Barriers to Bitcoin

Here are 13 key barriers to bitcoin’s widespread adoption:

• Extreme volatility – it is not uncommon for bitcoin to fluctuate 20-30% in a day. While recent gains may well offset this risk for some, BTC’s lack of stability greatly reduces its utility as a value store and payment method.

Chart: Price per Bitcoin ($)

• Transaction confirmation process is too slow, despite attempts to speed up and improve the capacity of the BTC blockchain.

Chart: Median confirmation time – mins

• Irrecoverable – it is a testament to the security of the network that should your private key be lost, the BTC associated with that address are fully unrecoverable. Equally, it is a barrier to widespread adoption.
• Irreversible – lacking a trusted central party, there is nobody who can be appealed to or arbitrate disagreements between transacting parties. Should you, for example, send bitcoins to the wrong address, once broadcast to the network the transaction is only reversible at the discretion of the receiving party. There is no authority or mechanism for error correction.
• Reduced decentralization – or a recentralization of bitcoin has led to monopolistic positions and geographies in the cryptocurrency markets. People who once had a half decent chance of earning some BTC by mining on their home PCs have been pushed out of the way in the bitcoin “arms race”, replaced by vast mining warehouses, strategically located in countries where electricity is cheap, such as China and India.   
• Conflicts and lack of inertia – debates around how to change and improve bitcoin’s protocol continue, further fuelled by BTC’s meteoric rise in recent months. The issue of how to address bitcoin’s mounting problems – via a hard fork (new version is no longer compatible with old software) or soft fork (new version is compatible with old software), remain controversial.
• Costs are high and hidden – mining bitcoin is increasingly expensive and resource intensive. An Australia-based sustainability think tank claimed that bitcoin could – at least in theory – eventually consume up to 60% of annual global electricity production.
• Unguaranteed security – should coin rewards decrease to such a low level that miners are not incentivised to process the BTC blockchain, a serious drop in mining would make the BTC network vulnerable to malicious attacks, as less hash power would be required to overwhelm a majority of the network.

Chart: It’s estimated that 99% of all BTC will have been mined by 2032

• Third parties make bitcoin vulnerable – one cannot help but notice the irony of storing a currency that is purely digital in nature on physical paper or coins or locked away in a central location deep underground. This likely helps explain why the explosion in popularity and value of bitcoin has not been accompanied by a proportional explosion in transaction volume.

Chart: Transaction momentum is largely unchanged by bitcoin’s rise

• Scalability – Transactions per Second (TPS) and an increasing cost per transaction reduce BTC’s scalability and chances of becoming a widely used payment method. BTC has a limit of approx. 7 TPS, while Visa has a peak capacity of around 56,000 TPS.
• Regulatory uncertainty – regulators on the whole have held the crypto currency markets at arms’ length, partly to avoid stifling innovation.
• Legal issues – the rise of ransomware – enabled by bitcoin’s rise – has further fuelled this illicit image. Bitcoin has also been cited in the media as a potential medium for money-laundering and illicit capital flight.
• Limited adoption – bitcoin appears to be at a strange stage of its adoption life-cycle. Many of those purchasing it appear to be doing so purely because the price is rising at the moment, creating a viscous cycle. Yet that increase in value has not been accompanied by an increase in use. It may be difficult for bitcoin to overcome these challenges and move beyond BTC being a store of speculative value, held by a select few.

Such points of contention and uncertainty reinforce my view that cryptocurrencies will remain niche payment networks for some time, functioning more as digital asset class for a select and central group of people.