Bitcoin's Fragility in the Internet Age
“Perhaps Bitcoin’s best bet may not be in the storage of value category, but in the category of collectibles. Only time will tell.”
By Block Society
To many cryptocurrency investors, Bitcoin is digital gold and competes with traditional gold. From a practical viewpoint regarding Bitcoin’s technical capability, this fits in Bitcoin’s narrative.
The actual utility of cryptocurrencies is amorphous as the technology is still in its infancy. A cryptocurrency asserts its utility via a smart contract platform, pure currency usage, tokenization, decentralized application, storage of value, or any combination of those categories. Bitcoin has a firm grasp in the storage of value category, but perhaps at no technical merit of its own. It cannot scale effectively which in turn inflicts a wide range of issues involving high transaction fees and long confirmation times. Lightning Network as a layer-2 scaling solution is not a panacea as it has certain drawbacks. Storage of value fits in Bitcoin’s current technical framework as a static network unsuitable for applications involving heavy transaction traffic.
However, the argument that Bitcoin is digital gold has its merit by just comparing its features to gold. Googling “Bitcoin vs. digital gold” would yield a multitude of comparison charts such as the following as an example1:
Compelling arguments for Bitcoin’s status as digital gold include its competitive features compared to gold, first-mover advantage, and Austrian economics to name few. Bitcoin’s massive energy consumption, limited history to prove itself as a safe haven, and scalability bottlenecks are some of the counter-arguments against Bitcoin as digital gold.
Interestingly, a major aspect of this debate has repeatedly been overlooked: Bitcoin is software. Why is this trivial fact important to recognize? In a recent interview, Tyler Winklevoss said that the only thing that gold has over BTC is a “3,000-year headstart”2.
While the above statement has truth to it, what one should understand about software is that it’s mutable assuming comprehensive consensus takes place. This means the properties of Bitcoin change whenever the software changes. The Bitcoin codebase from when it was first launched in 2009 is different from the Bitcoin codebase 10 years later in 2019. This has serious implications over the long-term.
To dismiss gold’s history over multiple millennia would be myopic. It could be argued that since gold is outside the digital realm, it is a far more effective safe haven since nothing about gold had to be changed, has changed, or will ever change. On the other hand, the internet age is advancing in an extremely rapid pace. The internet is the backbone that Bitcoin built on, and the internet has existed only for few decades. It would be safe to assume that the internet will look nothing like it does currently 3,000 years from now. The fact that blockchain technology as a whole is also rapidly evolving adds yet another layer to what appears to be a daunting task for Bitcoin: how to stay relevant. Gold does not have this issue since it is outside the chaotic radius of the digital revolution.
One cannot underestimate the short longevity of technology. Standard definition televisions are shunned. iPhones that are few years old are abandoned. Algorithms are eschewed in favor of alternative algorithms that increase efficiency tenfold. Old automobiles are left at the junkyard. But gold does not age since it is not based on technology.
Bitcoin shows every sign of aging technology. It takes about one week to synchronize a full node with the network. The network history is gigantic memory-wise which threatens decentralization. Bitcoin is not anonymous. The Bitcoin network has a low throughput per unit of storage which translates into long confirmation times, hefty fees, and an intrinsic ceiling of users. Bitcoin may or may not become quantum-proof in the future, depending if enough nodes adopt the change.
In addition, one should consider the history of alchemy as a hint for Bitcoin’s future. If one could easily convert certain materials into gold, then gold may not hold its value. On the other hand, it only takes one click to create a fork off the Bitcoin codebase and make significant technological enhancements on top of it. To prevent such value attrition, Bitcoin ought to hold on its own one way or another in the midst of the internet/cryptocurrency age which may be easier said than done especially when other projects achieve vastly superior advantages.
Should one need to download hundreds of GB to synchronize with the network as a node if this issue was already solved by the SafeBox technology? Should one need to pay fees for energy-intensive mining if Nano’s new economic model based on its block lattice ends up being a success? Should we stop outsourcing consensus to miners by using the Tangle for enhanced decentralization and low or no fees? There are success stories of blockchain projects, and there will be many more in the future once projects prove themselves over time.
Perhaps Bitcoin’s best bet may not be in the storage of value category, but in the category of collectibles. Only time will tell.
- Thornpike, V. (2019, February 22). The Most Outstanding Bitcoin Price Forecasts 2019, 2020 and Later: Is $1,000,000 for 1 BTC Still Possible? U Today. Retrieved from https://u.today/the-most-outstanding-bitcoin-price-forecasts-2019-2020-and-later-is-1000000-for-1-btc-still
- Chong, N. (2019, May 20). Winklevoss Twins Double Down On “Bitcoin Is Gold 2.0” Narrative. NewsBTC. Retrieved from https://www.newsbtc.com/2019/05/20/winklevi-twins-double-down-on-bitcoin-is-gold-2-0-narrative/