What is Bitcoin Used for?
By Anton Kovačić
A brief history of Bitcoin
In October of 2008, at the onset of the Global Financial Crisis, Satoshi Nakamoto, who is still anonymous to this day, published the Bitcoin whitepaper. About two months later on January 9th, 2009, Bitcoin became available to anyone who wanted to enjoy the benefits that come with it. Four days later, Satoshi Nakamoto sent 10 Bitcoins to Hal Finney, marking the first-ever transaction to be made on Bitcoin.
Bitcoin slowly grew in popularity over the years as people continued to learn the benefits associated with the cryptocurrency. In 2010, the most famous Bitcoin purchase was made when Laszlo Hanyecz paid 10,000 for two pizzas. As a result, the day was dabbed the Bitcoin Pizza Day. The 10,000 bitcoins were only worth $30 when the purchase was made. The same stack of bitcoin is now worth about $103.6 million.
Aside from buying pizza, Hanyecz aided in marking bitcoin’s establishment as a payment method. By late 2012, BitPay, one of the major payment processors that let merchants transact using Bitcoin, had received upwards of 1,000 merchants who preferred using the payment method. With the anonymity provided by bitcoin, the crypto giant quickly became one of the most popular ways of transaction in the dark web.In 2013, the FBI collected 26,000 bitcoins from a seizure of the dark web Silk Road. The agency also later seized another 144,000 Bitcoins after apprehending Ross Ulbricht, the founder, and owner of the dark web silk road.While Bitcoin’s history is littered with narratives of the different potential uses, the fact is that the crypto giant still struggles to have an established purpose. Critics often highlight this issue, arguing that Bitcoin and other cryptocurrencies try to solve a non-existent problem. Advocates of the giant crypto network claim that in the future, Bitcoin will play a critical role in addressing the global financial issues. However, a decade since its formation, the use of bitcoins is still only hypothetical.
Side Effects of Blind Steering
Bitcoin proponents promise a whole lot from the cryptocurrency in the near future. However, its current $185.7 billion market cap is only fueled by the faith of their investors. Most bullish valuations of the giant crypto suggest that by mid-July, Bitcoin could see $20,000 and $100,000 by the end of the year. However, despite what the enthusiasts claim, neither Facebook's Libra nor Bitcoin ETFs currently contributes significantly to the value of Bitcoin.
While Bitcoin advocates emphasize the rise in prices, there is little to no road map on how the digital currency will arrive at these prices. It is, however, true that Bitcoin prices are bound to increase if more and more people continue buying it at the current rate. However, for institutional investors, this type of reasoning will never fly; it is more important to know why a market is behaving in a certain manner than how the market is behaving.
While that may be true, faith has been known to be a strong force. It fuels religions, governments, currencies, and has so far pushed Bitcoin’s value past $10,000. However, with limited adoption and a market cap of less than $150 billion, fueling the financial market with faith only leads to price volatility.
Bitcoin is primarily stored in centralized exchanges and digital cold storage wallets. These storage locations are popular among the Bitcoin community since they allow them to practice the digital currency faith via speculation. Centralized exchanges provide believers with an arena that tests their faith in the digital currency. At the same time, cold storage wallets help to maintain a specific supply of the digital currency out of the market.
At the time of writing this article, the 24-hour USD Bitcoin trading volume was approximately $13.7 billion. At the price of 10,400 per Bitcoin, it roughly equates to approximately 1.3M Bitcoin traded in a day. That volume is comparatively similar to the volume of Planet Fitness on the stock market. However, the market cap for Planet Fitness is currently only 5.8 billion.
However, unlike Planet fitness that depends on the stock exchange, the exchange of Bitcoin is not regulated. That means there are fewer rules governing asset liquidation. For instance, if a Planet Fitness board member wants to sell a portion of his shares, the sale would have to be announced on the stock exchange market, usually noted in 10-K reports that are then filed to the SEC.
Disadvantages of using Bitcoin as a Transaction Currency
While the digital currency technology was introduced to conduct a peer-to-peer transaction, it is still not scalable. The technology mainly relies on proof-of-work, which is a system that is used to validate a transaction.
The advantage of the proof-of-work system is that Bitcoin users do not have to know or trust the other party. They also do not need to rely on a central authority or any third party to complete any transaction on the network. The Bitcoin network can currently only handle seven transactions in a second.
Every ten minutes, a block of transactions is verified, hence the name “blockchain.” However, the problem is that a batch can only allow so many transactions. For instance, if you purchased a coffee at Starbucks using Bitcoin, in the best possible scenario, the purchase will be classified under the next block. It will be verified in less than ten minutes if Starbucks will accept a single verification. There are several risks associated with receiving single verifications. We will, however, not get into that in this article.
On the other hand, your coffee purchase might fail to be classified in the next block, which means it will be pushed into the next batch, and you will have to wait an additional ten minutes. In total, you will have to wait for twenty minutes to get your cup of coffee. However, even then, there are no guarantees that your purchase will make it to the second or third block. By now, you can perhaps understand the burden that comes with using Bitcoin to purchase even a single cup of coffee.
If you are used to trading on centralized exchanges, blogs and various other internet sources might have you believing that transaction speeds on Bitcoin and other digital currencies are near-instant. However, this could not be further from the truth. On any centralized exchange, all the bitcoin are stored in one location. A Bitcoin transaction simply adds or subtracts the traded value from your Bitcoin stash. That is primarily why Bitcoin advocates claim that you do not actually own your Bitcoin until it is in your Bitcoin wallet. If bitcoin sits on an exchange, you stand the risk of losing your gains. Sometimes the trade might end up blowing your bitcoin account or simply refuse to send you the coins you purchased.
Bitcoin as a store of value
At its current state, I think the only substantial purpose that the Bitcoin assumes is that it is a pretty good store of value, comparable to gold. Outside Bitcoin’s promises for a higher value in the future, it is a speculative asset that has no practical value to its users. A majority of the people who hold Bitcoins only have it because of its promise for higher prices in the future. Only a handful of Bitcoin users carry out Short-term transactions to hedge their investments against this bet.
Bitcoin presents several advantages as a store of value. Firstly, Bitcoin can be easily stored and owned. Unlike blocks of gold, Bitcoin can be stored on a flash disk, regardless of the amount of Bitcoin you own. Gold takes up a lot of physical space, and a large amount of it can easily become noticeable. Bitcoin users also have a fixed amount of bitcoin to trade with on the network. There are upwards of 21 million Bitcoin currently available to Bitcoin users around the globe. While it is rare, gold continues to be mined around the world, and ultimately, it continues to increase.
Bitcoin cannot be counterfeited or imitated. However, scammers have been known to sell Bitcoin to ignorant buyers. It is much more straightforward for educated buyers to spot fake Bitcoin than it is for them to spot counterfeit gold or cash. Bitcoin users can simply check the blockchain for a record of each Bitcoin in circulation.
Bitcoin has become widely used in all countries around the globe. As a result, the digital currency is widely understood as people continue to research ways to use Bitcoin. Google search analysis clearly indicates that the term “Bitcoin” is currently three times more popular than it was in 2016. While Bitcoin has not attained the popularity of gold, its demand has drastically risen in the recent past, with more people obtaining the digital currency than ever before. This makes Bitcoin a credible store of value as compared to other investment options.
The Bitcoin community continually develops more technology to support the Bitcoin network. That gives hope to the digital currency’s users that it will increase the use cases in the near future. Currently, bitcoin remains an unscalable and speculative asset that can only be profitably owned as a store of value.