post by Adnandz 15, 2020 · 7 min read
Humble Beginnings
What can i use Bitcoin Used For? On Halloween 2010, during the last leg of the Global Financial Crisis, a person or group by the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper.
A few months later, on January 9, 2009, Bitcoin was released to the world and anyone could download a copy of the client to host a copy of the distributed ledger. Four days later, Hal Finney received the first transaction ever made on Bitcoin — Satoshi Nakamoto sent Hal 10 Bitcoins.
Slowly, adoption continued to spread between 2009 and 2013. In 2010, Laszlo Hanyecz made the world’s most famous Bitcoin purchase; offered to pay 10,000 Bitcoins to anyone who would buy him two pizzas.
Those 10,000 Bitcoins were worth approximately $30 at the time. By comparison, at the time of writing, the stash of Bitcoin is now worth $103.6 million. The day of the famous purchase has gone down in history as Bitcoin Pizza Day.
Outside of buying pizza, Bitcoin was making its mark as a form of payment. By the third quarter of 2012, BitPay, a payment processor that lets merchants accept Bitcoin,
had 1,000 merchants signed up to use the service. With the value proposition of its anonymity, Bitcoin quickly surfaced as a popular payment option on the dark web. In 2013, the FBI seized the dark web site Silk Road, and collected 26,000 Bitcoin as a result of the seizure; subsequently
, it confiscated another 144,000 Bitcoin from Ross Ulbricht, founder and former owner of Silk Road.
While the history of Bitcoin is littered with anecdotes of different potential use cases, the fact remains that the cryptocurrency still struggles with a purpose.
Critics highlight this issue and argue that Bitcoin (and other cryptocurrencies) is trying to solve a problem that doesn’t exist. Proponents of the digital currency claim that Bitcoin will, in the future, solve all the world’s financial problems.
From branding issues to technological hurdles, a Bitcoin use case is still only theoretical a decade later from its conception.
The Side Effects of Steering Blindly
Bitcoin makes many promises of the future, but its $185.7 billion market cap is currently fueled by little more than the faith of its investors. Bullish Bitcoin valuations flood the cryptocurrency news realm, such as this article published in June 2019 claiming that Bitcoin could see $20k by mid-July and $100k by the end of the year.
Neither Bitcoin ETFs or Facebook’s Libra is significantly contributing to the value of Bitcoin, despite what enthusiasts may claim.
While the predicted price is emphasized, little to no roadmap about how the price gets there is mentioned other than “if it continues its parabolic trajectory”; in other words, if people continue to buy it at its current pace, Bitcoin prices will increase (obviously).
This level of reasoning would never fly for institutional investors — more important than how a market is behaving is why a market is behaving in that manner.
That being said, faith is a strong fuel. It powers religions, existing currency, governments, and has pushed the price of each Bitcoin to $10,000. But with only a limited adoption (less than $150 billion market cap), fueling the market with only faith leads to pricing volatility.
Left without a use case, Bitcoin largely exists in two locations: centralized exchanges and believers’ cold storage wallets. These locations are popular, though, because they allow the Bitcoin community to practice its faith through speculation.
While cold storage wallets keep a certain supply of Bitcoin out of the market, centralized exchanges provide an arena that tests faith.
The 24-hour USD trade volume of Bitcoin is approximately $13.7 billion at the time of writing. At $10.4k per Bitcoin, that roughly equates to about 1.3 million Bitcoin being traded in the 24 hours.
Comparatively, that volume is similar to that of Planet Fitness on the publicly traded market. Comparatively, Planet Fitness’s market cap is only 5.8 billion.
Unlike the stock exchange that Planet Fitness sits on, though, Bitcoin’s exchange is not regulated, which means there are fewer rules around liquidating assets. For example,
if a board member of Planet Fitness wanted to sell off a bunch of shares, it would need to be announced to the market, and is usually noted in 10-K reports filed to the SEC. On the other hand, Bitcoin whales can liquidate whenever they feel like,
without the need for any explanation. As a result, large spikes up or down for Bitcoin prices are more often seen than on the stock market; after all, once an investor loses faith, they can liquidate all their bitcoin anonymously and immediately.
The Limitations of Bitcoin as a Transaction Currency
While it was designed as a way of conducting digital, peer-to-peer transactions, the technology is not scalable at this point. It relies heavily on what’s called proof-of-work, which is a methodology is used to prove that a transaction occurred.
The benefit of using this methodology is that users on the Bitcoin network do not need to know or trust each other, nor do they rely on a third party as the central authority that has the final say on a transaction. The methodology’s benefits come at a cost of speed, though.
The Bitcoin network can only handle 7 transactions per second. If you want to read more on the specifics of the proof-of-work transaction speed issue, check out my previous article below:
The Blockchain Scalability Problem & the Race for Visa-Like Transaction Speed Yes, blockchain has a scalability problem. Here’s what it is, and here’s what people are doing to solve it.towardsdatascience.com
More precisely, every 10 minutes, a batch of transactions (referred to as a block of transactions, hence, “block” chain) is verified.
The problem, though, is that the batch is only large enough to fit so many transactions. If, for example, you go to Starbucks, and you make a purchase with Bitcoin,
in the best-case scenario, your coffee purchase is put into the next batch and it is verified under 10 minutes, if Starbucks is generous enough to only accept 1 verification (there are risks associated with only accepting 1 verification, but we won’t get into that in this example).
On the other hand, if there is a long list of transactions ahead of you, your coffee transaction might not make it into that next batch.
What ends up happening is that your transaction gets queued up for the next batch. The queue that the transaction is waiting in is called the mempool.
So now you have to wait another 10 minutes after the previous batch of transactions is completed; i.e., you have to wait for up to 20 minutes. Even then, there is no guarantee. Hopefully, by now, you get the point and can see how burdening it will become to buy even a cup of coffee with Bitcoin.
If you trade on any centralized exchanges, though, you might be thinking that Bitcoin speeds are near-instant, but that’s an illusion. On centralized exchanges, all of the bitcoin is stored in a single location.
Your Bitcoin and mine are together. The exchange simply manages a database that adds and subtracts a record of the Bitcoin you own, based on each trade.
That’s why Bitcoin maximalists argue that you don’t truly own your Bitcoin unless it’s in your wallet; if it sits on an exchange, you are subject to risk. The exchange may disappear one day with all of your coins, or just flat-out refuse to give you the coins you purchased.
Bitcoin as a Store of Value
In the current state of Bitcoin, I believe that the only substantial use case that it has is a store of value,
similar to gold. It is a speculative asset because it has no practical value outside of the fact that there is a promise of future value.
The majority of people who have Bitcoin hold it for that promise, while a few may transact short-term to hedge against that bet.
As a store of value, Bitcoin has several favorable properties. First of all, it can be owned and easily stored. Unlike gold,
Bitcoin can be stored on a USB stick, regardless of the amount you own. Gold takes up physical space, and holding large amounts of it can become noticeable.
Bitcoin also has a fixed amount. In total, there will be no more than 21 million Bitcoin available to the world. Gold, while rare, continues to be mined, and the supply continues to increase.
Bitcoin is also hard to imitate. It cannot be counterfeited, although scammers can sell to ignorant buyers. An educated buyer, on the other hand, can much more easily spot fake Bitcoin than fake Gold or counterfeit cash — they can just check the blockchain, which holds a public record of every Bitcoin in circulation.
Finally, Bitcoin is becoming more widely understood — people are curious. Google Search trends indicate that the search term “Bitcoin” is 3x more popular today than it was this time in 2016 (with peak popularity in late 2017, during the most recent bubble).
While it is still far from popularity to gold, Bitcoin’s popularity is increasing, and as more people begin obtaining Bitcoin, its status as a store of value becomes more credible.
As the Bitcoin community continues to develop more technology to layer on top of the Bitcoin blockchain,
the use cases for the digital currency may increase in the future. For now, it remains a speculative and unscalable asset that is currently held as a store of value.
