Five challenges bitcoin must overcome to go mainstream
Monday 17 March 2014
Bitcoin has already come a long way in a very short time, and from the growing media coverage appears to be on the verge of breaking through into mainstream adoption. However, there are a number of significant challenges that will need to be overcome if it is to become the default currency of the internet, or even to be widely used for making purchases in physical stores. None of these are insurmountable, but they will need thought and investment if the bitcoin infrastructure is to grow and the cryptocurrency is to develop into more than a novelty. Here are five areas that will need to change.
One of the biggest problems for bitcoin at the present time is trusty. Adverse media coverage has badly affected it. The Silk Road episode was seized upon by the press as evidence that bitcoin was only good for illegal purchases. Unfortunately, these arguments have been accepted and passed on by some high-level politicians, too. In a letter to US financial regulators (including Fed Chairwoman Janet Yellen), West Virginia Senator Joe Manchin asked that they ‘take appropriate action to limit the abilities of this highly unstable currency... This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy.’ Then there is MtGox’s collapse, which has served as a warning to potential buyers that their bitcoins and fiat may disappear without notice, or any recourse on their part.
Clearly, bitcoin needs some rehabilitation before its next wave of growth. At the moment, rightly or wrongly, too many people simply don’t trust it.
The likelihood is that this rehabilitation will occur through regulation. The events of the last few months have forced states and regulators to take notice of the cryptocurrency and decide their policies on it. This is an ongoing process, and like much government activity is slow and bureaucratic. Some countries (like Russia) have effectively banned bitcoin outright. Others, like the UK, have taken a lenient tax position that is attractive to bitcoin enterprise.
As the regulators make their decisions, bitcoin will inevitably be regulated to some degree. Whilst bitcoin purists may not appreciate this, it is a necessary step for it to come to wider acceptance – most people simply will not deal in a currency that has no official safeguards.
3) Transaction time
One of bitcoin’s strengths and weaknesses is the time it takes for transactions to complete. Users typically require between three and six confirmations on the blockchain before a transaction is considered truly safe. This generally takes anywhere between a few minutes and an hour, depending on various conditions including the miners’ fee.
This period of time is much shorter than the time it takes to send money internationally. That can often be days or even a week. So there is a clear advantage in using bitcoin rather than a bank to send money abroad – as well as the fact it costs a few cents rather than several percent of the total amount.
However, even a few minutes is too much for customers who are shopping in physical stores. People are used to handing over cash or swiping a credit card and having the transaction complete instantly (even if it doesn’t show up on your bank statements for several days). Here, bitcoin has a major disadvantage.
Some bitcoin-accepting shops simply require zero confirmations, and take the risk. This is fair enough with small amounts of money. You know the transaction has taken place, and so the money is almost certainly on its way. But for larger amounts, the problems are more serious: there is greater incentive to defraud the vendor if you are purchasing expensive electronics than if you are just buying a pint of beer.
Various solutions to this problem have been posed. One is to use Litecoin – either instead of bitcoin or as a bridge between the real-world needs of fast transactions and bitcoin’s security benefits. Litecoin has a faster confirmation time, at the expense of a much larger blockchain (a factor of four in each case). However, even this is too much for day-to-day purchases.
Another option would be to create an escrow company, however there are few who seem willing to take the risk to step into this role and act as a guarantor to the vendor. Customers could transfer their bitcoins to the company, and the balance would be available for purchases when the required number of confirmations had been reached. Withdrawing money from this ‘current account’ could be subject to a delay, to prevent customers from making a purchase and then immediately emptying their account. The small amount of risk the guarantor would take on could be paid for with a percentage of funds transferred, perhaps 0.5 percent.
4) Wallet software
Currently most popular wallets are still too complex for most people to feel at home with. In the coming months no doubt some killer smartphone apps will be created that make saving, transferring and spending coins as easy as sending a text message. However, there is significant resistance to the idea in certain circles. Apple sparked dismay earlier this year when it removed the blockchain app from the Apple store, prompting critics to claim that bitcoin proved too much of a threat to the technology giant.
5) The value of one bitcoin
Back when bitcoin was little-known, just a year or two ago, its value was far lower – only a few dollars, or even less. Now that the value of a bitcoin has soared to several hundred dollars, it is awkward to work in bitcoins for small amounts of money. It’s clumsy to label goods with a fraction of a bitcoin: ‘0.001563 BTC’ is harder to grasp than the equivalent ‘$1’ (US). At the same time, one satoshi is still too small a unit. At one hundred-millionth of a bitcoin, $1 equals 156,250 satoshis.
Struggling with the position of a decimal point ought to be a small problem for bitcoin, given the other challenges it has to contend with, but the reality is that such issues of presentation do matter. There may come a time when merchants and users prefer to denominate amounts in milli-bitcoins (mBTC), or thousandths of a bitcoin. This could be a feature that is built into wallet software, rather than adjusted in the bitcoin protocol itself.
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