Like most people, I recently considered the virtual currency bitcoin to be dead. Expired. Bereft of life. Kicked the bucket. An ex-currency. But now I’m not so sure.
Contrary to expectations, the currency’s value has not crashed. It’s actually gone up compared to last year’s figures, with one bitcoin worth $397 today compared to $213 in January 2014. It’s still nowhere near stable, but it’s not a disastrous investment either. Those who bought $1000 worth of bitcoin a year ago have not lost their money – indeed, they’ve gained some.
So it’s strange to see Mike Hearn, a self-proclaimed Bitcoin expert, suddenly pronouncing the currency’s doom. “Despite knowing that Bitcoin could fail all along, the now inescapable conclusion that it has failed still saddens me greatly” writes Hearn.
It’s an odd argument in more ways than one. The greatest threat to bitcoin – its dangerously fluctuating value – has not crippled the currency. Meanwhile, its old advantages are all still present. It remains the currency of choice for rebels and rogues: go to any drugs marketplace on the internet, and you’re likely to find a bitcoin payment option.
The second great advantage is bitcoin’s phenomenally good transfers. If you’re looking for a way to transfer money across borders rapidly and cheaply, it’s hard to beat bitcoin. Western Union can’t compete: it costs a few pennies to transfer millions of bitcoin. As for international bank transfers, they take weeks, along with a hefty amount of paperwork.
And then there’s the feature that has made bitcoin the great hope of libertarians, and the great worry of authoritarians everywhere. Its decentralized structure. Now over five years old, no-one has succeeded in gaining monopoly control over the multitude of bitcoin “nodes” around the world that would be required to gain control of the currency.
And therein may lie Hearn’s problem, because many of the attempts to centralize bitcoin have come from him.
Bitcoin is run by the global consensus of all the people running Bitcoin infrastructure in the world. To make any change to Bitcoin, you have to convince the people running Bitcoin nodes to switch over. Hearn has tried to do this on multiple occasions, urging the Bitcoin community to switch to his modified version, “Bitcoin XT.”
The crucial difference between Bitcoin and Bitcoin XT is something technical called a “block size.” Every cryptocurrency is divided into “blocks” that contain transaction data. The larger the block, the faster it becomes to process transactions. However, greater block size means that computers around the world would require greater resources to run bitcoin, this decreasing the number of nodes around the world. Given that a majority of nodes is all you need to control the currency, fewer nodes would make Bitcoin more vulnerable to takeover attempts, which it has so far resisted.
A source in the Bitcoin community explained Hearn’s failed attempts to increase the size of Bitcoin blocks.
He made [Bitcoin] XT temporarily compatible with Bitcoin (it would become not so if it managed to gain a supermajority of 75% of all the Bitcoin nodes) and spent the next few months lobbying, making fake sockpuppet posts to reddit, and generally doing everything he could to convince idiots to help him in his unilateral takeover of the Bitcoinprotocol. It did not go over well. Bitcoin XT never got over 10%, much less the 75% supermajority.After Bitcoin XT there was Bitcoin Unlimited. Now they are trying to push “Bitcoin Classic”.They just want control of Bitcoin. Nobody is giving it to them. After months of being told to eat sh**, Mike finally throws this public tantrum you can see now.
These are the only two places in actual industry that actually want Bitcoin XT to move forward, and they are consumer payment rails. They want to put every single transaction that resolves through them directly on the blockchain as fast as possible, because this precludes them from actually having to hold capital reserves at all.The reality is that a consumer payment rail is not Bitcoin‘s primary market. Bitcoin‘s primary market is people evading capital controls and KYC/AML requirements. Bitcoin is not competing with Visa. It’s competing with Western Union, ACH, SWIFT wires, money launderers, and Forex services. Visa is big, but it’s current combined markets are in sum bigger and far more lucrative to compete with.
Regardless of the advantages, however, many in the Bitcoin community refuse to take steps that would compromise the currency’s unique decentralized structure. They’re right. Bitcoin isn’t meant to compete with Visa on speed, it’s meant to compete with Visa (and other payment systems) on anonymity, transferring money cheaply and discreetly, and remaining uncontrolled. That has always been its unique selling point. Why change it?
In reality, my main problem with bitcoin was never its impressive underlying mechanisms, but its rather unimpressive advocates. Much as I admire their arguments, I can’t stand libertarians and anarcho-capitalists with bitcoin-and-weed fixations. There’s more to life, you know? What’s more, they all have bad hair, and a few of them (shudder!) even wear bow ties.
But Bitcoin itself is an important feature of the free internet, and important to freedom in general. The media hates Bitcoin, and constantly pronounces its death, for the same reason it hates comments sections and free speech on the internet. Because Bitcoin represents a world beyond their control.
There is perhaps one threat to the future of Bitcoin: competing cryptocurrencies. After the success of Bitcoin, other wannabes came about in an attempt to emulate its success. Litecoin, Dogecoin, Peercoin, Primecoin, Blackcoin — one of my favorites — there’s a slew of competitors to chose from for consumers who want to invest in whatever gives the best value and security.
None of the competing cryptocurrencies have yet to overtake Bitcoin as the alpha-currency, which can be seen rocking its chunky blockchains as it dominates the online black markets. That’s for a variety of reasons, but mainly because people trust the individuals already running the nodes. As aforementioned, the people controlling the Bitcoin nodes have a proven history of immunity to takeovers, and that lets people know that their investments are at least semi-secure. With the other currencies, they are so volatile — and in some cases, so new — that most seem to still prefer the big B. Personally, I go for the the big D. And I don’t mean Dogecoin.
In the current marketplace of currencies, this isn’t bound to change any time soon unless a competitor takes the bold step and allows for the unthinkable: insurance and regulation. The reason why so many consider Bitcoin to be dead, is after the series of infamous lootings and scandals involving Bitcoin exchanges, such as Japan’s Mt Gox — originally an online exchange meant for buying and selling Magic: The Gathering trading cards — people lost trust in the security of their funds.
Many loved the Wild Wild West-like climate of the currency, which is why the value had shot up so rapidly at first. But their infatuation was questioned after their train was robbed, and all their valuables were snatched. When the security of the institutions were questioned, many people pulled out their investments, and the value of Bitcoin plummeted.
If a cryptocurrency was to partner for insurance on investments, similar to something seen with the $250k FDIC backing in US banks today, then it’s possible that it could create large enough consumer support to knock Bitcoin from its throne. That’s the great thing about Bitcoin. It can choose it’s own future. And if another coin wants to do something else to compete for investors in the marketplace of ideas, then they’re welcome to open up shop. Anyone is welcome to run their own currency however they wish, and most of the alternative cryptocurrencies currently have their own little gimmicks.
If future investors choose security and insurance over freedom from financial regulations, that’s a choice that they will be free to make for themselves. But at that point, the paranoid nature of the black market will probably still prefer the unregulated slew of current digital currencies.
It’s easy to see a future where both regulated and unregulated currencies could elbow out a niche to survive within the rough and tumble Darwinian nature of the crypto-coin marketplace. One coin might be primarily used by the black market and freedom loving cowboys, and another, backed by insurance, might be preferred by normies who trade primarily in over-the-table transactions with nothing to hide.