Introduction
Anyone who uses the internet today has heard about Bitcoin at one point or the other. The invention of money as a medium of exchange was a real tipping point in human civilization. Rather than using a barter system where people exchanged goods with each other without any concept of precise evaluation, money provided a method for people to conduct trade with higher efficiency.
With the conclusion of the 21st Century, the world is looking at another level-up for the fiat currency that is called cryptocurrency. With the digitization of money, the basic financial infrastructure can change as it is known. The paradigm shift in money can also transform the dynamics of politics, social interactions, economics, and ontology forever.
What is Bitcoin?
Bitcoin is a digital currency that is not controlled by any centralized government enterprise like Central Bank or SEC etc. Bitcoin is a cryptocurrency which means that it uses algorithms and encryption technology to contain financial transaction information. Bitcoin was originally introduced by its pseudonymous creator Satoshi Nakamoto in 2009.
The main objective of Bitcoin was to work as a substitute for fiat currencies such as USD, GBT Pound, Euro, Yen, etc. However, over the years Bitcoin has gained traction among the masses as a store of value or an investment option. Bitcoin has often touted as the first-ever cryptocurrency in the world that laid the foundation for the crypto market that now has thousands of new variants.
What is Blockchain?
Blockchain is the underlying technology that issues and hosts Bitcoin. A blockchain is a digital ledger that keeps a record of all the Bitcoin transactions on blocks. Blockchain is distributed among all its active users to ensure that everyone has a copy of every single transaction ever made on the network to ensure transparency.
In addition to issuing cryptocurrencies, blockchains can be used to perform several important tasks like supply chain management, quality control, data analysis, accounting, and several other management functions.
How did Bitcoin Gain Popularity?
When Bitcoin was first introduced in 2009, only IT experts and a few financial investors showed an interest in the technology. However, the Bitcoin blockchain gathered the attention of academics from all parts of the world for its underlying features as an open-source, trustless, and decentralized network. Open-source projects are those where any developer in the world can copy the code and launch a new project with a few changes.
A trustless network means that the Bitcoin blockchain refrained users from conducting their businesses based on trust in just one or a specified team of operators. Furthermore, the decentralized network meant that Bitcoin was able to remain operational without the presence of a governmental or private regulator 24/7. At the time of its debut, the main focus of many developers was on its centralized status as an exchange of value or replacement for paper money.
Due to factors like lack of digital banking and the increasing popularity of the internet around the world, Bitcoin has gained fame worldwide as a borderless and online currency.
Skepticism Around Bitcoin Over the Years
As the confidence in Bitcoin grew stronger, the value of the digital currency also started to increase. However, many key figures from government regulatory positions and private financial sectors also came forward to share their skeptical views on Bitcoin.
It is clear with the last ATH of Bitcoin in November 2021 valued at $69K, that all the negative connotations surrounding the token did not distract the interest of the masses in the alpha cryptocurrency. Here are some of the most noteworthy criticisms surrounding Bitcoin:
Limitations of Bitcoin
It is easy to deduce that over the years, Bitcoin has received critical antagonism from some of the biggest figures in the financial and investment sector. However, regardless of all the negativity around the token, Bitcoin gave birth to the entire cryptocurrency sector and maintained its position as the top-ranking cryptocurrency in the world in terms of market cap.
While Bitcoin has established its position as a store of value and hedge against inflation, even the most loyal proponents of the flagship cryptocurrency are unable to ignore some of its limitations. The moral world is an amalgamation of imperfections, and Bitcoin being the 1.0 cryptocurrency, also faces some issues that require the attention of stakeholders.
- Privacy
- Scalability
- Power Usage
- 51% Attack
- Flippening
- Forks
- Environmental Concerns
- Speed
- Transaction Fees
- Investment Risks
- Price of Volatility
- Lack of Education
- Utility
- Upgrades
- Irreversible
- Insurance
- Financial Regulations
- Download and Storage
- Removal of Jobs
- Illegal Usage
- Lost Bitcoins
- Fully Minted Blockchain/Selfish Mining
Privacy
The Bitcoin blockchain is an open-sourced project that allows any developer to examine it at any given time without posing any barriers. It means that anyone using the blockchain at any given time is presenting their entire financial transaction history to other network users. At the retail level, there are some transaction applications like Venmo that have recently adopted that feature.
It means that a person is enabling all the users in the world who are also using the Bitcoin blockchain to know about all the transaction details they have made using the same network. For individual users, this can be a minor inconvenience. However, for commercial entities, it can be a major issue to maintain their financial privacy and avoid making all their internal transactions public at their discretion.
Scalability
Scalability is the ability of a computing network to handle the increasing online traffic. At its base, the Bitcoin network can process seven transactions per second. It is worth noting that Bitcoin is a global network that millions of people around the world are using at the same time. For context, another international digital transaction service provider, VISA, can process around 20,000 transactions per second.
Furthermore, the VISA network also can increase its scalability for rush hour periods like the holidays and other events. To improve the scalability of the Bitcoin network, a team of developers from Square Inc. is working on a second-layer Bitcoin project called the Lightning Network.
Power Usage
Bitcoin network works on a consensus model that is called Proof-of-Work. PoW is a type of consensus model that requires the presence of miners who use decryption machines or computing power units to solve every new block puzzle on the Bitcoin network. Miners are essentially competing against each other to be the first ones to solve the block encryption to qualify for mining rewards.
However, to increase their chances of winning, miners use heavy-set mining machines and state-of-the-art processors. Most of these mining operators need a hefty amount of energy input to remain in operations 24/7. According to an estimate, the amount of electricity used by a Bitcoin mining gird in 10 minutes is enough to power the population of 100,00o in a developed city.
51% Attack
Bitcoin miners are mostly not individual computer owners working remotely from their homes. Most Bitcoin mining operators are clustered in the form of cartels or pools to ensure their chances of success. At present, the four biggest mining operators control more than 51% of the global hash rate production. The common belief that the Bitcoin network is immune to corruption is not accurate under the current scenario.
According to a theory, if one individual can control 51% of the mining contribution for the Bitcoin network, they will have the ability to change the financial ledger history. It means that it would be possible for the 51% cartel to use the Bitcoin currency twice. Under such circumstances, the market value of Bitcoin would reduce significantly.
Flippening
Flippening is a hypothetical event where several altcoins or just one contender can outrank Bitcoin. The putative dethroning of the flagship cryptocurrency can change the makeup and outlook of the cryptocurrency market forever. At present, the cryptocurrency market is not entirely independent from its dependence on the stock market performance.
Meanwhile, at all times, Bitcoin prices have been responsible for shouldering more than 50% of the aggregate cryptocurrency market cap. If Bitcoin is replaced by another cryptocurrency or stablecoin as the top digital currency, it can result in massive losses or gains for several whale investors, high-net-worth traders, and traditional financial giants.
Forks and Clones
Forks are the division of the underlying Bitcoin consensus model on account of conflict or a planned change. Soft forks are the automated changes in the algorithm of a blockchain that allow the users to upgrade in time. On the other hand, hard forks are the updates that introduce a wholly new version of the blockchain that only those who have accepted the update can use.
In the case of Bitcoin, there are several popular hard forks like Bitcoin Private, Bitcoin Cash, and Bitcoin Gold, among others. All of these new currencies and blockchains are sourced from the original Bitcoin blockchain.
In addition, there are stand clones such as Dogecoin, Peercoin, Litecoin, Dash, and others that have also issued native currencies and garnered localized investment communities. Forks and Clones are Bitcoin copies that take away investment interest.
Environmental Concerns
It has been established that Bitcoin mining requires a considerable amount of energy input. At the same time, there are some concerns about the environmental implications of Bitcoin. Estimates by CoinShares suggest that Bitcoin mining operations are accountable for 41 megatons of CO2 emissions in 2021. The legislative assembly of New York has also imposed a 2-year ban on all PoW digital currencies in the region on account of environmental concerns around Bitcoin.
On the other hand, many Bitcoin proponents believe that the Carbon footprint statistics around Bitcoin mining are exaggerated. The proponents also claim that the carbon footprint generated from the traditional financial infrastructures is greater in comparison to Bitcoin mining farms. However, the jury is still out on the subject, and it can have a massive negative impact on the price projections of the top coin in the future.
Speed
It is worth noting that Bitcoin was originally introduced as a substitute for fiat currencies. It means that hypothetically speaking, Bitcoin should be able to sustain the transaction pressure of 8 billion people in the world. However, following the baseline design of the Bitcoin network, the Bitcoin blockchain can process only seven transactions per second.
As per the latest survey, around 47 million people in the United States of America own some amount of Bitcoin. Even at the current stage, it is common for Bitcoin network users to deal with backlogs for a considerable amount of time.
Bitcoin creator Satoshi Nakamoto allowed a new block to be added to the network after every 10 minutes, and every block can carry 20 thousand transactions. Due to processing speed, it seems a challenge for the Bitcoin network to replace fiat currencies any time soon.
Transaction Fees
The transaction fees for the Bitcoin network are the same for any amount of value exchange. For example, if a trader was sending $10,000 or $10, in both cases, the transaction fees for the process are going to be the same.
It means that Bitcoin is not ideal for making small transactions like buying a cup of coffee in the morning. There are solutions like the Lightning Network that are working on decreasing the transaction fees and also improving the transaction speed of the network.
Investment Risks
Bitcoin as an investment carries a considerable amount of risk. Many people treat cryptocurrencies as a digital substitute for stock trading. However, in reality, Bitcoin has a more close resemblance to commodity trading. There are not a lot of indexes or dedicated technical indicators available to track the prices of Bitcoin and other altcoins just yet that increase the investment risks.
Volatility
One of the most frequently criticized cons of Bitcoin as an investment option is its high price volatility. Bitcoin prices are inherently subjected to sudden ups and downs on account of its vaguely defined fundamentals. However, there are investors like Mark Cuban who believe that Bitcoin price volatility is the main reason that it also offers a massive return.
Lack of Education
In 2021, the government of El Salvador became the first country in the world to accept Bitcoin as its sole legal tender. In addition to facing criticism from external financial enterprises like IMF and World Bank, the country also faced a sizeable amount of resistance internally.
The largely unbanked masses of the South American nation claimed that they are not familiar with how Bitcoin work or what it is. The lack of formal education for Bitcoin is a massive hurdle to its wider acceptance.
Utility
Over the years, there are many companies like Tesla, AMC Cinema, and several others have made Bitcoin payments available for their consumers. However, there are not many retail and commercial enterprises that accept Bitcoin as payment. Furthermore, financial regulators around the world are working toward banning Bitcoin payments from preserving the power of centralized legal tenders.
Upgrades
Bitcoin is an open-sourced and wholly community-owned network. Its creator Satoshi Nakamoto has chosen to remain under the shadows since its introduction. The pseudo-status of Nakamoto helped Bitcoin to remain operational without facing any regulatory issues. However, at the same time, it is impossible to add any upgrades to the Bitcoin network.
Irreversible
It is worth noting that once a transaction is finalized on the Bitcoin network, it becomes irreversible. It is a great feature of the Bitcoin network that every transaction is finalized almost instantly on the network since it does not require any verification or approval from a centralized authority. However, it can be a hassle for commercial entities to be unable to reverse a financial transaction in case of a breach of contract or refund.
Insurance
The Bitcoin network does not offer any type of insurance. When it comes to traditional financial enterprises, most financial services are covered under insurance. In some cases, the stock traders are also able to cover their losses with the help of a particular type of investment insurance policy. However, by design, Bitcoin transactions and trading does not grant any safety net for its users.
Financial Regulations
There are little to no financial regulations available for Bitcoin. Therefore, many commercial investors refrain from using it as a portfolio diversifier or a mode of transaction. On the other hand, some of the latest regulations that have been introduced for Bitcoin are mainly concerned with imposing taxes on Bitcoin traders.
Download and Storage
Every new investor who is conducting a Bitcoin transaction is required to download the whole blockchain first. The current size of the Bitcoin blockchain is as big as 100 GB. It means that it can take up the whole space for a low-end PC or a high-end smartphone memory. On average, it takes days for the entire download to occur successfully in the best-case scenario.
Removal of Jobs
Bitcoin is essentially another automation of the financial transactions system. The Bitcoin blockchain removes the need for the presence of real people who run the management of the regulatory bodies like banks etc.
It means that the ultimate form of the blockchain systems is going to further decrease the need for human-based jobs such as tellers, bank managers, administrators, auditors, chartered accountants, etc.
Illegal Usage
Bitcoin blockchain often faces allegations from financial regulators for its role among hackers and in financial crimes such as money laundering.
Lost Bitcoins
Bitcoins are stored in digital wallets that are stored with the help of using private keys and seed phrases. These private keys are complicated, hefty, and almost impossible to remember by memory as they are comprised of a long string of random data. The latest research suggests that around 20% of Bitcoins are lost forever due to their owners forgetting or misplacing their private keys.
Fully Minted Blockchain
Every year, the number of transactions added to the Bitcoin block is reduced by 50%, and it also reduces their mining rewards by the same percentage. This process has been ingrained into the Bitcoin blockchain by design.
In one of his community postings, Bitcoin creator Satoshi Nakamoto claimed that in 20 years, the miners would depend on transaction validation for their earnings, and by that all-time, all the Bitcoin transactions will either double or go down to zero.
Pseudo-Decentralization
Bitcoin is often touted as being a decentralized network. However, any IT expert with little knowledge about cookies and web trackers can trace the original identity and the origin of every single digital transaction on the network. Therefore, according to experts, Bitcoin and every other blockchain are pseudo-decentralized.
Selfish Mining
The apparatus that is used in the Bitcoin mining farms is useless for performing any other type of computations or online operations. Bitcoin miners often require the installation of the most expensive and shortly available semi-conductors. Meanwhile, selfish mining is a phenomenon where the miners issue orphan blocks that were previously hidden that are still un-validated and demand high transaction fees operating in a cluster of cartels.
Conclusion
The Bitcoin blockchain is often considered the most innovative and disruptive invention since the internet. However, just like every other new technology, Bitcoin is faced with its limitations. However, it seems that the main objective of Bitcoin creator Satoshi Nakamoto has already come to fruition with the presence of the whole cryptocurrency market and thousands of altcoin variants.
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