EVERYTHING YOU NEED TO KNOW ABOUT BITCOIN AND WHY IS IT DOOMED TO DIE

Money won’t create success, the freedom to make it will.

-Nelson Mandela

Satoshi Nakamoto, the pseudonym used by the developer(s) of world’s first and currently most valuable cryptocurrency-bitcoin, is trying to prove the sanctity of this quote. Bitcoin was founded in the year 2008 and was made public in a cryptography mailing list, just after the burst of the real estate bubble and when the economic crisis started unravelling its effects. In the whitepaper released by Satoshi Nakamoto in November 2008, he defined bitcoin as “A purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without going through a financial institution.” But for a layman it can get a little confusing as people refer to two different things when they talk about bitcoin.

First is bitcoin the currency, the digital units of value created through a software (viz. bitcoin protocol) which is used as an exchange for goods and services. Holding bitcoin token can represent ownership of the digital concept and thus holding value. This is referred as bitcoin-the-token. Its rather a very funny story of how bitcoin got its value. Even though founded in 2008, its value till 2010 was a perfect 0 majorly because no one was aware about it and thus there was no demand or supply. Then on May 18, 2010 a guy anonymously put up an ad on the social networking site, Reddit that he wants two large size pizzas and in return he is willing to pay 10,000 bitcoins. The person who accepted this ad delivered two Papa Johns pizza worth $14 to that guy and in return got 10,000 bitcoins which were worth for what he paid for the pizzas i.e. $14. Thus in the first transaction in this world involving cryptocurrencies, 1BTC was valued at $0.0014, while in 2017 it hit an all time high of $20,089, a whopping increase of 1.4B %. This is referred as bitcoin-the-token. Second, bitcoin as a technology- this is the broader definition of bitcoin. The fundamental technology of most of the cryptocurrencies is set of programming instructions that allow a network of globally connected computers to communicate and enable them to keep a track of and verify monetary transactions in the bitcoin economy. This is referred as bitcoin-the-protocol. Both, the token and the protocol are referred as bitcoin. This protocol enables payments to be made completely peer-to-peer, i.e. without the need of any intermediary such as a payment gateway or a bank, between users who hold bitcoin-the-token electronically in their digital wallets. Now let me explain you the major difference between bitcoin and other traditional currencies by comparing it with INR.

The Indian Rupee is a centralized currency that has been printed by the Reserve Bank of India and guaranteed and issued on behalf of the central government. Whereas bitcoin’s most important characteristic is that it is a decentralized currency. No central bank, government, or any single institution controls the bitcoin network. It is a distributed and open network owned by no-one, run by a group of volunteer coders known as the bitcoin community and is backed by lakhs of computers running this protocol who are referred as ‘Miners’, about which I’ll discuss a little later.

The RBI can print more and more money and effectively increase the supply of INR as and when it wants (obviously after considering a number of factors) making the supply of INR unlimited but the supply of bitcoins is limited to just 21 million. There are just 21 million tokens in the bitcoin ecosystem and they cannot be increased further. While traditional currencies like the INR are printed by the central bank in order to increase its supply, on the other hand, bitcoins are mined. Mining is a process by which a miner gets rewarded in bitcoins for verifying and tallying a transaction and adding them to a distributed and public ledger called Blockchain. For this, miners should verify 1 megabyte (MB) worth of transactions and secondly they should solve a complex computational maths problem. This method of mining is called ‘Proof-of-Work’. Other cryptocurrencies like ethereum follow a different style of mining which is called ‘Proof-of-Stake’. The compensation for mining given to a miner is called block reward. The block reward is halved every 210,000 blocks, or roughly every 4 years. This is because the BTC protocol has built in algorithms that halve the rate at which bitcoins are created at every quarter of a decade. In 2009, it was 50. In 2013, it was 25, at the end of December 2018 it was 12.5, and sometime in the middle of 2020 it will halve to 6.25. It is expected that at this rate all bitcoins will be mined by the year 2106.

Another point of difference is the storage and transfer of value. Just like you hold your money in a bank account and in case of payment from one person to another, you directly transfer money from one account to another. Similarly, you hold and store your bitcoins in a digital wallet. A digital wallet is the most popular interface to the bitcoin protocol just like how a web browser is for the internet protocol. A few examples of popular bitcoin wallets are Coinbase, Binance, Bitmex and Zebpay. Upon opening a bitcoin wallet you get a private key. Think of it like the code for your bank locker. Using this private key you can access your bitcoins in your wallet and transfer them to someone else. If you lose this private key then there is absolutely no chance to recover it and you should probably forget that you ever owned some bitcoins. RBI ordered all the banks to stop providing any kind of service to individuals and institutions trying to trade in bitcoin w.e.f 05th July 2018. But still there are a lot of ways that I have figured out using which you can buy bitcoins. Some of them are using P2P exchanges like WazirX or LocalBitcoin.com. Also there are certain exchanges that accept PayPal deposits like eToro, through which you can buy bitcoin. But I recommend beginners who want to enter this space not to use them as they are not very safe and you could end up losing your money.

Now the question rises why we need bitcoin when we have banks, payment gateways and other intermediaries like PayPal. The reason for this is fairly simple but is tremendously important due to the global economic condition that we have been in from the beginning of the 21st Century. We have been dependent upon the banks for a very long time. We extensively rely upon them to conduct almost each and every business activity. Businesses have no option but to rely upon these banks with their money. Acting as an intermediary between borrowers and savers and as a medium to transfer money, the banks have become extremely powerful and have created a centralized system of trust and have placed themselves in the middle of it. Every transaction you do there is a middlemen you trust. Banks build this trust and so to build and foster this trust they charge exorbitant fees. Every business has no choice but to deal with these banks. As the finance business grew many other players came into the market like the securities brokers, insurance agents and credit card companies. All of these have made the banks at the centre of the financial system in any economy and eventually the banks become too powerful that people have fostered a dangerous dependence upon them. And when any financial entity becomes extremely powerful, it starts exploitation of its power and the results are devastating. Such an effect we saw in the financial crisis of 2008 in the United States. This is where we need to enter the world of bitcoin whose sole purpose is to eliminate the middlemen and create a ‘Trustless’ system. It is a network of trust which is entirely peer-to-peer which means that you can settle deals with anyone around the globe without the interference of any bank or government and free from exchange rates or other charges.

But I am afraid that this technology might fail and will die soon. I see very apparent reasons that indicate that bitcoin won’t last another decade. I might be wrong or I might be right. I might become the genius who predicted the fall of bitcoin a decade ago (which I really don’t want to happen) or I might end up being the foolish guy who was stupid enough to not see the success of this revolutionary technology. Prediction is a tricky business. I, if truth be told, actually want to the witness the success of bitcoin as I believe in this technology and I know that it is revolutionary but there are signs and some very imminent problems that are leading bitcoin towards its doom. I have mentioned before all the reasons that make bitcoin a revolutionary technology and why we are in the urgent need of it. But there are also a lot of apparent problems and concerns with bitcoin that need to be addressed or it will die very soon. I present before two possibilities- mass adoption of the protocol throughout the world or absolute whitewash making bitcoin an utter failure. The value of bitcoin might fall to $0 or it might rise to $1,000,000 and replace USD and becomes the world’s reserve currency. Both the situations are very extreme and will only happen after a considerable period of time. Now the reasons why I believe that bitcoin is showing signs of its doom have to do a lot with majority of the people who are interested in the crypto space. People like you, me, crypto traders and investors, crypto evangelists, crypto enthusiasts and last but certainly not the least the media. Some of the major problems are as follows:-

Problem 1: You mistake bitcoin for an asset class

According to me, this is the most significant reason as to why bitcoin will die very soon. If you get hyped up when someone tells you that he/she made thousands of money off of bitcoin or if they tell you that he/she doubled their investment in a week and you instantly make a decision that as soon as you’ll reach home you will buy some bitcoins, then you are the reason why bitcoin might fail. This is a problem of understanding and attitude. People think of bitcoin as an asset class and as an investment vehicle where they can park their surplus funds and can expect huge returns in a very short period of time with considerably low risk to return ratio. People are aware of the potential gains bitcoin can give in relatively shorter period of time and thus isolate traditional forms of investment like stocks and bonds for bitcoin. Bitcoin mostly attracts younger generation of the population between the ages of 18–25. People in these age category tend to be more impatient; they want huge gains quickly and are much more inquisitive than others, so they put all their money in bitcoin. This is why it is not very uncommon nowadays to hear the headline of an 18 year guy becoming a millionaire because of bitcoin. They are unaware that what they are doing is not investing but gambling. The most unfortunate thing that happened in the history of bitcoin was it reaching $20,000. Let me present a crazy piece of fact before you-bitcoin reached from $8000 to $20000 in just a span of 21 days. It makes no sense for bitcoin to touch $20000 whatsoever. No one can justify such a meteoric rise. This is because the mentality of people towards this cryptocurrency has changed. They view it not as a world changing technology but as an investment option where they can make lots of money very quickly. We should have a technological point of view towards it and not look at it like a profit making vehicle. Unless we stop thinking of it as an investment option, stop day trading in bitcoin and stop speculating its value we cannot revive it because after all it is a technology which is capable of being adopted by each and every organisation in every country of this world and for that we have to be aware and recognize its purpose. Satoshi Nakamoto also would have definitely developed it in a way keeping in mind bitcoin as a technology and not as an asset class.

Problem 2: You don’t understand the potential of the technology

No one can imagine the true potential of it. If you are excited about its potential, your frame of reference comes from a past where bitcoin and blockchain didn’t exist. Some people believe that we don’t need such a complex medium of exchange when we have other means to do business activities. This might seem true now to some people (to me it never seemed true) and this is their principal argument against adoption of bitcoin. They might be correct as it is very difficult to make every person understand this complex technology but there is no denying the fact that we need it, now or in another decade, when we have gone through a lot more financial crisis. Consider this case. In 2003–05, cameras were added to our phones which made them very expensive due to which people were not buying them and thought of it as unnecessary. But you cannot imagine your phone today without a camera. Does it seem unnecessary now? We might not realize the need of something now that is why we turn a blind eye towards it and completely ignore it and this prevents us from not looking at its future benefits. It wasn’t that a camera wasn’t useful on a phone, the issue was it just didn’t fit our outdated concept of a phone.

Problem 3: Bitcoin prices have become extremely volatile

Volatility is an enemy of mass adoption. Price of bitcoin is extremely volatile with almost double digit changes every day. The reason why bitcoin price is so volatile is mainly because of the mentality and understanding issues I mentioned in the first problem. With huge volume of trades every day price fluctuates to a large extent. Investors pouring their surplus money every day along with hugely leveraged day trades make the price of bitcoin extremely volatile. No organisation will adopt this technology if the price of bitcoin is this volatile. Companies want the prices to be stable. Consider bitcoin to USD price as foreign exchange rates, companies enter into foreign deals because they know that the foreign exchange rate of their country with the other party’s country is very stable and it won’t swing very wildly. Similarly, companies will enter into deals with others only if the price of bitcoin is stable and not volatile. Thus mass adoption of bitcoin throughout the world will only happen when the price of bitcoin is stable and if the price of bitcoin continues to be volatile just like how it has been from the past 18 months then worldwide adoption of bitcoin is a farfetched dream.

Problem 4: The problem of scalability

All cryptocurrencies including bitcoin use blocks to process transactions. These blocks form the bitcoin blockchain that records the transactions that are happening in bitcoin which are then verified by miners and are added to the blockchain in the form of blocks. Blocks, as the name suggests, are containers that hold all the information of a transaction. Initially the maximum size of the blocks was just limited to 1 MB. Satoshi had to sacrifice the number of transactions that can be processed at a particular point in time, called Scalability, in order to make bitcoin more secure. With transactions comes a lot of data and with block size only 1 MB, there’s only so many payments that can be processed at once. So transactions started to queue up waiting to be processed but the process got slower and slower as more and more people started using bitcoin. Think of the processing of transactions as a toll between two major cities. There is a lot of traffic i.e. there are thousands of cars waiting for their turn in the toll line but there are only limited number of toll booths. I hope you can image the situation at that toll plaza. Similar is the current situation that the bitcoin community is facing regarding the problem of scalability. A lot has been done in the past to solve this scaling problem like the introduction of ‘Lighting Network’ but nothing tends to bear much improvement. Currently, bitcoin has the capability of handling just 8–10 transactions per second (TPS), which is very low considering if it has to go mainstream it should handle thousands and on the other hand IBM blockchain can handle 1000 TPS and various payment gateways like visa can handle up to 47000 TPS. This makes bitcoin slow and impractical for retail transactions.

Problem 5: Bitcoin mining will not be profitable anymore

Bitcoin mining is a cost intensive process. It requires special computer hardware and uses a lot of electric power. In 2013, miners started using computers that were specifically designed to mine bitcoins. These computers are known as Application-Specific Integrated Circuits (ASIC). ASICs are designed to mine bitcoin as efficiently and cheaply as possible. Today mining has become such a competitive business that you can profitably mine bitcoins only with ASICs and only when they are up-to-date. These ASICs can go up to lakhs of rupees. Also one computer is not rarely enough to give a miner sufficient bitcoins to be break even so what they use is called ‘Mining Rigs’ which consists of a number of ASICs all fired up at the same time mining bitcoins. Mining rigs can cost from anywhere between 50 lakhs to 1 crore or even more. Another major cost component apart from the computer hardware is the electricity cost associated with running the ASICs. According to Bitcoin Energy Consumption Index, the global power consumption of all bitcoin mining is already equal to the power uptake of the country Czech Republic with a population of 10.6 million. According to a research conducted by Elite Fixtures, the cost of mining one bitcoin varies significantly across the globe ranging from as low as $530 in Venezuela to $26,170 in South Korea. As per the same research the cost of mining bitcoin in India is $3214. And the cost will further increase as miners will have increase their spending in order to keep their ASICs up-to-date and increased computational time, which means they will have to run their ASICs more which will obviously consume more electricity, in solving the mathematical problems which will only get harder and harder in future. Cryptocurrency had entered a bull market just one month after bitcoin touched an all time high and the bull marketed hasn’t been over yet. The price of bitcoin has been ranging between $3200 and $8200 from the past 3 quarters. Thus with constantly increasing mining costs and continuation of the bearish cryptocurrency market, mining will certainly not remain as a profitable activity. I mean who would really want to mine one bitcoin that costs him $7854 (this the average cost incurred taken as an average for 106 countries)for which he will only get $4000. There are many theories as to what might happen if bitcoin mining stops but the most probable scenario would be that bitcoin won’t possess the required computing power that is needed to validate the transactions and so the bitcoin ecosystem will eventually come to a halt. This is another major foreseeable reason that might lead to the end of bitcoin.

CONCLUSION

History has proved that humans are often very ambivalent around massive technological shifts- around any change really- reacting with a flurry of anxiety. Be it with the reluctance to use the internet thinking that is unnecessary and useless or developing a ‘computerphobia’ in the 1980s when computers were introduced or with the development of telephone, humans have always been very a victim of anxiety and fear in absorbing such massive technological shifts. Even though we always regret late adoption of such technologies, we will continue to fear those coming in the future because of natural human psychology. Bitcoin is facing the same fear and anxiety that internet and the camera on a smart phone experienced at the time of their introduction. But I’m not certain if bitcoin will achieve the same level of success that the internet, smart phones or computers achieved. But there are high chances that my prediction might be incorrect, after all prediction is a tricky business.

Technology always evolves. It is one of the most basic characteristic of technology. Technology further leads to innovation and makes space for even better technology to take its place. Let me take an example from the social networking space. Two social networking sites were launched in the US in the year 2002 and 2003, Myspace and Friendster. Both died very soon after their launch but they paved way of other social media giants like Facebook and Twitter. So I won’t be disappointed if this technology disrupts as technological disruptions make an economy more efficient. I positively believe that bitcoin, if it does not succeed, will pave way for another technology which will revolutionize and transform the world. Think of it just like a brainstorming activity where everyone gives their best ideas and when the group thinks that they got the most suitable one, suddenly they think of a better idea that has been developed out of the previous best one. Similarly, bitcoin might not be the best of the ideas or innovations but it will give way to an even better technology which will surely be counted as one of the world transforming technologies.

There is no denying the fact that bitcoin has the potential to change the world just like how internet and computer did. So obviously it will receive a lot of bumps on its journey to transform the world and I have highlighted a few of them in this article. I bet there is no one who after understanding the concept of bitcoin, its uses and purpose of development, will say that bitcoin is superfluous. Bitcoin might sound utterly futuristic and frightening for some people but I am very sure that within a decade (if it is able to survive) it will sound impossibly old-fashioned. And as Rick Falkvinge has very rightly said, “Bitcoin will do to banks what e-mail did to the postal industry.”