they are going to go to an exchange before going down to the grocery store. This is a huge friction for people. As people continue to receive bitcoins in natural ways as a currency, receiving wages or getting paid for goods, bitcoin will become more accessible, especially for the unbanked.
“With relative stability, Bitcoin is just a lot more volatile vs. the dollar, making it a bad store of value in comparison. However, in certain countries, like Vietnam, Venezuela and Argentina, Bitcoin actually is relatively stable. This creates opportunity for adoption in these countries and as this occurs, it should provide stability to the system that is needed to penetrate markets with more stable currencies.”
Bitcoin as a Payment Rail
For Jonathan the major issue with Bitcoin as a payment rail has to do with liquidity which he says can be broken down into two segments. On liquidity he says:
“the first is that the current market cap is 6.5 billion USD of value. The current forex markets trade a 5.3 trillion USD of value a DAY. It is literally impossible for bitcoin to support this market at it’s current market cap, especially since a majority of bitcoins (78% according to a 2012 survey) are not being openly traded, but rather stored. The second liquidity issue occurs with geographical markets. Unlike the US, Europe and China, many of the other bitcoin markets are highly susceptible to price movement for relatively small transactions sizes (I’m talking on the range of $10,000).”
He believes that for Bitcoin to rise as a payment protocol, more local market makers must be introduced into the industry. Saying that it is a good thing that with Bitcoin, there is an easy access to the true exchange rates, meaning that it is a lot easier for these market makers to engage in arbitrage, and incentives that will likely help to solve this problem in the future.
Bitcoin as a Ledger
Lastly, there is looking at Bitcoin as a ledger. Mr. Chester’s view is that the idea is to tokenize an asset on bitcoin to leverage the blockchain for it’s ledger capabilities. He says;
“The main issue here is that the token only acts as a clearing mechanism and not a settlement mechanism. For instance, I have a pink slip for a car. I tokenize it on a satoshi. Now I send that satoshi to a friend for $10,000, but I keep the pink slip. Who now has ownership? It’s an interesting question. What if I gave the token to a friend instead of him paying for it? What if I was hacked and the token was taken away from me? I have not done the legal research, but I would guess that a judge would most likely say the person in possession of the pink slip still owns the car.”
To Jonathan, the separation of clearing and settlement is a major issue. As he believes that for this capability, there is room for improvement, and if it does not change soon, there may even be a way for a different blockchain to take over this aspect.
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