It is believed that Bitcoin is only used to a minor extent for payments. Instead, the currency is held for speculation or saving purposes. If Bitcoin is to take market share from traditional payment services, it must thus be used for payments to a much greater extent than currently. What could prevent such a course of events? What could be the role of other virtual currencies in future?
No Consumer Protection or Supervision
The main factor that will probably make it difficult for Bitcoin to grow as a means of payment is the absence of consumer protection and supervision by public authorities. The reason for this is simple. Broad usage of Bitcoin for payments would also require a high proportion of consumers to be prepared to have Bitcoin holdings.
If Bitcoin is perceived as risky, it is not very probable that the general public would be prepared to do this. I have called attention above to this lack of consumer protection in Bitcoin payments. Bitcoin holdings are also more risky than funds held in accounts. It is thus probable that Bitcoin must, in some way, be placed under the same or equivalent regulations that apply for other payment services or funds in accounts in order to gain broad acceptance – for anything other than very small payments.
At the same time, however, rendering the use of Bitcoin more reminiscent of traditional payments would overturn the fundamental concept underlying Bitcoin; that is, of it being independent of governments and the financial sector. Creating the requisite regulations could also prove difficult for the government. For example, how could something that is decentralised and does not have an issuer be regulated?
Doesn’t Work for all Types of Payment
Another obstacle is that Bitcoin is not suitable for all payment types, Bitcoin payments not occurring in real time. While payments are verified every ten minutes, it is also recommended that users wait for a couple of more verification rounds to be completed to be sure that the transaction has actually been added to the blockchain.
Hence, it can take up to an hour for a user to be sure that the payment really has gone through. This makes Bitcoin unsuitable for many types of common payments, such as at the checkout of a convenience store. In card payments, which do not occur in real time either because the account of the recipient is credited with the funds one or several days later, this problem is resolved by reserving funds in the account of the payer and guaranteeing the payment to the payee.
Bitcoin, which does not have a central issuer or verification process, cannot do this. However, individual payment service providers can guarantee Bitcoin payments to their customers. But, finding a guarantee that supports the decentralised usage of Bitcoin, without central participants, is difficult.
Credibility Issues of a Technical Nature are also a Barrier
Bitcoin’s functioning is based on miners verifying transactions. Incentives for them to do so mainly consist of new Bitcoins being allotted to miners. However, this incentive could be undermined, which could erode confidence in the virtual currency.
One reason is that the creation of new Bitcoins declines over time. This risks reducing the incentive for miners to continue with their activity. Another is the upper limit to how many Bitcoins there can be (21 million). The fundamental problem is that virtual currency can easily be newly created. If 21 million Bitcoins can suddenly turn into 42 million, each individual Bitcoin would also be worth less. Keeping an upper limit of 21 million Bitcoins is therefore important to preserving credibility in Bitcoin’s future value.
That credibility is affected by the perceived stability of the protocol governing Bitcoin. In connection with problems or a crisis, the protocol might quickly need modifying. Yet, if it is considered far too easy to modify the protocol, there is also a risk of confidence in the cap on the number of Bitcoins being undermined.
Another reason for why incentives for miners could be undermined is that the exchange rate could decline, which would reduce the value of the reward. On top of that, computing power and electricity might become too expensive. As the hash function becomes more complex, increasing computing power and bespoke computers are needed.
Another potential problem is that the length of the blockchain is constantly increasing. It is currently at over 14 gigabytes. The Bitcoin network presupposes that there is a great number of nodes with the entire blockchain stored on their machines. This makes the network robust. The incentive for managing such a “full” node has diminished, and such nodes are apparently decreasing in number. It appears, in other words, as though Bitcoin is becoming increasingly centralised and thus less robust.
If incentives for miners disappear, the decentralised verification of transactions will cease and it will not be possible to use Bitcoin.
Other Virtual Currencies Could Replace Bitcoin
There are thus several potential obstacles to Bitcoin’s ability to grow as a means of payment. However, it is also important to bear in mind that Bitcoin was the first virtual currency. Although the Bitcoin protocol can be modified and is publicly available, which stimulates further innovation surrounding Bitcoin, it is not certain that Bitcoin will mark the end of the evolution of virtual currencies – better solutions could emerge, putting it out of business.
There are currently over 450 other cryptocurrencies and they are constantly on the rise.
Some of them have taken Bitcoin’s structure as their basis, but enhanced or modified it. Others have seemingly emerged as part of a business model to capitalise on the attention generated by Bitcoin.
The success and future of Bitcoin are thus not clear cut. All we know is that the future will not be as it is today, and how we make payments in 25 or 50 years’ time is an openended question.
Here you have a short video about the Future of Virtual Currencies.
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