The Only Actual Reason Why Bitcoin Fails As A Currency
Bitcoin maximalists and HODLers are rejoicing as Bitcoin skyrockets to new heights — yet it is unfit for the purpose it is supposed to serve.
Don’t worry — I won’t bore you with anti-crypto arguments. There are plenty of people arguing against Decentralised Ledger Technology (DLT) and in favor of centralized and regulated currencies.
I am not one of those. I actually see a lot of value and potential benefit in how cryptocurrencies work and see a future in which we can replace our current financial backbone with DLT, owned by the people.
Yet, there is one fundamental problem that Bitcoin specifically (and other cryptocurrencies very similar to it) have, which makes them utterly useless as a said future currency.
And the interesting thing is that very few people seem to be aware of it, speak about it or recognize it when it comes up. And all that at a time when critical events are taking place — such as Tesla’s decision to hold $1.5bn of their reserves in Bitcoin.
Limited Supply & Irreversible Transactions
Three critical elements come together in a toxic mix for Bitcoin. The first two are actually vital features:
- Limited Supply: There will only ever be 21 million Bitcoin mined (forecasted to be reached by 2140)
- Irreversible Transactions: Once a transaction is committed and the responding block mined, it cannot be rolled back
In the original design of Bitcoin, these are advantageous features — ensuring immutable transactions that guarantee a certain trust in the system and protection against eternal inflation.
As a currency’s design, these are useful elements, specifically in a decentralised currency without a competent and trustworthy authority providing oversight, regulation, and relevant stability.
However, the third element breaks the camel’s back:
There are plenty of ways in which people lose Bitcoin. And by that, I do not mean losing them to third parties or losing them gambling, but losing them in a way that makes them inaccessible for the whole world forever. Similar to setting physical dollar bills on fire.
- Sending a transaction to the wrong address: Bitcoin wallet addresses are complicated, and a minor inattentiveness can ensure that a transaction is sent into the digital nirvana; unrecoverable.
- Forgetting the password to the wallet: Bitcoin wallets are not precisely simple to handle, and plenty of people have been locked out of their accounts by forgetting their passwords, losing their 2FA access, or forgetting their recovery phrases. Account access is impossible to recover.
- Passing away without recording the password: When Bitcoin owners die, without having passed on or recorded the necessary access credentials to their wallets, the same effect as above takes place — making their Bitcoin unrecoverable forever.
- Forgetting about exchange accounts or cold wallets: As Bitcoin comes in and out of fashion, people who get into it at some point, opening accounts with various exchanges, might at some point forget where they used to trade and leave behind their coins.
“Unlike a typical bank account with password protection and recovery, bitcoin accounts are secured with a private key that only the user knows. To access a bitcoin account, bitcoin’s software uses complex algorithms that can confirm the password without actually knowing it. So, anyone can create a bitcoin wallet, without going through a financial institution or identity check — but it means there’s no backup when the user forgets or loses their key, NYT reported,” adds PYMNTS.com.” (ETFTrends)
If you think these are minor effects, you would be entirely mistaken:
- By 2017 some studies showed upward of 4 million Bitcoin (~20% of max supply) likely to be lost forever
- In January 2021, the amount of people seeking help in wallet recovery has spiked 3-fold from just a month before
- >$140bn (current value) worth of Bitcoin are likely lost forever
All of this after just about a decade of having been around (released in 2009). What will that mean for the future of Bitcoin as a trusted store of value and exchange?
Fast-forward To Exhausted Supply
Very simply, when a variable only has the potential to go down over time, with a specific (even if minuscule) likelihood, with zero probability of increasing, then it will approximate zero over an infinite time span.
However small you believe the chances of Bitcoin losses to be, and however good we become at improving the UX (a significant factor in the human errors) of cryptocurrencies, the simple fact that supply can ever only decrease makes it entirely useless as the basis for human commerce.
These properties make it only a speculative investment — which it is today. People see Bitcoin mainly as an asset that trades at a particular market value against fiat currency.
Rarely does anyone ever use it for actual commercial transactions in the real world, and that use case will remain highly unlikely.
As mentioned in the intro, I believe in the promise of DLTs, and I think that our financial system could run on a future variant of Bitcoin that fixes this fatal flaw. However, for Bitcoin, with the system design we see today, I see zero chance and value in it becoming an actual currency.
Sebastian is Co-Founder and Chief Operating Officer of MING Labs, a global strategic design and digital transformation consultancy with 6 offices in 4 countries. He started and grew MING Labs in Shanghai, China for 5 years, before moving to Singapore and establishing an office here. With now globally 80+ experts, Sebastian, and MING Labs work with MNCs, local champions, SMEs, and government agencies in setting their transformation vision and strategy, as well as helping them execute against that with organizational enablement and implementation of key strategic initiatives across Business Design, Experience Design and Technology Implementation.