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Is Bitcoin an Efficient Currency?

by Pragati Shrivastava

When Bitcoin was first used for settling payments, banks and fiat supporters concluded that Bitcoin, as an actual payment mechanism, was a failure. It was slow, taking a minimum of ten minutes up to several hours to process a payment; it was unpredictable, complicated and definitely not user-friendly.

To use Bitcoin as a remittance tool, especially in the beginning, relied on untested third party vendors that could easily take your Bitcoin and run, or challenge a transaction if you had the misfortune of being scammed through LocalBitcoins or PayPal. In addition to rampant scams, they were prone to hacks too.

There seemed to be way too much responsibility for the average newbie user, and even the cryptopreneurs who know better can lose their pass codes!

Bitcoin also uses an extraordinary amount of energy and resources to keep the blockchain stable. Some might compare the energy use of Bitcoin to be equal to the energy use of Ireland! And then there’s the volatility that makes Bitcoin an inefficient medium for everyday payments.

In its early days, the number of payments that could actually be handled by the network was very low, there were governance problems, and the transaction cost involved in making a payment was very high. However, Bitcoin’s volatility and massive trend reversals have kept regulators and fiat supporters speculating about the cryptocurrencies legitimacy and its intrinsic value.

Store of value and medium of exchange
With the Lightning Network and other updates in the Bitcoin ecosystem, using Bitcoin as an effective currency has become easier, but it’s not perfect. Traditional methods are tedious and though many people still use banks for international money transfers, online transfer services are gaining popularity for their simplicity and low-cost options. Transferring money through Bitcoin is slightly different from a money transfer service, however, it’s simple.
Here’s the basic process:

  • Deposit your fiat currency (government-issued currency, like Dollars, Euros and Yen) onto a Bitcoin platform
  • Buy bitcoin and send it to your recipient
  • Your recipient sells the bitcoin for fiat currency on a bitcoin platform
  • Your recipient withdraws the fiat currency to their bank account
  • The process involves a few more steps than using a traditional money transfer platform. What’s more, you have to complete them yourself — nobody takes care of the entire process for you
  • This may be a strike against bitcoin

And before we get to the cost of transferring money through Bitcoin, let’s consider how money transfer services usually make a profit. Some services charge transaction fees to send money; some charge a fee to the recipient, and some charge on both ends of the transaction, especially if there is a conversion between one fiat currency to the other. In many cases, the average consumer is sending money to someone who can least afford the fees, but until cryptocurrency, the other option was risking security and the time it takes to mail cash, which is definitely not recommended. So, people are legally robbed – but what choice do they have?

Recently, someone transferred about $1 billion in Bitcoin and only paid about $700 in network fees. Is it any wonder that Bitcoin has become a favorite for quick and cheap transactions? Cryptocurrency is beginning to be a real choice for banks, enterprise and individuals.

Decentralization in Bitcoin
Bitcoin has become more decentralized by several measures, according to Canadian financial services firm Canaccord Genuity Group. In its February report, the firm said Bitcoin was less decentralized in its earlier days, as measured by its hashrate distribution. However, over the last few years, “increased competition” among mining chip manufacturers has led to decreasing centralization. In 2019, no single mining pool controls more than 20 percent of bitcoin’s hashrate, with five mining pools having from 10–20 percent and the remaining groups controlling less than 10 percent of the total hashrate.

Bitcoin’s increased decentralization is a foundational positive development and while there are several factors that contributed to it, the most important factor has been the commoditization of bitcoin mining chips, as advances in ASICs have slowed allowing for broader competition for bitcoin’s mining rewards. Bitmain, for instance, has seen increasing competition from Canaan Creative due to its inability to produce a meaningfully superior alternative to the Antminer S9.

Bitcoin’s centralization as measured by the Herfindahl-Hirschman Index (HHI) has steadily declined from ~3000 in 2013 to ~1200 currently. The HHI index is used to gauge market concentration. An HHI of less than 1500 is considered to be a “competitive marketplace,” an HHI of 1500–2500 is considered to be “moderately concentrated,” and an HHI of over 2500 is considered “highly concentrated.”

All of Bitcoin’s Hard Forks
In early 2009, Satoshi Nakamoto released the first software program that implemented the digital currency Bitcoin. Since then, Bitcoin has gone on to not only gain massive appeal across the globe but also to inspire hundreds of other digital currencies. Many of these cryptocurrencies make use of aspects that were already inherent in Satoshi’s initial program and concept. Others take the Bitcoin model and adapt or attempt to improve upon it. In some cases, Bitcoin has spawned variations which are based on the same underlying concept and program but which are distinct from the original. In these situations, the Bitcoin blockchain has undergone a process known as forking, through which the blockchain itself is divided into two distinct entities.

For the beginner, it can be difficult to tell the difference between these cryptocurrencies and to map the various forks onto a timeline. Now we’ll walk through many of the most important forks to the Bitcoin blockchain over the past several years.

  • Bitcoin XT – Bitcoin XT was one of the first notable hardforks of Bitcoin. The software was launched by Mike Hearn in late 2014 in order to include several new features he had proposed. While the previous version of Bitcoin allowed up to seven transactions per second, Bitcoin XT aimed for 24 transactions per second. In order to accomplish this, it proposed increasing the block size from 1 megabyte to 8 megabytes. Bitcoin XT is technically still available, but it is generally seen to have fallen out of favor.
  • Bitcoin Classic – When Bitcoin XT declined, some community members still wanted block sizes to increase. In response, a group of developers launched Bitcoin Classic in early 2016. Unlike XT, which proposed increasing the block size to 8 megabytes, Classic intended to increase it to only 2 megabytes. Like Bitcoin XT, Bitcoin Classic saw initial interest, with about 2,000 nodes for several months during 2016.
  • Bitcoin Unlimited – Bitcoin Unlimited remains something of an enigma some two years after its release. The project’s developers released code but did not specify which type of fork it would require. Bitcoin Unlimited set itself apart by allowing miners to decide on the size of their blocks, with nodes and miners limiting the size of blocks they accept, up to 16 megabytes.
  • Bitcoin Cash – In response to SegWit, some Bitcoin developers and users decided to initiate a hardfork in order to avoid the protocol updates it brought about. Bitcoin Cash was the result of this hard fork. It split off from the main blockchain in August 2017. Bitcoin Cash remains the most successful hardfork of the primary cryptocurrency.
  • Bitcoin Gold – Bitcoin Gold was a hard fork that followed several months after Bitcoin Cash in October 2017. The creators of this hard fork aimed to restore the mining functionality with basic graphics processing units (GPU), as they felt that mining had become too specialized in terms of equipment and hardware required. One unique feature of the Bitcoin Gold hardfork was a “post-mine,” a process by which the development team mined 100,000 coins after the fork had taken place.
  • SegWit2x – When SegWit was implemented in August 2017, developers planned on a second component to the protocol upgrade. This addition, known as SegWit2x, would trigger a hardfork stipulating a block size of 2 megabytes. SegWit2x was slated to take place as a hardfork in November 2017. However, a number of companies and individuals in the Bitcoin community that had originally backed the SegWit protocol decided to back out of the hardfork in the second component. Some of the backlash was a result of SegWit2x including opt-in replay protection; this would have had a major impact on the types of transactions that the new fork would have accepted. November 8, 2017, the team behind SegWit2x announced that their planned hardfork had been canceled as a result of discrepancies among previous backers of the project.

Bitcoin’s Future
A new report by the World Gold Council shows that there is a Global demand for harder forms of money than fiat currencies. Such demand points to a bright future for Bitcoin given that it represents an even harder form of money than the precious metal.

A total of 61% of those surveyed in the report said that they trusted gold more than they did fiat currencies. Most attribute this “trust” due, in part, because of the precious metal’s limited supply. But Bitcoin is also finite and considered the “gold standard” because it is the grandfather of all crypto. Of course, there is a debate on which is the better commodity, Bitcoin or gold, but either is probably the better choice than fiat currency in this volatile era of civil unrest and trade wars.

The one thing that Bitcoin does lack when compared to gold is history, but adoption, ease of use, and faster transaction speed with low cost for transfers give Bitcoin an edge over gold. With Bitcoin, all you have to do is scan a QR code to transfer $1 million. How much would it cost to ship that amount of gold and keep is safe from thieves?

In the meantime, as much as governments are putting restrictions or barring Bitcoin and cryptocurrency exchanges, I suspect they’re only doing this until they figure out how to tax us.

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