As 2018 gets ready to roll in, we can say 2017 was the year of two things, really: “the resistance” getting its butt kicked, and bitcoin.
This has been the year everyone has learned about this thing called the blockchain, and on that blockchain, a bunch of startup companies, hundreds of them actually, are creating new currencies out of thin air and becoming millionaires. Bitcoin is a small part of the larger cryptocurrency world, powered by this new blockchain technology. It accounts for over a third of all cryptocurrency trading, but that is shrinking as other major currencies like ether and litecoin gain traction. What will next year hold for the star of the show, which is still undeniably bitcoin?
ING Bank economists think that 2018 won’t bring mass adoption of bitcoin. It’s going to continue to be a niche product, for niche services and trading, but the impediments it faces to reach a larger audience won’t be surmounted easily.
ING’s Amsterdam based economist, Teunis Brosens, recently put together a seven-page report for clients interested in learning more about bitcoin. Everyone feels they are missing out. The cryptocurrency was worth just $15 per coin five years ago this month. Today, one bitcoin will run you a cool $15,800. Who knows what it will be worth tomorrow? A couple days ago, it was over $17,000.
Regardless of the hyper-hype of bitcoin, Brosens doesn’t think it dies a slow death. But he does believe that bitcoin hits five snags next year, and possibly beyond. Here’s a brief overview of the five impediments to further adoption of bitcoin, not in any particular order.
- Regulation. This is a double-edged sword. Regulators can scare away blockchain developers and bitcoin traders, forcing them to move to other countries. On the other hand, investors want protections, which leads to bitcoin being regulated as a security. Bitcoin futures are now traded in Chicago. “For bitcoin to mature, it needs to be brought into the center of regulated space,” Brosens says. “This will require exchanges and bitcoin service providers to conduct proper know-your-customer checks and implement other compliance functions, greatly reducing the supposed privacy advantages of using bitcoin. Even then, it will be difficult to regulate something that has no head office or legal entity, so governments and regulators may not come to like decentralized financial networks at all.” Worth noting, if bitcoin was somehow over-regulated, investors and startups that fund themselves in crypto coins would just turn to other coins like ether, litecoin and dash to name a few. Brosens does not mention those coins.
- Intermediaries. Where are they? Who are they? Bitcoin investors use digital wallets to keep their digital assets secure via security keys. It’s not like an ETF or a mutual fund, or even a bank CD. These wallets can come and go and are they even trustworthy? Are they protected from hackers? “The average person does not like having no rights, no recourse, no guarantees, no legal coverage….nothing,” notes Brosens. He thinks that bitcoin needs reputable custodians to hold the currency for the investors. (Rumor has it that JP Morgan and Goldman would like to be intermediaries, while its executives often trash bitcoin at the same time.)
- Scalability. Bitcoin is able to process about seven transactions a second. For bitcoin to play a meaningful role as a payment system, the transaction speed needs to be at least 1,000 times faster, Brosens says. “When I pay with bitcoin, the retailer’s terminal not only processes my transaction, it needs to process all other transactions going on at that time and keep a record of them. The creates a lot of traffic and a huge database the retailer has to store,” he says. Delays in bitcoin transactions can reach several hours. But, and Brosens does not note this, new startups are coming online that can process cryptocurrency transactions faster and at lower fees. There are a lot of moving parts and bitcoin is not the sole owner of blockchain-based financial transactions. There will be disruptors, for sure.
- Volatility. For bitcoin to function as a means of payment, it needs to be stable. As it is now, a $1,000 price tag in bitcoin on Monday, might cost $2,000 bitcoin a week later. No currency moves like this. The problem is even bigger for institutions which have to plan ahead and cannot assume 20% price movements on a transaction because of the dollar-bitcoin exchange rate. Bitcoin prices rose 99% against the dollar in the last four weeks alone. At best, users can buy bitcoin in the hopes that they can convert that bitcoin into more dollars. But today, bitcoin volatility outstrips all currencies. Bitcoin remains a form of money with fixed supply on its own blockchain, with no central bank to choke off supply if needed. That makes bitcoin inherently prone to wild price swings.
- Energy. Bitcoin transactions require ‘mining equipment’, which look like old computer CPUs, to process those transactions. While new chipsets are being developed to make the processing speeds faster, and less energy hungry, buying and selling bitcoin draws a lot of power. Brosens says that bitcoin mining currently consumes “as much electricity as a small country.” (Maybe a small, poor country with a couple of light bulbs per house…) Although Borsens does not make this point, he argues that using electricity to power bitcoin when it could be used for more productive uses is unsustainable. And this could lead unfriendly governments to strangle cryptocurrency mining. The problem with that is, developing countries and frontier markets looking for money will have no problem setting up shop. Russian hydroelectric power firm En+ Group is already getting into bitcoin mining because it owns power stations in Siberia, and has access to cheap electricity. Mining companies would simply gravitate towards countries with the cheapest electricity (think Russia and Brazil), or to frontier markets where consumers are not large users of electricity anyway.
“Impediments like scalability and energy use are of a practical nature,” admits Brosens. “They might be overcome, either by reforming bitcoin itself…or more likely…by other cryptocurrencies.”