Eight years ago, few people thought that bitcoin, which cost pennies, would reach highs of $20,000 by the end of 2017. Even though bitcoin’s price recently went down, it’s still valued at over $6,400. However, despite the high price, bitcoin is slowly becoming a legacy system.
Roughly 4.3 million bitcoins are still available to be mined. By 2040, we will see almost all bitcoins in circulation. However, long before that, bitcoin will see some dramatic changes. The changes either will affect the way that bitcoin is treated or will involve the cryptocurrency itself. Moreover, there are other cryptocurrencies learning from bitcoin’s mistakes. In this way, some of the new cryptocurrencies are better suited to fulfill the main purpose of bitcoin: to serve as a decentralized, digital medium of exchange.
Victim of its Own Success
Bitcoin is a legacy system. Though, the cryptocurrency is not going anywhere. Because bitcoin was so expensive, it was also prone to more volatility. Therefore, for many merchants (and customers) it didn’t make sense to pay for something and see the value of bitcoin change significantly within hours. Over a longer period of time, the difference in price may be astronomical. To put things in perspective, in 2010, a programmer from Florida paid 10,000 bitcoins for two pizzas. According to the Bitcoin Pizza‘s Twitter, that amount currently has a value of over $64 million.
There was also the issue with transaction fees. Last year, transaction fees reached over $30. When you buy something worth $50 and have to pay $30 in transaction fees, it doesn’t make sense. Now the fees are much lower. However, due to the last year’s situation, the number of retailers accepting bitcoin has thinned. Popular video game store Steam dropped bitcoin as a payment method last year citing high transaction fees and volatility. Earlier this year, Microsoft and Expedia have also stopped accepting bitcoin.
A Legacy System that is Not Going Anywhere
Nevertheless, there are a lot of people that adopted bitcoin as an alternative asset and continue to invest in it. In the future, we will likely consider bitcoin not just a legacy system, but also a commodity like gold, silver, or platinum. Some people looking to diversify their investment portfolios are also more likely to look at bitcoin than other commodities because it’s easier to buy and store.
Bitcoin’s flaw as an asset is that it’s not a physical commodity. Additionally, bitcoin has no intrinsic value. The only thing supporting bitcoin’s price is how much money people are willing to pay for it. Some banks and even the US regulators classify bitcoin as a commodity. It makes sense because the bitcoin is scarce, there is a limited supply of 21 million bitcoins, and it has inherent value. At the same time, bitcoin does not have a central bank and there is no government to support it. This speaks against bitcoin as a currency.
Bitcoin’s Flaws Need to Be Fixed
Bitcoin is becoming a legacy system mainly because its underlying technology cannot cope with the demands. One of the main problems with the bitcoin is Proof-of-Work. Proof-of-Work is a protocol that requires solving complex mathematical problems to create a new block on blockchain. As cryptocurrencies became more popular, Proof-of-Work became outdated. It took too much time to validate a transaction. Proof-of-Work also consumes a ton of electricity. Given that we generate most electricity by burning dead dinosaurs and prehistoric trees, the carbon footprint of bitcoin is immense.
To solve the issue of the slow transaction processing and high electricity consumption, newer cryptocurrencies adopted Proof-of-Stake, which assigns the validation of a transaction and obtaining new coins based on an entity’s holding of existing coins. Recently, Microsoft has introduced “Proof-of-Authority” for Ethereum on Azure. The Proof-of-Authority system is also used to validate blockchain transactions.
Technically, bitcoin can switch from PoW to PoS. However, it’s unlikely. At least not until all bitcoins are in circulation. Currently, miners are enjoying a decent profit from mining bitcoin and it’s hard to believe that they will agree to change that.
There is also the issue with the limit of 21 million coins. This could create a shortage in supply if bitcoin becomes a mainstream cryptocurrency. Again, it is possible to change after all coins are mined.
Bitcoin’s Future Looks Promising
All things considered, there are two paths that bitcoin might take. One is that of an alternative asset, in which people will invest. It is already shaping as a good investment and even can be considered a sort of a digital alternative to gold. Bitcoin proved its worth during the Eurozone debt crisis in Greece and Cyprus. People can invest in bitcoin in order to shield their money from a stock market crash or a financial crisis. Another option is a bitcoin 2.0, which will represent a true cryptocurrency that will build on the trust that the current bitcoin has. A new bitcoin should also implement some changes in order to ensure faster transactions and reduce the carbon footprint.