The bitcoins btc price has taken a turn towards the upside in 2019, rising roughly 135% so far this year. This most recent price surge, which started around the beginning of May, followed reports from Adamant Capital and Delphi Digitalthat the bitcoin price had likely reached its bottom for the current market cycle.
Having said that, there is still plenty of work to be done for bitcoin to reach its full potential. Although it is often promoted as an anonymous, decentralized, and apolitical version of digital money, the crypto asset has much room for improvement when it comes to fulfilling the cypherpunk vision of anonymous digital cash.
What follows is a reality check on what bitcoin can realistically provide to its users today.
1. Bitcoin is Not Anonymous
One of the key tenets of digital cash is that it should be anonymous and fungible. Without these features, it becomes much less like its real-world equivalent.
Bitcoin is simply too traceable right now. There are multiple blockchain analytics companies that are able to write reports on the state of the Bitcoin network based on their ability to track the flows of bitcoin between users. This should not be possible in a system that is supposed to be digital cash.
Wasabi Wallet and Samourai Wallet have both made strides in making Bitcoin more private, but trying to use bitcoin in a private manner is still rather clunky due to the the limitations caused by the current consensus rules. In terms of base layer privacy, something like Confidential Transactions, which masks the amounts sent in transactions, may be needed to create a more user-friendly experience.
While Confidential Transactions is an improvement that is unlikely to find its way into Bitcoin for quite some time, Schnorr signatures have the ability to enable a competitive advantage for more private transactions in the form of lower fees.
Additionally, the second-layer payments protocol known as the Lightning Network has the potential to improve privacy by broadcasting transaction information to less people and publishing less transaction data on the blockchain.
A decent chunk of bitcoin’s potential value and usefulness comes as a hedge against a dystopian cashless society where governments and large financial institutions are tracking everyone’s financial activities, so improvements in privacy should be seen as a priority for developers and users.
Having said that, as Blockstream mathematician Andrew Poelstra has explained, Bitcoin users are generally unwilling to add experimental privacy features to the network at the potential expense of things like security, stability, and a transparent calculation of the bitcoin supply.
2. Mining Pools are a Point of Centralization
The key selling point of the Bitcoin network is that those who are in charge of ordering transactions are dynamic and potentially anonymous. This is what enables bitcoin to act as a censorship-resistant digital money. It’s also why things like Facebook’s upcoming “cryptocurrency” offering likely belong in a completely different category.
Having said that, the current state of mining involves large pools that are easily identifiable. While recent reports of cryptocurrency exchange Binance potentially colluding with these mining pools to push for a reorganization of the blockchain in the aftermath of a hack were somewhat overblown, the fact that coordination between mining pools is possible should be viewed as less than ideal. This sort of organization amongst miners could also be used to do things like censor transactions that are deemed unsavory by a government or the mining pool operators themselves.
This is not how Bitcoin was intended to operate.
A potential solution to this centralization around mining pools is longtime Bitcoin developer Matt Corallo’s BetterHash proposal. The key feature of BetterHash is that it allows all of the miners who are pointing their hashing power at a centralized mining pool to choose their own transactions to be included in blocks. This means someone who wishes to control the types of transactions that can be included in new blocks would have to collude with 51% of individual miners rather than the few mining pools that effectively represent 51% of the network hashrate.
Better privacy for transactions would also have the side effect of limiting censorship and other bad activities from miners or mining pools because they wouldn’t be able to distinguish one transaction from another.
3. Exchanges are a Point of Centralization
This third reality check for Bitcoins btc price is closely related to the recent price increase. Starting in 2017, much of the activity related to bitcoin moved from bitcoin wallets to centralized exchanges because more people were interested in speculating on the price than anything else.
Bitcoin was intended to be digital cash, but that’s not how many people use it. For example, cryptocurrency exchange Coinbase once revealed they at one time held roughly 10% of the total bitcoin supply on behalf of their users.
The fact that centralized third parties like Coinbase, which basically act like traditional financial institutions, hold so much of the bitcoin supply on behalf of others leads to a few different issues. Obviously, these sorts of centralized entities have a history of being hacked, although exchanges have become much better at dealing with these sorts of incidents as time has passed.
On top of that, there is a very anti-regulation ethos at the core of why bitcoin was created in the first place. Indeed, it has earned the nickname “digital gold” for good reason. However, if a government wanted to outlaw bitcoin, one of the first things they would likely do is confiscate the bitcoin and other cryptocurrency held at local exchanges — much like what then U.S. President Franklin D. Roosevelt did with gold on an individual basis back in 1933.
One of the value propositions of bitcoin is that it is difficult to confiscate, as it can be stored on a piece of paper, on a hardware wallet, or even as a memorized phrase in one’s head, and handing over control of one’s bitcoin to a traditional financial institution removes this feature.
Another key issue with centralized exchanges is that they contribute heavily to the privacy issue through their Know Your Customer and anti-money laundering policies. Additionally, exchanges and other custodians are entrusted by users to verify that the rules of the Bitcoin network are being followed on their behalf.
These issues around centralized exchanges are also at the core of why many bitcoin users weren’t too excited at the way in which the recent “acceptance” of bitcoin at Whole Foods and Starbucks was implemented.
The good news is that more decentralized, non-custodial exchange options are finally hitting the market. Solutions such as Arwen and the Lightning Network-powered Sparkwap allow users to trade on exchanges without handing the custody of their coins over to a third party.
While these non-custodial exchanges are a move in the right direction, bitcoin users likely also need to simply transact in a more peer-to-peer manner on a regular basis to lessen the impact of these security holes in the Bitcoin ecosystem.
There are definitely indications that Bitcoin is moving in the right direction when it comes to privacy and decentralization (and thus its potential as digital cash), but it’s also clear that there is plenty of work left to do. Thankfully, the helpful improvements like the Lightning Network, which continues to show signs of growth, do not require any changes to Bitcoin’s current consensus rules.
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