Bitcoin is going to revolutionize the way we pay for things because it’s quick, cheap, anonymous, and decentralized. Well, not quite. It turns out that this is kind-of-not-completely true. I wouldn’t say a lie, but more like … an untruth. (Da da da. Cue suspenseful music..)
Quick and cheap – By design, the Bitcoin network processes 3-6 transactions per second. Sounds fast! But for reference, Visa handles 47,000 transactions per second. When the number of Bitcoin transactions worldwide was low, this wasn’t a problem. Now that Bitcoin has skyrocketed in popularity it is not uncommon for wait times of 30 to 60 minutes. Anecdotally I had a transaction that I made at 3:30pm which didn’t get confirmed until I woke up the next morning.
Also, in order for a transaction to be processed, there is a transaction fee that used as incentive and reward for the miner to process the transaction. Not including any transaction or too low a transaction fee has the risk of waiting for a long time for your transaction to be processed. Again, due to high levels of transactions and the laws of supply and demand, people have seen fees upwards of $30. So imagine waiting half an hour for your cup of coffee, and paying an extra $30 for the privilege of paying with your Bitcoin.
Anonymous – As I’ve already mentioned, Bitcoin is not truly anonymous. This is because the blockchain is open and public, so even though you don’t know which address belongs to who, anyone can see the balance of any Bitcoin address. You can also actually trace the flow of Bitcoin. For example, picture the scenario where Alice pays Bob and Bob in turn pays Charlie. You could see that funds flowed from Alice’s bitcoin wallet through Bob and onto Charlie.
Decentralized – Ok, so this one is still true, BUT it’s not 100% impossible to circumvent, and we are nearing a situation where decentralization could be compromised. There are thousands of Bitcoin computers aka miners around the world. Bitcoin needs them to be independent because they are confirming transactions essentially by voting. If over 50% of miners say a transaction is valid, then it gets confirmed You can imagine a handful of rogue miners submitting false transactions. Those transactions would get rejected by the other thousands of miners who would disregard those miners’ transactions. Phew… as long as more than 50% of the miners don’t band together to conspire to confirm false transactions.
Beware of evil miners!
BUT due to cheap electricity costs, most Bitcoin is mined in China, an estimated two-thirds of all Bitcoin. Having such a large percentage of miners in one country puts decentralization at risk. While I can’t imagine how the Chinese government would be able to take control of all the miners inside the country, this is also the same country that has shut down access to Facebook and Google to over a billion people, so there is definitely a greater than 0% chance. And keep in mind that decentralization is what makes Bitcoin valuable. So there you go, it IS possible (albeit still very very unlikely) to destroy Bitcoin.
So where does this leave Bitcoin?
Well, Bitcoin is still the godfather of cryptocoins, and is by far the most recognized and has the most potential to hold value. But this is one of the reasons why there are hundreds of other cryptocoins out there. We are already on the second and third generation of cryptocoins, each one seeking to shore up Bitcoins weaknesses. Litecoin can process about 50 transactions per second while Ripple claims a ridculous 1500 transactions per second. Other coins like Monero and Dash focus on privacy and provide the anonymity that Bitcoin lacks.
As always, invest wisely!