Vipul Bansal

@vipsyvipul

Why bitcoin might not be the success we all hope

Nobody knows who is the true creator of Bitcoin. The paper that brought Bitcoin to existence credited its authority to someone named Satoshi Nakamoto. But no one came forward to claim the ownership. It is not even clear if Satoshi is an individual or a group of individuals.

Nevertheless, Satoshi told the world an amazing story and was fortunate to gain a consensus. This is the major reason that a non-physical entity created by algorithms and that lives as an electronic charge which itself doesn’t exist, gained recognition as a digital currency. And no doubt, bitcoin is indeed a revolutionary concept. Thanks to blockchain.

While I believe in the power of bitcoin, few factors shake my confidence as I look towards the value bitcoins hold in the future.

Loans — Money comes into the system by way of loans. A bank loans you a certain amount of money and the amount you repay (principal + interest) is higher than what you took. This contributes to the bank’s revenue which they can channel into different investment instruments thereby putting money back into the system and the cycle continues. This is possible because of the presence of central institutions that can effectively manage the transactions.

Bitcoin rules out the need of central institutions by virtue of its peer-to-peer model. The transactions are sent directly from one person to another, the record of which is distributed to the entire network of bitcoin users.

In a certain case, where you might require a loan of bitcoins, how do you think it would be made possible? You might want to ask some of your friends for help but what if the requested amount still does not add up! Maybe a central institutions that works on the same principle as current financial institutions could help. But wouldn’t this central financial institution create the same concern as is with the existing ones?

Limitations of technology — Bitcoin is an algorithmically generated currency. It needs power to operate. If no participating machine is running, no bitcoins will be generated. This means to earn bitcoins you have to keep your machine running for most of the time. Forever, is the preferred time.

A process called mining is used to add extra bitcoins in the network. Whenever a new transaction is to be validated, the bitcoin algorithm throws a challenge to all the participants. Whichever participant solves the puzzle first, gets the reward in the form of certain amount of bitcoins.

As you can guess, the participant with the most computational processing power will win. Most of the time. This implies that you’ll have to upgrade your computer to the latest and the best processor tech. Prepare to shell out more money!

According to this thread on Quora, a typical high-end computer itself could take 435 years to earn a single bitcoin! But not everyone owns a ‘high-end’ hardware and it is highly probable that you are one of them. With a non-specialized hardware, you can imagine, by the time you will earn one bitcoin your total spend on electricity will be 100x more than the return.

There are only 21 million of them — Yes. The total number of bitcoins that can be mined is 21 million and 78% of them have already been mined. All the bitcoins are estimated to have been mined by the year 2140.

The current exchange rate for a single bitcoin is $2714 USD (at the time of writing). The last line signifies that to make bitcoin work, you would still need to convert it to existing currencies. This begs to answer the question, is Bitcoin really a currency? Or is it a token to transfer currencies? Is it a cloak to hide all transactions?

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