What is bitcoin
To understand why bitcoin will never work, we'll need to understand what it is.
Bitcoin is a virtual cryptocurrency generated by its user base solving harder and harder cryptography equations. Its design and function was laid out in a 2008 white paper by someone calling themselves Satoshi Nakamoto.
The purpose of bitcoin was to create a currency that didn't have any state or central bank behind it. Only its users could create the currency and only they could ensure the coins validity. The idea behind this is to prevent the central authority from debasing the currency through inflation or issuing debt to print money.
To protect against fraud, the system relies on something called a blockchain to record and verify payments. The blockchain is a public ledger filled with every transaction of every bitcoin, allowing its users to theoretically go back and track the entire history of the bitcoin they're being paid with.
Because there's no central authority backing the validity of bitcoins, the users themselves have to perform these checks for each transaction. To do this, users are assigned a digital wallet they then create a password for. To buy something, the buyer submits a bitcoin- or whatever percentage of the coin they're using- from their wallet, then the coin is assigned a hash, which is like a digital signature. From there, another user, or network of users if they want to authenticate multiple transactions, verify the hash isn't being used for multiple purchases, does all the math, with the end result being the transaction is added to the blockchain, and life goes on.
It's a ridiculously labor and energy intensive process, with Bitcoin mining using more electricity than Ireland.
Who Needs Trust?
If you wanted a simple reason why bitcoin is doomed to fail, it's that there's no trust in the system.
The white paper closes celebrating that it laid out the best case for creating a currency that operates without trust. Bitcoin's barkers point to the blockchain as the ultimate solution to this problem- you don't need trust in a system of relentless verification.
This sounds like a huge, game changing feature- except all it does is make everything more complicated for no benefit whatsoever.
Imagine going to the grocery store and having to wait in line as the teller calls up every individual customer's bank to verify their account information, their available balance, only hanging up once they confirmed the transfer from your account to the store's was complete.
Then imagine them doing this all over again once the next person in line stepped up. Then multiply this process for every single transaction at every store in every city of the country. Think about all the things you buy in a day and try, just try, to imagine all the time you'd lose if you not only had to go through this process every single time but also wait for everyone around you to go through it, too.
What people miss the most about money is that it is a social tool. The whole point of it is to facilitate moving resources from one place to another which, at some point, you're going to need trust to move the process along.
You can see this process in the evolution of paper currencies. During the reign of Kublai Khan, the Yuan imperial government would send out papers marked with the amount of coins they owed to the merchants they bought supplies from. The promise was the merchants could come to the capitol and exchange the paper for coins whenever they wanted. Since trading the papers was as good as trading coin, eventually those pieces of paper became a form of currency in their own right.
Something similar happened in Europe, too. Between the 14th and 18th centuries, these things called bills of exchange were used to facilitate trade among the different European countries. How they would work is a bank in Italy would issue a letter to one of their depositors so they could exchange it at another bank in Spain, where they could take the letter and exchange it for cash.
Merchants could also use their bills as payment if they didn't have cash on hand. They would sign the document over, then the new owner could take it to the bank to get paid. Hell, people could even sell the bills themselves if they wanted to get some quick cash in their pockets.
In London, banks would issue their own paper currencies to their depositors as a representation of the gold they had in their account. Eventually depositors asked for banknotes of smaller denominations so they could use for more everyday purchases. If anyone wanted coins instead of paper, all anyone had to do was just take the note to the bank who issued it and redeem it. And that was it- just trade a piece of paper for gold, no questions asked.
The point is that for money to work, you need people to trust that what you're giving them is worth what you say it is. You need people to believe that when you hand them a piece of paper that says it is worth x amount of value, they can take that paper anywhere to trade on its stated value.
Because bitcoin cuts out that trust, it's essentially crippled. It can't process payments at any rate that's sustainable- it can handle 3-4 transactions per second, compared to the 1,667 Visa manages- which leads to embarrassing situations like a cryptocurrency conference refusing to accept bitcoin payments because they take too long to process.
Money is a vehicle for social cohesion and trust, bitcoin buries its users in isolation and suspicion. You can't have anything like FDIC insurance under bitcoin so if you lose the password to your wallet or someone steals your coins, you can't be reimbursed. Any coins that you got in recompense would have to come at the expense of someone else. Bitcoin at its peak is a zero-sum game, which, yeah, see how long that lasts. Or, see what happens when inevitable economic shock comes and whatever value people have is gone forever.
Removing the social aspect of money from bitcoin's design has created a currency that demands total faith from its users but offers no protections to them when things go wrong. No matter the myriad other reasons, this choice will forever doom bitcoin from achieving anything its believers hope it will
The Myriad Other Reasons
Bitcoin is hardcoded to have a limit of available coins. Once 21 million coins have been minted, the system stops producing them. There a few problems that arise from this, the biggest being that bitcoin is suicidally deflationary.
Put simply, deflation happens when the value of your goods is higher than the value of your currency. So if you have $1 billion worth of goods to sell, but only $100 million in currency to buy those goods with, you've got deflation. The easiest way of solving this problem- just print more money- is unavailable because the currency is tied to a finite resource like gold.
Since printing money isn't an option, the only thing to do is wait for prices to fall until they're in line with the available money supply. This process can take years as people have to absorb the losses they take while they're cutting prices and wages to match what people have in buying power.
Why this is relevant to bitcoin is that it is nowhere near big enough to support a national, let alone global, economy. At $48,000, the total value of every possible bitcoin would come in at just over $900 billion dollars. That sounds impressive until you realize that the GDP- the measure of the goods and services produced in the economy- of the United States is $21 trillion. The crunch from the value of goods falling to match the value of bitcoin would trigger a depression so severe in length and scale the only viable way to end it would be to ditch the currency entirely, just like when countries abandoned the gold standard to escape the Great Depression.
The second, albeit not as catastrophic, problem is that one of the incentives for people to use so many resources to verify payments and add them to the blockchain is that they get a bitcoin as a reward. The groups who do this also charge transaction fees, but the coin is obviously the main draw here.
As you can probably see, if no more coins are being minted, than the only incentive these groups will have to expend all those resources is more costly transaction fees. Plus, the more transactions lined up to get verified, the more difficult the equations get, which means more power, which makes it more expensive to solve, meaning for every single transaction you're not only using up bitcoins to pay for goods but also you're paying more and more for the time and energy needed just for the privilege of buying something.
Aside from the electricity waste, there's literally nothing bitcoin does better than anything it intends to replace. Because your bitcoin wallet is tied directly to your I.P. address, cash is better for anonymous, untraceable payments which is why there's a concerted effort to reduce the amount of available cash going on right now. The efforts have failed miserably so far but the goal is clear: governments want the ability to track every purchase its citizens make and a blockchain is the perfect tool for that project.
It barely even holds up an investment tool. Bitcoin's real value is the same as any other commodity: you get to exchange it for dollars. That's why it's not a big deal that some companies allow bitcoin payments, all they're doing is accepting to go through a longer, more complicated process to exchange your assets into real money. All the excitement around bitcoin is based on its dollar value.
Sure it's on a bit of a tear now but we've been down this road before, too. The price will climb, media attention will draw new users excited to get in on the game but then the reality that you can't do much of anything with your new toy sets in and then the price can drop 20-30% in a single day.
That's obviously not a very stable investment situation, which means more people cash out at a loss, the more the price drops because people lose confidence in bitcoin's value. Eventually, the price stabilizes again because the user base self-selects for true believers who keep insisting bitcoin is worth something which, slowly but surely, drives the price back up until the cycle repeats.
Ironically, all these failures are why bitcoin won't be going anywhere any time soon. As an object of faith, the more bitcoin fails, the stronger people will cling to their belief. All bitcoin has is the faith of its users which means as long as they have that faith, this wannabe currency isn't going anywhere.
Is There Any Way To Make It Work?
No.
Bitcoin is explicitly designed to be harder to use the more people try to use it. The whole point of its payment system is that it grinds to a halt the moment transaction volume picks up.
You can't change anything about bitcoin to make it more workable because bitcoin, at its core, is an ideological argument. Changing how bitcoin works means admitting the ideology that created it was wrong. Which no one will admit, because ideas aren't products, they don't get recalled if they're defective.
