In 2008, an author named Satoshi Nakamoto published a research paper on a cryptography mailing list on the platform Metzdowd titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The first phrase of the research paper shows the main intention of the author.
“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.”
Bitcoin: A Peer-to-Peer Electronic Cash System
This groundbreaking idea led the way to the most popular financial invention of the century, “Bitcoin.”.
Satoshi’s system proposed a peer-to-peer version of electronic cash, which is:
- Decentralized
- Transparent
- Accessible
- A medium of exchange for everyday transactions.
However, as Bitcoin has evolved over the years, many argue that what Satoshi intended has been lost or significantly altered.
Store of Value vs. Medium of Exchange
People see Bitcoin as an investment or as the digital version of gold rather than a medium for daily transactions that can replace fiat currencies.
- According to a survey by the University of Cambridge in 2021, 55% of Bitcoin users primarily hold it as an investment, while only 30% use it for transactions.
- Still, the daily average of Bitcoin transactions has remained relatively unchained at around 300,000 since 2018. Though the popularity Bitcoin gained throughout this time drastically increased, people still hesitated to accept Bitcoin as a currency.
- 30-day BTC/USD volatility, also known as “Bitcoin’s Volatility Index,” averaged 3.5% in 2021, compared to 0.6% for gold and 0.9% for the S&P 500. Volatility indexes determine how quickly the value of a certain instrument can be changed. This higher volatility makes Bitcoin less suitable for everyday transactions.
Centralization of Networks and Large-Scale Exchange Platforms.
Though the Bitcoin network is still distributed and decentralized, the control of mining power by some large mining pools and the dominance of centralized exchanges have raised a major concern about centralization.
- Four of the world’s largest mining pools controlled more than 60% of Bitcoin’s total hash rate in 2023.
- In 2021, the United States dominated Bitcoin mining with 46%, followed by Kazakhstan and Russia with 21% and 11%, respectively, showing the geographic centralization of Bitcoin mining, which eventually will lead to the centralization of the network.
- The Nakamoto coefficient, which measures the smallest number of participants that can act collectively to shut down a cryptocurrency network, has been reduced to 5 for Bitcoin in 2022.This implies that five entities could potentially endanger the whole network.
With the growth of large, centralized bitcoin exchanges, a new kind of centralization has entered the bitcoin ecosystem. These exchanges share common characteristics of centralization.
- Market Dominance: Currently, the five largest centralized cryptocurrency exchanges (Binance, Coinbase, Kraken, Bitfinex, and Huobi) control more than 70% of the global Bitcoin trading volume.
- Custodial Control: These exchanges hold many of their users’ bitcoins, which contradicts the ‘being your own bank’ ideology of bitcoins. As an example, Coinbase disclosed that it had $90 billion in customers’ assets in Q1 2022.
- Single Points of Failure: The failure of FTX in 2022 and the Mt. Gox collapse in 2014 CEXs illustrated the potential SPOF (Single Points of Failure) in the ecosystem because of their centralized nature.
- KYC and AML Requirements and Restrictions: Most of the large cryptocurrency exchanges have strict Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, which reduce anonymity.
- This trend, along with the growth of the government’s interest, is quite opposite to the idea of Bitcoin as a decentralized currency.
Accessibility Issues
Users find it more difficult to mine bitcoin than ever, drawing average users out of the network and making the system less open.
- Mining Hardware Costs: The specialized ASIC miners used for efficient Bitcoin mining have become unbearably expensive for most people. ASIC miners, which have a higher hash rate and energy efficiency and are more suitable to mine bitcoin, can be found on Amazon for as much as $15,000.
- Electricity Costs: Bitcoin mining requires energy-intensive and specialized hardware. The network hash rate, which defines the computational power required to mine bitcoin, was around 1 exa hash per second (EH/s) in early 2016, but in 2023 it had surpassed 400 EH/s.
- With this increase in computational power required to mine bitcoin, the electricity requirement and consumption have increased proportionally. The cost of mining a single bitcoin reached an all-time high of $24,000 in March 2023, up from just $5,000 in 2018.
What caused Bitcoin to shift from its initial vison?
Scalability Limitations
Only a limited number of transactions can be done within the Bitcoin blockchain at a time, making it impractical for widespread, everyday use.
- Visa network can process 65,000 transactions per second, while the bitcoin network is capable of handling 7–10 transactions per second.
- In April 2021, the transaction fee required to transfer one Bitcoin from one wallet to another reached its highest, to a staggering $62.78, making smaller transactions impractical via the network.
- The Bitcoin blockchain size has grown from 50 GB in 2015 to over 500 GB in 2023, raising concerns about long-term sustainability.
Regulatory Involvement
- Bitcoin has largely lost its core values of anonymity and decentralization due to growing governmental influence and regulation
- As of 2023, over 100 countries have implemented some form of cryptocurrency regulation.
- The Securities and Exchange Commission (SEC) in the United States has classified many cryptocurrencies as securities. Which will eventually lead to strict government regulations of these cryptocurrencies.
Speculation and Investment
The potential for high returns has turned Bitcoin into a speculative asset, overshadowing its utility as a currency.
Speculative asset are high-risk assets which investor invest without solid fundamental analysis based on price fluctuations and other insights
- Bitcoin’s price volatility in 2022 was 63.5%, compared to 16.5% for the S&P 500 and 14.5% for gold.
- The number of Bitcoin addresses holding more than 1,000 BTC (whales) increased by 30% between 2020 and 2023, indicating growing institutional investment.
- Cryptocurrency derivatives trading volume reached $3 trillion in 2022, with Bitcoin futures and options accounting for a significant portion.
Competition and Technological Advancements
Many cryptocurrencies and blockchain technologies have emerged to resolve the limitations associated with Bitcoin.
- As of 2023, there are over 20,000 different cryptocurrencies, many of which offer improved features over Bitcoin.
- Ethereum, the second-largest cryptocurrency, can process 15–30 transactions per second and supports smart contracts, features Bitcoin lacks.
- Layer 2 solutions like the Lightning Network aim to address Bitcoin’s scalability issues, but adoption remains limited, with only about 5,000 BTC locked in Lightning channels as of 2023.
Bitcoin ETFs (Exchange-Traded Funds)
A Bitcoin ETF or exchange-traded fund, is a financial asset that replicates the performance of Bitcoin, or a digital asset, and is listed for trading on a conventional stock exchange.
It enables investors to invest in Bitcoin without having to own or directly deal with the asset. However, these ETFs have a great influence on the model that was envisioned by the creation of Bitcoin.
- Centralization: ETFs are a slightly centralized concept since they are managed by financial institutions. This was contrary to the decentralized nature of Bitcoin.
- Reduced direct ownership: This means that more people may indirectly invest in Bitcoin through traditional financial markets without directly owning and using Bitcoin through ETFs. This could reduce peer-to-peer usage.
- Increased institutional involvement: ETFs make it easier for large institutions to invest in Bitcoin, potentially giving them more influence over the market.
- Regulatory oversight: ETFs are known to be regulated under traditional financial rules; therefore, this will have an impact on the degree of Bitcoin’s independence from government rules.
- Price volatility: While ETFs may help stabilize the price of Bitcoin in the long term, they could also contribute to higher short-term volatility, as seen with the GameStop and AMC stocks.
- Separation of ownership and usage: This could partly cause the manifestation of two different forms of bitcoin: one that is traded in as an ETF and the other that is used as a currency for transactions.
Yet, it is necessary to mention that the cryptocurrency market is rather young and developing at a fast pace. Some experts expect that further technological advancements, changes in regulations, and user habits may push Bitcoin to its original potential or introduce new digital currencies with the same vision as Nakamoto once had.
