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Gravely misunderstood; the Bitcoin story

stefandorresteijn profile image Stefan Dorresteijn Originally published at Medium ・6 min read

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. — Satoshi Nakamoto

Welcome to the first in a series of articles on cryptocurrencies. In this series
I’ll dive deep into the largest, or most popular cryptocurrencies. I’ll tell you
what I think they’re worth, what their roadmap is/should be and what I think of their team.

I obviously don’t have an insider view on these companies/currencies but I have a background in software engineering and a serious interest and stake in cryptocurrencies, allowing me to do proper research before giving them my seal of (dis)approval.

Bitcoin.

Today we’re starting with the largest of the cryptocurrencies; Bitcoin. Father
of the blockchain, Bitcoin has a market cap of $157B. Bitcoin was originally imagined by Satoshi Nakamoto as a decentralized payment system but became much more than that. It is the industry leader both in valuation and status, pulling the cryptocurrency cart in terms of regulation and mainstream adoption. However, Bitcoin doesn’t seem to be the currency once imagined by Satoshi Nakamoto, or at least, it doesn’t function as such any longer.

Tech.

Bitcoin has a scaling problem. To understand this scaling problem, you need to understand how Bitcoin — and by extension, the blockchain — works. When you perform a Bitcoin transaction, that transaction is thrown on a block and every 10 minutes, that block is added to the blockchain. The amount of transactions in a block is limited to prevent a block from being over 1mb in size. This was introduced in 2010 by Nakamoto in order to prevent DoS attacks on the Bitcoin network. Without this limitation, an attacker could create blocks of infinite size, paralyzing the network.

While many things have changed since 2010, the block size limit problem still exists. In 2017, the introduction of SegWit allowed the block size to grow up to 2mb (and eventually up to 4mb) and opened up the Bitcoin blockchain for services to be built on top of it. However, SegWit introduction wasn’t all smooth sailing. In fact, this scaling issue led to multiple hard forks of Bitcoin, creating Bitcoin Unlimited and BitcoinCash in the process, both of which I will discuss in future articles.

As the scaling issue exists, it severely handicaps Bitcoin as a mode of transacting value. Transactions take very long to perform and the low fees a cryptocurrency should be able to provide have long disappeared. An on-chain solution needs to be created that properly handles the scaling issue now and in the long run.

Team/Community

It’s hard to talk about “the bitcoin team” or even “the bitcoin community” because ironically, they never seem to be able to come to a consensus. Solutions to problems are proposed, then a hard-fork is proposed and there’s another cryptocurrency with “Bitcoin” in its name. While I believe eventually one of these coins will win the market-cap race, I don’t think they all serve the same purpose. The lack of consensus in the Bitcoin community comes mostly from a disagreement in scaling methods. Where Bitcoin decided on the SegWit solution, some community members decided that was against Bitcoin’s original design and that other solutions should be found. This created multiple hard forks, leading us down a road of shattered community support and multiple currencies, trying to fulfill the same purpose.

Likely the largest issue existing in the Bitcoin world today is the fight between Bitcoin and Bitcoin Cash. The former still exists as the official Bitcoin but the latter sees itself as the only rightful carrier of that name. I won’t cast judgment on who’s right but it’s obvious these disagreements have led to miscommunication to new users and a lot of angry tweets. Fortunately, even the split Bitcoin communities are large enough to sustain themselves and one of the scaling methods/development teams will prove themselves to be the best, hopefully leading to a single, united Bitcoin community again.

If we look at the Bitcoin core development team, there’s not much to comment on a technical level. A currency this large and this tested simply has to be properly developed to run at scale, which it is currently doing. If we ignore the scaling issues — which I don’t see as a technical issue but more a community issue — Bitcoin is rather solid. If the community can get together and decide on a proper path forward, I don’t see tech ever becoming a serious issue for this currency.

Valuation

The word on many people’s minds nowadays is “bubble” and the question if Bitcoin can be considered to be one. In my opinion, the Bitcoin price as it stands is far too high. While I completely believe in cryptocurrencies having a major impact on the world in the future, I don’t think Bitcoin is necessarily the answer. If you’re going to take over the world, you need a few things Bitcoin currently doesn’t have under control:

  1. Quick transactions, meaning people don’t have to wait for their money to arrive. Imagine having to wait 15 minutes for your payment to go through when you’re checking out at the grocery store. While Bitcoin can be incredibly quick, it has issues performing transactions at a high speed at peak times. Solutions have been designed for this but the currency itself doesn’t have a proper one yet.
  2. Cheap transactions or low transaction fees. It shouldn’t cost me much to pay for something. The higher this cost, the more likely I am to switch to a FIAT alternative. While most cryptocurrencies are significantly cheaper than FIAT alternatives, Bitcoin struggles at times. The lightning network solves this problem but that’s not a Bitcoin solution, it’s a community-developed solution for a Bitcoin problem.
  3. Single-player influence. While a decentralized currency means no single person or organization can alter the chain of transactions, currently one person with deep pockets can make the Bitcoin price shoot up or down. If Bitcoin ever wants to be truly decentralized and uncontrollable by large entities, it needs to do better at stopping hoarders from tanking the price.
  4. Hoarding. If you look at the amount of Bitcoin actually being actively transacted, you’ll quickly spot that a large majority of the coins are never moved. They’re in the wallets of the largest miners. This is a problem because it creates a false scarcity and it gives control over the price to those people holding large amounts of the coin (see point 3.)

These are only a few of the larger issues Bitcoin faces as it tries to become a mainstream currency. While I believe new solutions for existing problems are popping up left and right, the currency will have to solve a lot of these issues itself if it wants to scale up. This, and because Bitcoin was first, not best, is why I believe we can expect to see the Bitcoin price drop quite aggressively before it slowly moves back up to a reasonable price. There is currently simply no reason for this coin to be worth what its market cap shows.

Closing remarks

I believe Bitcoin was the most innovative thing to hit the world when it was invented. This paved the way for other cryptocurrencies to be created which now do Bitcoin’s job better than Bitcoin itself. If it wants to stay #1, Bitcoin will have to adjust and unite. While I believe in the strength of Bitcoin, I fear it has strayed away from Satoshi Nakamoto's original ideas. Bitcoin is no longer useful for transactions and seems to be more functional as a store of value.

The Bitcoin price might drop strongly in the coming year(s) but I believe it will crawl back up at a more reasonable pace when it has. That’s when the bubble has burst, when the incredible profits are gone and the currency can start looking at mainstream acceptance.

This was the first of my articles on blockchain and cryptocurrencies. Please let me know what you thought of this article!

This article was originally posted on My Medium, where I write about a myriad of topics

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stefandorresteijn profile

Stefan Dorresteijn

@stefandorresteijn

I'm a lightly bearded author, software architect, startup CTO and gamer. I run PodShare.io.

Discussion

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Stefan, this is a great write up and a nice hype-free primer. I'm surprised that people don't make a bigger deal out of point #4 (connected to point #3). That's something that has bothered me for a long time:

I look forward to reading your future articles.

 

Agree with you. You need discuss also on 51% attack . currently Bitman has 45% hash rate of total bitcoin network hash rate.

I think should also talk about Raven coin. Which is based on x16r asic resistance algorithm and also support assets transfer.