A Criticism of Bitcoin
Bitcoin has endured extensive criticism since its inception in 2009. First it was deemed as worthless because no one would trust digital money made out ones and zeros. then it was accused as being a tool for money laundering. The price began to see a steady increase when the closing of the silk road. Then the hacking of Mt. Gox caused a huge drop in people’s confidence towards Bitcoin. But the year of 2017 resulted in a huge surge in not only the price of Bitcoin, but the cryptocurrency market as a whole. At the climax of Bitcoin 2017, Paul Krugman and many other prominent establishment figures blamed Bitcoin as a ponzi scheme, fraud, and being evil. Although these claims are mostly hyperboles, there is plenty of room for criticism towards Bitcoin. The following are some legitimate downsides with Bitcoin and some other cryptocurrencies that seek to compensate for the weaknesses of Bitcoin.
Scalability
The Bitcoin block size is currently not feasible for day-to-day transactions. If I wanted to buy a pizza with my Bitcoin today it would simply not be feasible. Most experienced Bitcoin users know that the safe thing to do is to wait for 6 blocks to be created before you assume that your transaction has gone through. This process takes about one hour. Now we know that central banks can typically take up to 5 business days to transfer money, but that’s just a distraction argument. If Bitcoin was to take on the hundreds of millions of users to make it a viable currency, the network would be too clogged up. Now this is not to say that this problem can’t be resolved. If the Bitcoin network was able to come to a consensus and implement segwit or lightning network, it would be able to solve the scalability problem. Litecoin, Bitcoin Cash and Raiblocks are two cryptocurrencies that make digital transactions more feasible on a widespread-use basis. Litecoin and Bitcoin Cash have smaller block sizes which enable transactions to go through quicker. For the Raiblocks network, essentially each node that is part of the network has its OWN blockchain. Each of the blocks on the network communicate with each other through a lattice, speeding up things significantly and making it almost instantaneous. This is possible because unlike Bitcoin, the blockchains running parallel to each other are asymmetric and does not solely depend on a timestamp for the completion of a block.
Volatility
Yes, I admit that I’d much rather trust a decentralized currency than fiat currency, but currently Bitcoin doesn’t offer a relatively stable store of value like the U.S. dollar does. Bitcoin can act as a store of value, but from one ten minute period to the next the price jumps up and down worse than a 16 year old boy’s hormones. Now to be fair, fluctuations in the early stages of any new market are expected. This is what it takes to find a stable equilibrium, but it currently isn’t very appealing for use by the laymen. Much of the Bitcoin craze is driven by greed and curiosity. If Bitcoin is to become a top ten major currency it needs to be adopted by many markets as legitimate and incur widespread use.
“Waste of Electricity” and the 51% Attack
To set the record straight, I don’t think mining bitcoin is a waste of electricity. But this is the common conception people have about Bitcoin mining. Because Bitcoin’s blockchain network uses a proof of work system to secure the network, there is a ton of electricity involved. Many other cryptocurrencies seek to move away from this problem and use methods such as proof of stake. Many environmentalists and critics of Bitcoin will say the energy expended into securing the network just isn’t feasible in the long run. One crypto project that comes to mind is Curecoin. Essentially, Curecoin uses a proof of work concept that implements using computing power to do research on protein folding. Incorrectly folded proteins is what results in many autoimmune diseases. So instead of “wasting” electricity, crypto mining is instead used for securing the blockchain network of Curecoin. Another problem recognized by Satoshi Nakamoto in his white paper was the 51% attack. If some entity is able to obtain 51% of the computing power in the network it would be able to double spend. This is highly unlikely, but still a possible downside of Bitcoin. Many other cryptos are trying to add additional safety mechanisms to avoid this issue, but it is still a potential theoretical threat that looms around the security of the Bitcoin network.
Interoperability
Bitcoin’s blockchain does not communicate well with other blockchains. Because of the incompatibility with the Ethereum blockchain and the Bitcoin blockchain, there are many limits to the future potential of Bitcoin. If it is to adapt to a society which largely adopts blockchain, there needs to be many changes implemented. Some crypto projects that are trying to create interoperable blockchains include Cardano, Qtum, Tron, (and possibly Ethereum later). Cryptos such as Qtum create a layer between the Ethereum and Bitcoin blockchain network so they are able to communicate with each other.
Anonymity
Anyone who claims Bitcoin is untraceable is delusional. The FBI’s closing of the silk road is concrete proof that once one money launderer is caught, they can trace the movement of currency through the blockchain network to find others involved with crimes. To be more correct, Bitcoin was intended to be pseudonymous. There are many libertarians and privacy proponents that see this as a big downside to Bitcoin. Many users of cryptocurrency don’t want to be tracked by the government and hate the regulations that are being imposed on cryptos. Crypto projects such as Dash and Monero utilize dark nodes, which is just like it sounds. It makes it nearly impossible to trade the route of how one’s money travels and adds extra privacy to the digital currency network.
Conclusion
In my eyes, it is important that users to not get delusional and hop on the train of Bitcoin dogmatism. Bitcoin is not immune to criticism, and as illustrated in this article is susceptible to many threats. Many of these new crypto projects offer great promise in solving the downsides of Bitcoin, but I will concede that many of these have not been tested in a market as long or as frequent as Bitcoin has. Theoretically they seem good, but only time will tell if it can offer up on its promises. I am no hater of Bitcoin, in fact I love the fact that it has exposed millions of people to the concept of blockchain technology and cryptocurrency. But more importantly, I want to emphasize that cryptocurrency truly is the epitome of a free market. Sure there’s downsides to Bitcoin, but the crypto market shows what a competitive environment, relatively free of government intervention can provide-innovation, problem solving, and the framework of technological advancement.