Bitcoin: the cryptocurrency that started them all.
Created as the first decentralized, peer-to-peer payment system independent of a third party mediator, the appeal to manage personal finances without requiring a traditional bank account is a concept that has appealed to many, to say the least. But as Bitcoin reaches its tenth anniversary and continues to mature as a financial instrument, the strengths and weaknesses of the cryptocurrency are becoming increasingly realized.
One recent academic study indicates that perhaps Bitcoin should move away from its goal of succeeding as a widely-used domestic payment system, and should instead focus on its strength as an international payment method.
Bitcoin’s competition
An Economic Analysis of the Bitcoin Payment System, authored by Gur Huberman, Jacob Leshno, and Ciamac Moallemi, compares the features of the Bitcoin payment system to that of the traditional alternatives offered by banks.
The study finds that Bitcoin payments are likely to incur higher charges compared to bank-operated, traditional domestic payment systems. The authors attribute this to the decentralized architecture of the network, with the mining structure behind the blockchain also allowing for delays on small transactions as they do not carry a great enough financial incentive to be processed quickly.
In short, the paper concludes that strictly in economic terms, Bitcoin fails to provide real competition to traditional domestic payment systems.
Where it does find strength, however, is its ability to process international money transfers far more efficiently and cheaper than its competitors at, say, Visa, Mastercard or SWIFT, particularly when it comes to larger sums of payment.
The ideological argument
Those who hold a libertarian ideology, or indeed anybody that is distrustful of central banks, can argue the benefits of Bitcoin as a domestic payment system despite these comparative downfalls.
The current monetary system has arguably been the cause of recessions, inflation, and growing wealth inequality; cryptocurrencies offer individuals the chance to operate within a new financial system that operates independently of these factors. Whether or not Bitcoin is the most practical or efficient option for spending money on a daily basis may well be overshadowed by a desire to exit the mainstream monetary system.
There is also the Lightning Network which, once launched in full, offers a potential scaling solution for the Bitcoin network with quicker and cheaper options for micropayments for when you buy a cup of coffee, for example.
And it is still early days for Bitcoin in the scheme of things; it is entirely possible that other scaling solutions will emerge for the network that will allow it to succeed domestically.
In the wake of a bad year for market performance, perhaps it would be most beneficial for developers to focus on Bitcoin’s strengths as outlined by the researchers until the cryptocurrency can find its feet again.
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