Bitcoin is Dead: Here’s The Post Mortem

So long bitcoin.

You had a great life. You had a great run last December, peaking at almost $20, 000. It seemed like there was no stopping you. Then happened one of the clearest, bubble-bursting market corrections which left you at $9,900.

So, what happened to this rockstar cryptocurrency? Why the somber mood from its legion of fans?  

Let’s take a closer look, shall we? Here are the 5 nails in bitcoin’s coffin:  

1) Increasing transaction fees

In the early days, Bitcoin enthusiasts used to trumpet the cryptocurrency’s lower transaction fees vis-a-vis entrenched players like Visa and Mastercard. Well, that argument has lost a leg especially after fees have peaked at $55 (Dec. 21)—quite literally costing an arm and a leg.

Looking at the figures from bitinfocharts.com, the fees from January to December of 2017 saw a hundredfold increase from $0.4 to $40. The fees have settled around $6 as of this writing, but there’s no telling when they’re going to skyrocket again.      

It used to be that fees were a negligible part of the equation. That is no longer the case. (One man, over Twitter, even claimed that he paid $16  for a $25 bitcoin transaction.) How can the technology encourage mainstream adoption if the simple act of participating in it wipes out a significant amount of value?

2) Clogged network

Bitcoin transactions are far from the frictionless wonders envisioned by its evangelists. Fees have not only become prohibitively expensive, the transaction process itself became painfully slow. The deluge of bitcoin investors who want in on the action grew exponentially over the past year. This means more bitcoin transactions are being processed by the network. And this growth has clogged the system, increasing transaction times.

The bitcoin network has inherent limits that are coded into its DNA. For example, “block size,” which ultimately determines the number of transactions the network can process, is pegged at 1 MB.  

At 1 MB, the whole system can process only around 3-4 transactions per second.

So what does this mean for the investor? Well, you could be digitally queueing for hours just to get a single transaction confirmed! According to blockchain.info, a recent (Feb. 7) average confirmation time was almost 6 hours! (But that’s nothing, because it was 42 hours two weeks earlier.)

So if you paid for lunch at a restaurant that’s accepting bitcoins, by the time you have that transaction confirmed, it may already time for dinner, and you might as well place another order of steak.

3) Entrenched non-crypto competitors

If the Bitcoin network can process only about 3-4 transactions per second, do you know how other payment systems fare?

Well, Paypal easily handles 193 transactions per second. Visa, 1,700. And that’s not even their maximum capacities. Visa claims that it actually maxes at around 56,000 transactions per second—leaving Bitcoin in the dust many times over.

We may not like their fees, and centralized as they may be, these players are doing a bang up job of serving the customer.

Better believe it, these non-crypto competitors are not taking things sitting down. For example, Paypal not only continues to grow its network of partnerships, enlarging its slice of the pie, it has introduced new wireless card readers. Now, with a simple swipe or tap, small and medium businesses can easily accept Paypal in-store payments.

The old guards are warm and familiar. Their technologies are not frighteningly new. And yes, they have almost instantaneous transactions.   

4) Tightening government oversight

If cryptocurrency is the Wild Wild West, then there’s a new sheriff in town. Oh wait! It’s actually the old sheriff, just coming late to the party.

After its historic rise (and fall), Bitcoin has gotten the full attention of the US government regulators who are getting their printers warmed up for a wave of regulations. They started out slow, probably because they didn’t know what to do about this new animal. But they’ve gotten faster since then and have crossed from “I think we need to regulate this thing” to “Dang, we definitely need to regulate this juggernaut!”

China for its part is planning to ban all websites engaged in cryptocurrency trading and ICO’s. Our Philippine SEC stopped the ICO (Initial Coin Offering) of some coins because the company issuing them has not registered with the SEC. It is their determination that these “coins” are ultimately securities and therefore fall under their jurisdiction.

Governments around the world are waking up for the urgent need of oversight functions. Some, like Russia and Venezuela, are even contemplating issuing their own government-backed virtual currencies.

And you know what happens every time the government joins the party, right? Costs rise because compliance with regulations requires an investment of time and effort. Speed bumps , and sometimes walls, get erected seemingly overnight. Regulations might dissuade bad actors from perpetrating fraud and theft, but they might also choke off the same people they’re trying to protect.

With the coming wave of regulations worldwide, the dreams of Bitcoin idealists of a politically unfettered technology will remain just that, a dream.   

5) Falling usage in retail

“Bitcoin Accepted Here!” used to be a great marketing ploy. It signaled that the store owner is cool with technology and is on with the times. Awesome! Yeah, but those days are over, and those window stickers are carefully being peeled because bitcoin, a virtual currency, proved too unwieldy.

Instead of gaining mainstream acceptance, bitcoin has suffered serious setbacks in its utility as a currency. People have largely stopped from using it to buy products and services.

When a conference on bitcoin suddenly stops accepting bitcoin payments for tickets because it’s just not fast enough, there’s an irony hiding there somewhere.

We’ve already talked about the congested network, long processing time and the high fees. Another reason that makes bitcoin unsuited for payment is its jaw-dropping volatility. Its value can do record increases one time, and be on a free fall the next. You don’t want to be the seller or service provider who accepts payments in bitcoins, and, after hours of waiting for confirmation, realized that the value of your bitcoin plummeted. In short, all that work and all that wait, and you just got paid with a huge wad of digital nothing.

When you sell something, you want to be sure that the payment you receive has a stable value. With bitcoin’s volatility, woe is the seller who receives payments during a freefall. (And worse, if he wants to use his bitcoins, he now has to contend with the high fees himself.)

SOOOO. . .IS BITCOIN REALLY DEAD?

Well, yes and no.

It can be dead right now, but it can spring back to life in a week or two. In an hour or two.

Naysayers have forever been predicting the eventual demise of bitcoin. And there are weeks when this prognostication seemed perfectly true! But then, quite suddenly, the currency springs back to life. Every time. And not only that, like a Phoenix rising from its ashes, it soars to record highs, as if putting to shame all who lost faith.

“But it’s different this time!”

The confluence of the events, the five nails in bitcoin’s coffin does present a pretty strong case. The weight of the coming government regulations alone, not to mention the existence of over a dozen virtual currencies making serious strides and coveting the top dog position.

Hacking disasters, skyrocketing fees, painfully slow transactions, and bitcoin’s blinding volatility  are all bad news. Experts would definitely say this is the perfect storm that would strike fatal blow that finally bursts this bubble.

Well. . .here’s the thing about experts. Two can be looking at the same thing and come out believing two totally opposite conclusions.

Someone who believes in “Blockchain” (the technology that powers bitcoin), would point out that all the problems mentioned earlier are but the birth pangs of a technology still slowly finding its groove. We are, after all, just a few years into this thing. There might be over $400B invested in cryptocurrencies right now, but that pales when compared to the market capitalization of gold, which is in the trillions. So yeah, this is a relatively new arena.

In short, these experts believe that we have not even really seen the real power of bitcoin and blockchain technology. So instead of pronouncing it dead, consider it not even really born. We are still in the nascent stages of this technology.

The problems mentioned before, like the hyper slow transaction times (which makes it really look low tech), can actually be remedied. There are many ways to attack this technical problem, and camps have been proposing solutions for it. It’s just a matter of time before one solution gains traction and wins support of the bitcoin community.

Better believe it, just like their non-crypto peers, the people behind the technology are also not taking things sitting down. As more and more money is being poured into this thing, tech is improving, lessons from the previous hacks are put to heart.                    

As of this writing, the price of bitcoin is at $9,900. All things considered, this is still a very (really) high price to pay for a “dead” bunch of digital “nothing.”

Bitcoin is not dead. Far from it.

Something tells me we haven’t seen the last of it.

(What do you think? Please feel free to comment.)