I should start this post by listing my Bitcoin “credentials”, if you will. While I never drank the kool-aid to the extent some have, I got quite excited by the notion of cryptocurrency towards the end of last year. Since then I have built a couple of proof of concepts based on it, one being a consumer-friendly DRM system, the other, a Reddit-clone which uses Bitcoin for voting. I also turned a few thousand dollars into over $35,000, and then subsequently lost all but $200 through speculating on cryptocurrencies. This last incident caused me to take a step back, and it has allowed me to see Bitcoin a bit differently.
For many critics and proponents of Bitcoin, it is very hard to look at the matter with any objectivity. Critics can’t see the potential that Bitcoin has as a technology because all they see is something that looks like a pyramid scheme and a community that has seen numerous scams such as Mt. Gox. For proponents of cryptocurrencies, many are very vested both ideologically and emotionally, and some have major financial attachments. The community already has an us-versus-them attitude due to some very strong opinions about the financial system, and this all culminates in a community which lives in a bit of a bubble (no pun intended, really).
The ideology behind Bitcoin, and indeed the politics for many supporters, is very libertarian. There’s a rejection of the government and corporate controlled monetary system, and a desire to replace it worldwide with something that is decentralized and puts people in control of their privacy and money. This is all very much up for debate but the last part is laudable: it is a desire to empower individuals. None of this is new information for those who have paid any attention to the subject, however, one point that is often overlooked by proponents is that Bitcoin can only succeed as a technology if it loses the ideology and much of the advantages it has in the first place. If this is the case, one might ask, what is the point?
Bitcoin currently sits in a grey area, both legally and in terms of adoption. Legally, people want to use it as a currency (and do) but the IRS treats it as property. In terms of adoption, Bitcoin isn’t just a nascent movement, retailers like Newegg and TigerDirect accept it, and even some charities and political parties have jumped onboard for donations. Despite this, Bitcoin hasn’t seen widespread adoption at a consumer level: the people purchasing things with Bitcoin are a relatively small group of early adopters.
There are perhaps two things which stand in the way of the average consumer using Bitcoin. The first is obtaining Bitcoin. While there are sites like LocalBitcoins.com which allow you to find people to exchange cash for it, this doesn’t work for much of the populace for the obvious reasons of convenience and security. The safer, simpler, though not necessarily more convenient route is to use a service like Coinbase. After providing a certain amount of personal information, a user can then purchase Bitcoin legally after a set period of time.
Once someone has purchased Bitcoin, the second issue is figuring out where to store it. Anyone can download the Bitcoin software and host their own wallet on their computer. However, this wallet, just like any other file, is then vulnerable to loss or theft. If your wallet is not properly secured and backed-up, then you can literally lose a few thousand dollars worth of value just by deleting said file or a hacker gaining access to it. When many people have pretty low computer-literacy, this is problematic for adoption.
However, Coinbase can host your wallet for you, which puts much of the responsibility on their shoulders, and at this point they become much like a Bank of America with a smaller set of services available to the consumer. Importantly, due to the level of regulations (perhaps necessary when you see incidents such as Mt. Gox), the only entities that can legally serve as exchanges and vaults are those that already have money and/or political clout. If this convenience and safety is necessary for mass adoption (and it almost certainly is), then Bitcoin will go from being a decentralized technology to one that sees most of its traffic through larger third-parties. (1) We could imagine Coinbase becoming a well-known insitution and existing banks adding Bitcoin banking to their list of services. It is worth noting that the free Bitcoin protocol would at least still exist and thus allow interoperatibility, but it also is quite likely that these third-parties would quickly build properietary services on top of the protocol.
To me this suggests three possible futures for Bitcoin:
Future three is by almost any measure a complete failure. Future two is not as dire, but not nearly as far-reaching as proponents hope. And then there is the first future in which Bitcoin “wins” and ends up adopted as proponents are hoping, but it ends up having almost no impact socially and culturally, and certainly is not the ideological success and extreme decentralization that some dream of. (2) If this is the case, then really, what is the point? Is the world any better off with a cryptocurrency dominated by the existing financial system? Just as important, from a technical standpoint, is such a system any better than what already exists? Is it perhaps worse when you consider the wasted storage and energy used by the blockchain?
It is for this reason that I believe that Bitcoin is likely doomed as a currency. It will either exist as part of the system with its basic goals stripped away, or it will exist outside of the system, kept alive or remembered only by a small group of fervent supporters. While the technology may not work well as a currency, similar ideas that harness decentralization, but aren’t focused on being a currency, such as Ethereum, may have a more realistic chance. Currently, supporters are perhaps unrealistic about what can realistically be and even should be decentralized, but the core application is a powerful one, and goes back to perhaps the original ethos behind Bitcoin: put power in the hands of the people.