Why Bitcoin is not the future of digital currency?

If you’re a cryptocurrency enthusiast , you probably read the title of this post with great dismay. Before I begin, I think it is important that I state the obvious: I love crypto. I really do. For me, cryptocurrency has the potential to enable economic freedom and equality of opportunity throughout the world, especially in developing countries. Cryptocurrency, for those of you who aren’t familiar, is a decentralised digital asset designed to work as a medium of exchange. Bitcoin, which launched over ten years ago, was the first cryptocurrency and is by far the most influential. With that said, I am not ready to declare Bitcoin as my favoured digital currency. At least, not yet. In this post, I want to focus on three key challenges preventing the mass adoption of Bitcoin: Scalability, Privacy and Fungibility.

Scalability

One of the setbacks of using Bitcoin for payment transactions is the issue of scalability. In this context, ‘scalability’ refers to the capability of the network to handle a growing amount of transactions. In ‘Bitcoin: A peer-to-peer electronic cash system’, Satoshi Nakamoto, the founder of Bitcoin, said a block is generated every 10 minutes — also known as block time. At the moment, Bitcoin can only process around 7 transactions per second, assuming the block time is ten minutes. The significance of this problem becomes apparent, when compared with traditional payment providers like Visa’s average of 65,000 transactions per second. If Bitcoin is to be adopted as the preferred digital currency throughout the world, it needs to develop in a way that permits increasing transaction volumes.

Privacy

Bitcoin uses blockchain technology, a distributed ledger, to store users‘ transactions. By doing so, the history of all payment transactions ever made is easily available online. There are two main reasons why this is problematic for users. First, payment transactions disclose the amount paid, who sent the payment, and who the payment was sent to. Second, all information about your purchases, including your balance is publicly visible. In essence, this compromises the privacy of both merchants and consumers. As such, one can only imagine what privacy intrusions will occur when companies begin data mining Bitcoin transactions to gain a better understanding of consumers’ spending habits. Considering invasion of privacy is arguably one of the biggest problems the world is facing today, it is imperative we find a solution to Bitcoin’s privacy problem.

Fungibility

The growing prominence of advanced Blockchain analysis tools means it is easy to trace the transaction history of Bitcoin. In reality, the provenance of your money should be private to ensure fungibility. In this context, ‘fungibility’ refers to the ability of a token to remain within the immoral space. For instance, say you have a £5 note in your wallet. You don’t know who held the note before you, what it was used for or where it came from. Unfortunately, this isn’t the case with Bitcoin. Like I mentioned above, the Bitcoin network visibly broadcast the details associated with all transactions facilitated on the blockchain. In compliance with Anti-money laundering laws (AML), several exchanges have blacklisted bitcoin and other cryptocurrencies associated with illegal purchases of drugs, firearms and other questionable items. While fungibility seems like a distant problem, it is a necessary condition in order for mass adoption.

Conclusion

Let me reiterate again, I love Bitcoin. I really do. At the time of writing this, Bitcoin stands at a whopping $18.5k, more than doubling since the end of 2019. And like many of you, I am bullish on the price of Bitcoin. Very Bullish. That being said, I think it is important to find solutions for the challenges that prohibit Bitcoin from becoming the future of money that we have all been longing for. If not, then perhaps it is time we start to recognise the emergence of other altcoins that have provided solutions to the problems listed above.