Bitcoin has enjoyed a breathtaking run over the last couple of weeks. People had speculated that the volatile cryptocurrency was in trouble after it had shed as much as 40% of its value in September, falling from a high of $4,800 to nearly $3000. But bitcoin is back with a bang — it now trades at $5,700, after touching a lifetime high of $5,855 today.
Much of bitcoin’s valuation comes from a belief that it’ll eventually replace government-issued fiat currencies. Bitcoin does have several advantages over traditional currencies — it solely operates online, so doesn’t rely on clunky pieces of paper, and is completely decentralized, meaning it’s largely outside the purview of governments. But bitcoin is unlikely to replace traditional currency anytime soon — there are serious problems that could come in the way of its large-scale adoption. Which means that bitcoin’s value could very well be the biggest bubble of our time.
1.Limited transaction capacity
Bitcoin is a global currency, but its underlying architecture currently doesn’t allow for widespread adoption — only 7 transactions can take place per second on the bitcoin network. In comparison, Visa handles 2,000 transactions per second, and has a peak capacity of 56,000 transactions per second; even in 2014, PayPal was handling 1115 transactions per second. At just 7 transactions per second, bitcoin can hardly hope to become a large global currency.
2. High transaction costs
For bitcoin to eventually replace fiat currencies, it’ll need to be used for lots of small transactions. But bitcoin’s high transaction fees makes his hard — if you pay for a cup of coffee worth $3.50 with bitcoin, you’ll end up paying as much as $0.50 in fees. This will make bitcoin prohibitively expensive for small transactions, and hamper widespread adoption.
3. Long transaction times
Bitcoin transactions aren’t instant — data shows that bitcoin transactions can take anywhere between 45-60 minutes to be fully confirmed, with some transactions can take as long as 10 hours. That’s hardly ideal when you’re looking to make a quick purchase and leave a store.
4. Spiraling energy costs
New bitcoins are created by running programs on the internet, and transactions are authenticated by running computer programs too. But over the years, the costs of running these computer programs have increased exponentially. Things have become so bad that these days, the electricity required for a single bitcoin trade could power a house for a whole month. Visa, on the other hand, takes 20,000 times less energy for a single transaction.
5. Volatile prices
Another factor that could prevent bitcoin’s widespread use is the large fluctuations in its price. Over the last month, bitcoin has lost 40% of its value, and then gained it back and some more. These massive changes in bitcoin’s price would make paying for large goods using bitcoin feel like a big gamble. If you end up buying a TV worth, say, a lakh, with bitcoin, you could end up feeling really happy or sad about your purchase a month later — the lakh you paid in bitcoin could be worth a vastly different amount then.
6. Governmental regulation
And while bitcoin is only a few years old, it’s already incurred the ire of several world governments. Last month, China banned Initial Coin Offerings (ICOs) in the country, and there have been rumblings about Russia looking to regulate the currency too. Most people agree that the ICO market is more than a little frothy at the moment, with everyone from Floyd Mayweather and Paris Hilton backing new ICOs. In China, ICOs were being pitched to elderly grandmothers as a viable investment option — without educating them of the risks involved.
7. Bad publicity
Currencies ultimately are about people reposing faith in little pieces of papers or numbers on the internet, and bitcoin currently doesn’t exactly have the best reputation. Thanks to its decentralized nature, bitcoin is widely used for illegal transactions — drug deals, weapon sales, and kidnapping ransoms. Bitcoin is the currency of choice for the underground deep web, and even during the huge ransomware attacks that took place this year, the hackers demanded ranson in bitcoin. Hardly a good advertisement for a currency that hopes to become a new global standard.
8. Uninformed investors are pouring in
Bitcoin’s early adopters were people who really understood the underlying blockchain technology and the potential it held. That was nine years ago, and bitcoin has now become a lot more mainstream. Many of its newer enthusiasts are people who’re in it only to make a quick buck. Discussions on online bitcoin forums have become increasingly about how much the price of the currency is about to rise — there is hardly any talk of actually using bitcoin in real life. If a large group of people keep accumulating an asset which brings no apparent benefit, other than being able to sell it to someone else at a higher price, you know you’re in a bubble. And bitcoin, with its current $5,855 price tag, might just be the biggest bubble of our time.