The vertiginous rise of cryptocurrency has been nothing short of breathtaking for many, and bewildering for many more. At the time of writing, bitcoin, litecoin, and ethereum – three of some of the most valuable cryptocurrencies by market capitalization, collectively representing nearly $350 billion in current economic value at the time of writing – are trading at or near all-time highs.
But bitcoin and its alts didn’t start out as investment vehicles, despite Wall Street cozying up to the idea. It was originally meant to be used like any other currency: to buy pizza, alpaca socks, and stuff from the dark corners of the Internet. It aimed to be the magical internet money that solves the problem of securely transacting online without censorship or oversight from Big Banking.
However, does bitcoin’s recent run-up in price, combined with extant scaling problems, mean that it has effectively shed its utility as a currency? At least for now, probably.
From Fast And Free To Slow And Pricey
The original bitcoin white paper laid out a vision for “[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.”
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So here is what that means: holding true to the “bitcoin as electronic cash” metaphor, someone with bitcoin should be able to send bitcoin – either a small amount or a large amount – to someone else quickly, securely, and cheaply.
Like the cash most of us are used to dealing with, bitcoin (or other cryptocurrencies, for that matter) should be difficult to counterfeit and spend twice in the same transaction. (Similarly, you can’t pass the same $20 bill to someone twice and say you’ve paid them $40.) And while there’s little doubt today that the bitcoin network is secure, it is the quick and cheap side of the cash usability equation that bitcoin is currently failing at.
How It’s Supposed To Work
Bitcoin was the first electronic cash system to implement a blockchain, an open database of all of the transactions that have ever occurred within the system. It’s the technology that facilitates the “without going through a financial institution” part of bitcoin’s vision.
In the case of bitcoin, a new block is created roughly every ten minutes. You can think of a bitcoin block (or any other block) as a “file” within this special database.
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In theory, this block is supposed to capture most, if not all, of the transactions that occur within the ten minutes after its creation. After those ten minutes have elapsed, a new block is created by way of some complicated math. The previous block (and the transactions contained therein) is confirmed and secured by a huge and growing network of computers all trying to solve the same kind of math problem, which they do in exchange for the chance to earn cryptocurrency.
However, what works in theory doesn’t always work out in practice. And that’s the sticking point that bitcoin, as a currency, faces today.
Yes, bitcoin has grown more popular, and not just in the public zeitgeist. Over the past two years, the number of confirmed transactions per day has nearly doubled, according to statistics from Blockchain.info, an early and prominent provider of web-based bitcoin wallets.
However, due to certain limits in bitcoin’s software infrastructure, the network hasn’t scaled itself up adequately to maintain the cost-efficiency and speed needed as a suitable alternative or replacement to cash. Let’s take a look at each in turn.
Bitcoin Transactions Don’t Come Cheap (Anymore)
The average price of bitcoin transactions is on the rise, much to the chagrin of users.
On top of exchange fees, there are wallet usage and payment processing fees paid by the few folks who actually use bitcoin to buy tangible goods.
When the network is under light load, it’s often the case that bitcoin transactions are free or nearly-free to make, with few rare exceptions due to technical hiccups. However, as the network has become more congested, bitcoin users have been encouraged to add a fee or “miner incentive” to their transactions to prioritize them ahead of other transactions. If bitcoin was able to accommodate more transaction volume today, this would be less of a problem.
In the case of bitcoin, an auction system is employed for getting one’s transactions delivered through the network faster. Under times of heavy load, those transaction costs can balloon. In the chart below, we have displayed data from Blockchain.info. It shows the average cost of a bitcoin transaction over the past year, calculated by dividing the number of transactions processed in a given day by the amount of transaction fees gathered by miners.
It should be stated that there are a few different ways to calculate the cost-per-transaction metric. Ars Technica writer Timothy E. Lee recently pointed out that most transactions go through for around $20 during times of heavy load. However, Blockchain.info’s calculation claims to include all miner fees collected for processing transactions, which includes some transactions with very high fees attached.
Why would someone attach a large transaction fee? To stay out of the transaction backlog, of course.
Bitcoin Transactions Aren’t That Fast, Either
Considering that the average bitcoin block, at time of writing, contains around 2,200 transactions, and the average block is created roughly every ten minutes, then the bitcoin network is capable of processing just under four transactions per second. In times like this, when people are initiating more transactions than the network can process, many low-priority transactions – those without the all-important mining incentive attached – go into the backlog.
And bitcoin’s backlog has grown significantly over the past sixty days, according to data gathered by Blockchain.info.
With over 130 megabytes worth of transactions left unconfirmed at the time of writing, it would take roughly 130 new blocks (at 1 MB per block) to clear the backlog in its entirety, not including any new transactions. At one block produced every ten minutes, it would take just under 22 hours to clear the entire backlog.
But that’s not going to happen any time soon.
So long as transactors are willing to attach a sufficient fee to get to the front of the line, there will be a long-lasting “underclass” of low-priority transactions with low or no fees. For some, waiting days in lieu of not paying transaction fees is fine. But for others who either want or need a transaction to go through quickly, hanging in purgatory for a long period of time is untenable.
Factor in the wild price swings, and the $100 you sent to buy something could be worth $130 or $60 by the time it arrives. There is just too much risk associated with transaction delays to use bitcoins like regular money. For these reasons, many ecommerce sites have stopped accepting bitcoin.
Bitcoin’s Growing Pains
There have been a number of attempts to help bitcoin scale up that benefits miners, enable more transactions per second, and adheres to the security in which the blockchain provides.
But the saga of the bitcoin community’s attempts at consensus around scalability is long, convoluted, and rife with comedy and tragedy. To understand it all, Daniel Morgan compiled a reasonably thorough accounting of bitcoin’s heated scaling debate, even a summary of which is beyond the scope of this article.
That said, there are plenty of possible solutions, especially in the short term, for improving scalability in the bitcoin network. But just like how computers in the bitcoin network need to “agree” with one another to verify transactions, consensus is also needed among the humans that oversee that protocol in order to scale. So far, it’s been a fairly contentious process.
External Costs Of Bitcoin Loom Large
But even if the bitcoin community is able to reconcile these infrastructural problems, there are plenty of other emerging issues that need to be addressed. One is energy consumption. Digiconimist produced a widely-cited projection of bitcoin energy consumption, and at nearly 90 million KWh used per day, bitcoin mining hardware consumes roughly the same amount of power as the country of Denmark.
According to Digiconomist’s estimates, one bitcoin transaction uses as much electricity as almost eight American homes do in a single day. If bitcoin’s energy consumption continues to grow at its current rate, by February 2020, the bitcoin network will consume as much power as the entire world does today, according to Eric Holthaus in an essay for Grist. Such projections are likely unrealistic, but they do point to the long-term unsustainability of bitcoin’s growing power consumption.
Crypto’s Success May Be Its Undoing As Currency
Bitcoin. Is it a bird? A plane? No. A collective mass delusion? Given recent prices, maybe. But is it cash?
Not in the way it used to be.
At one time, the main use case for bitcoin was buying stuff or sending money overseas. But now, looking over transaction records and adding up how much I spent on trivial stuff – such as Reddit Gold, some stickers, a GPU for a mining rig that barely paid itself off – I kind of wish I didn’t spend it. But that’s deflation for you.
Given the precedent set by recent price appreciation, I doubt many people will readily spend their coins (bitcoin or otherwise) as cash—just like people didn’t often plant the tulip bulbs they bought in the 1600s.
We’ll let a thousand digital flowers bloom in hopes of finding the new skyward asset.
Illustration: Li-Anne Dias