These are interesting times for cryptocurrencies. One could argue that a currency that is now over 10 years old should have achieved further dissemination, this week we will see the number of mined coins at 18 million., signalling the slow and steady race towards 21 million coins, the maximum there will ever be. So this should have been a great week for Bitcoin proponents.
And yet, the currency’s price continues to decline steadily since the year’s all time high of $13,300, and is now trading under $8,000 for the first time since June. Lack of mainstream and institutional investment has been eroding confidence in cryptocurrencies, and the interest in Bitcoin is very low. This price decline is happening despite recognition that there is widespread market manipulation, and potentially outright fraud in the way some exchanges deal with cryptocurrencies.
It was not supposed to be like this. Bitcoin started gaining prominence as the currency of the future, a cheap, secure, anonymous, efficient, peer-to-peer, decentralised method of payment. Paraphrasing Luke Skywalker, every single word in that last sentence was wrong.
The failings of Bitcoin as a currency as now well publicised, but the problem boils down to the basics of what a currency is supposed to do. Defining a currency as a medium of account by which it is possible to exchange goods and services, then Bitcoin fails to do just that; it’s cumbersome, it’s slow, it doesn’t support high volumes of transactions per second, and the wild price swings make it unappealing to most merchants. Some technical solutions have emerged, such as the Lightning network, but these are still not working as intended, and have problems of their own.
So if Bitcoin is not a currency, then what good is it for?
As its usefulness as a currency diminished, enthusiasts switched to propose it as a store of value. Much in the same way we don’t usually use gold to transact daily, Bitcoin is a digital equivalent to gold, it has value and its main use is to store value, allowing people to weather the inexorable inflation of fiat currencies. The argument is that Bitcoin continues to gain value, so it is an investment, a way to convert currencies that lose value over time, with one that gains value over time. The fact that it is a cryptographic currency with a limited amount of coins in existence makes it valuable because of scarcity, and the fact that it is mined and maintained by energy expenditure makes it valuable as well.
The problem with this argument is that it has been decreasing in price steadily, so anyone who bought at higher prizes than today, is actually losing money. Moreover, the energy expenditure needed in order to maintain the network is excessive to its usefulness to society, if we take into account the potential ecological damage of the cryptocurrency, then its appeal as a store of value is also diminished.
The third use case is that it is an anonymous and secure cryptocurrency, and while it may not be useful for everyday transactions, its real use is when anonymity is needed. This means that Bitcoin has become the currency of choice for a series of dodgy practices: selling drugs online, cyber extortion, ransomware, and child pornography.
But this week, even that use case took a big hit, when a multinational sting operation against child pornography produced hundreds of arrests around the world. The operation involved a site in South Korea that was seized by the authorities, but most importantly, they were able to track down individuals by using the Bitcoin transactions and the blockchain. An agent for the US Internal Revenue Service (IRS) explained:
“Our agency’s ability to analyze the blockchain and de-anonymize Bitcoin transactions allowed for the identification of hundreds of predators around the world”.
This tracks with similar situations where the much publicised anonymity of Bitcoin failed. Just last December we reported about a kidnapping case in Costa Rica, where the perpetrators were also identified thanks to Bitcoin.
So the question in the title remains. What is Bitcoin good for? Use cases continue to dissipate.