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It’s a complicated 10th anniversary for Bitcoin. The cryptocurrency, whose white paper was published 10 years ago on October 31, 2008, is still leading a year-long crypto market crash. Meanwhile, its seeing growth and spread on other fronts: Its primary use case continues to evolve as the technology scales and develops. And as international turmoil moves and spreads across the globe, so does Bitcoin’s market and adoption.
In her 2008 white paper, Satoshi Nakamoto described Bitcoin as electronic cash. Ideal for paying for your latte and groceries, cash is still the predominant payment type for small value transactions. However, due to scalability issues, Bitcoin can only process an estimated maximum of seven transactions per second, making it unfit for small payments on a larger scale.
Aside from the energy consumption involved, this throughput limitation is the biggest source of criticism against Bitcoin. The more people use the network simultaneously, the longer each transaction takes to confirm, and the higher the fees get. During peak times, when the network clogs up, Bitcoin fees are just as volatile as its prices. This problem culminated in December 2017 as the last bull run was starting, with the average fee topping out at $55 per transaction, and the average confirmation time passing 11,000 minutes. Needless to say, when having to wait days for their money, traders and investors avoided sending Bitcoin whenever possible, choosing the usually quicker Ether or Litecoin for inter-exchange transfers and withdrawals.
Current use cases
As a consequence of its scaling trouble, Bitcoin’s main role up until now has been as a strong first base layer for settlement, not throughput. In the 2008 white paper, Satoshi did however mention that Bitcoin could scale larger than Visa, and there is no shortage of attempts to make this a reality. Bitcoin protocol upgrades like SegWit, a soft fork introduced last year, and second layer solutions like Lightning Network, a payment protocol that can be added on top of Bitcoin, will likely keep fees down and increase transaction speeds enough to achieve micro transactions on a macro scale.
For now, Visa and Bitcoin serve very different purposes, and looking at average transaction values — currently $3,000 for Bitcoin and $81 for Visa — is comparing apples and oranges. It would make more sense to compare Bitcoin transactions with wire transfers. But once the Lightning Network is fully implemented, that comparison of Visa and Bitcoin transactions could make sense.
If Bitcoin is able to take on that role as electronic cash, it will have attained two of the primary functions of money in mainstream economics: being a medium of exchange and a unit of account.
Up until now though, Bitcoin has been receiving more credit for two of its other properties: being censorship resistant and — the third of the fundamental characteristics of money — being a store of value. Bitcoin’s journey as a store of value has been, and still is, a volatile one. That doesn’t seem to scare off its believers, though. A recent Twitter poll by entrepreneur Vinny Lingham made clear that the crypto community still believes in Bitcoin’s digital gold proposition despite its declining price. Fifty-seven percent of respondents said they won’t stop believing in its store of value function no matter how low the price goes or how long it takes to recover.
National currencies in hyperinflation, like Venezuela’s Bolivar, are catalysts for these unique attributes of Bitcoin. Over the past weeks, Bitcoin trading volumes have seen record highs in Venezuela. Stories are told about people escaping the country, carrying their life savings in cash or gold, and government officials confiscating it all at the airport. Transporting physical valuables through an airport is risky. Memorizing your Bitcoin private keys means no one can take your money from you. Bitcoin is censorship resistant because it can’t be manipulated or controlled by anyone, making it an effective method of moving money out of struggling currencies.
The next financial crash, which experts predict could hit markets soon and harder than the 2008 recession, could become the next accelerator for Bitcoin’s viability as a store of value, with millennials’ already high awareness of cryptocurrencies further triggering this nascent market’s growth.
Cross border transactions are another area where Bitcoin shows strength over fiat currencies. In stable markets and economies, using Bitcoin is simply an effective way to send money abroad. It’s cheaper and saves you days and sometimes weeks in processing time. And in conflict-torn countries and states like Iran, Turkey, and Palestine, using Bitcoin is the only option for a lot of people wanting to invest abroad or shop online.
Getting your hands on Bitcoin in the first place can be challenging in itself in these unstable regions. The trading volumes mainly come from over-the-counter (OTC) transactions conducted over peer-to-peer exchanges, such as LocalBitcoins, which is the biggest global player in this market.
When you can’t work with national banks, using a Bitcoin wallet becomes a frictionless alternative for securing your funds or buying goods and services. These unstable markets bear witness to Bitcoin’s utility in international transactions and its potential as a global reserve currency.
Future uses
The Internet gave us the delivery platform that allowed us to bypass brick and mortar. Blockchain technology lets us skip the wholesaler as well and go directly to the consumer. Cryptoassets will provide the payment layer that the Internet has always lacked, making native payments easy to implement in any web application. With its first-mover advantage and decentralized nature, Bitcoin is the likeliest candidate to become the native currency for the web 3.0 era.
Tokenization is a trending word within the blockchain and crypto space. It basically means converting paper shares into digital security tokens that run on a blockchain and are compliant with federated securities regulations. Security tokens are not currencies but tradable agreements like bonds or stocks, and will therefore not be competing with Bitcoin or other cryptocurrencies. Bitcoin, already the preferred denomination for traders, could very well also become the main currency to price security tokens in. And if we’re in fact moving towards a mass-tokenization of existing securities as prominent members of the space predict, creating a new trillion dollar market, that would mean a significant boost to Bitcoin’s already established use case as a currency for trading.
Bitcoin could also have untapped potential as a fundraising tool. Sidechain projects like RSK and Zen Protocol are bringing programmable smart contracts to Bitcoin and are working on simplifying tokenization on top of the original blockchain. This could enable Bitcoin to challenge Ethereum as the leading platform for projects that are issuing their own tokens and running an initial coin offering (ICO) as part of the process.
The first RSK ICO will be launched on Bitcoin later this year. There’s no guarantee these smart contract platforms will be successful — others have tried without gaining very much traction, like Counterparty and Omni Layer (previously Mastercoin). There are competing protocols being built as well, and once we have true interoperability between different chains, competition will only get tougher. And it’s possible Bitcoin wasn’t meant to be used as a platform for raising money — it wasn’t built using a Turing complete language and is limited, probably intentionally so, in that regard.
A couple of years ago, a lot of us were expecting blockchain protocols and dapps to have volatile user bases. With anyone able to fork your open-source code at any time, copycats could easily attract your users to their own, slightly modified, or just cheaper, service. It seemed obvious that we would see users jump ship and move their funds with them to the next big thing. Just like Kodak, MySpace, Blockbuster, and other giants who failed to innovate in the past, we expected Bitcoin, with its supposedly outdated tech, to lose its top spot.
That prediction turned out to be wrong. Not only did it underestimate the complexity of the crypto ecosystem, but it also showed that we probably don’t yet understand the power of open-source blockchain projects. The “build it and they will come” mantra doesn’t work here — the best tech doesn’t always win. Your code can be copied, but your network, partnerships, miner and developer community, and ecosystem of services and tech cannot. That is why the original Bitcoin is extremely antifragile and has a leg up on every hard fork and other blockchain projects out there.
Bitcoin is more than a regular currency. It is economic infrastructure. It’s the first time we have an application that’s a currency, a network, and a protocol. Bitcoin is an economic, technological, and social experiment, and the best money out there currently. And while it keeps trying to figure out what it wants to be when it grows up, Bitcoin remains the king of crypto and the killer app of blockchain technology.
There will only ever be 21 million coins mined, and one day even the smallest denomination of one could prove to be more valuable than any central bank-controlled, inflationary fiat note. Today, on its 10th birthday, Bitcoin is still far from mature. We can expect its price volatility to return many more times still — and stronger than ever. The coming year will likely be a roller coaster ride.
But eventually its volatility will subside and its best use cases will become clear. And then the world will finally understand the real value of the original cryptocurrency.
Trond Vidar Bjorøy is CTO of GOeureka, a blockchain startup aiming to disrupt the online travel agency space. He also works as a consultant and advisor to travel and blockchain companies and follows both industries closely.
