Andre Alessandro — The five problems listed here are both structural and external and they will prevent the mass adoption of the cryptocurrency.
1. The Price
Regular people are not going to invest heavily in a speculative losing asset. If prices are expected to decline further, then buyers will hold off their purchases until prices stabilize or begin an upward trend.
Since the end of the bubble, there have been some price rallies, but really they are dead cat bounces. Since bitcoin has no underlying value, the decline is equatable to a loss in its confidence and popularity. Quite simply, the only people holding bitcoin today are those who purchased bitcoins at the top and are waiting to recoup their investment or diehards who believe that Bitcoin will one day succeed.
2. Mining Is Becoming Less Profitable
The price decline has also led to a serious blow to its production or “mining,” which is the underlying process by which Bitcoin creates new coins and determines the validity of all Bitcoin transactions.
In recent months, there have been a spat of companies involved in producing specialized mining hardware that have filed for bankruptcy, most notably Hashfast and Cointerra. In both cases, the companies were not able to deliver ordered supplies on time to their customers and now both companies owe investors tens of millions of dollars. These companies products were specifically designed to mine and their niche value has plummeted.
Additionally, Bitcoin mining “Farms,” essentially large sets of computers devoted to mining, face ever decreasing profits as the price drops. At some point, the electricity it takes to mine a block overtakes the profit gained from mining, meaning the farmer is now paying money to create coins. As well, as time goes on, mining bitcoins becomes harder and less rewarding. There are only 21 million “mineable” Bitcoins and close to 13.9 million of them have already been mined. The remaining 7 million coins will take another 100 years to mine, thus the majority of miners trying to make a quick buck has already peaked. The shrinking price will eventually lead to a consolidation of miners, until the majority of mining is controlled by an individual or a few groups. In this dangerous scenario, if a single or grouped entity controls more than 50% of the mining, they can manipulate it for their benefit.
3. No Consumer Protection
Bitcoins are the modern equivalent of a bearer bond. This type of financial instrument allows whoever holds the bond (the bearer) to present it to a bank in return for cash. In many old bank heist movies the thief's prize was a stack of these that could be worth several million dollars, thus excluding the problem of trying to move a similar amount of gold of the bank. Governments phased out these types of bonds because they follow the “abstraction principle, where the banking institution only has to validate the bond in order to distribute funds, rather than confirm whether they were acquired through criminal means. Modern anti-money laundering (AML) laws have effectively killed the use of bearer bonds, as the government of the United States passed strict regulations to ensure all funds are acquired legally.
Unlike bearer bonds, government issued currencies held in banks are guaranteed against theft, fraud, and loss. If a credit card is stolen, once the thief tries to make unusual transactions, the account is frozen automatically. Even if the transactions are processed, the account holder is not liable for the losses, rather, the merchant or the bank is liable. A depositor of a bank usually never worries about the safety of his deposits. On the other hand, access to a user's blockchain is only protected by himself. If a user wakes up in the morning and his blockchains bitcoins are gone, there is no action that can be taken or organizations to contact who will provide insurance. Once the Bitcoin is lost, there is no getting it back.
4. Low Adoption Rates
The goal to have every merchant accept Bitcoin as payment is a lofty dream, but the reality is, that many businesses are not considering adopting Bitcoin in the near future. Because Bitcoin has dropped in popularity, there is no reason for any merchant to update its existing pay structure. It also currently faces competition from some of the largest companies in the world with Apple Pay, Google Wallet, and Paypal. There are only a few merchants, mostly smaller business like coffee shops and a few large companies such as Dell, that accept Bitcoin payment. Concurrently, Apple has said that 38% of all large retailers will have adopted Apple Pay by the end of 2015 and full adoption will happen by the end of the decade. Bitcoin does not have that prospect. It is a third rate payment system, far behind cash, credit cards, and then other forms of money such as gold and silver.
Bitcoin will fail, not for fans lack of trying, but rather its status will never be more than an interesting concept championed by those in the techie or libertarian camp. Holding Bitcoin is more of a political expression rather than a sound economic investment.
The people who hold it either think its an interesting technological idea or are skeptical of Central Banks constant money printing. They believe the currency to be an answer to the Keynesian interventionist based policies of the world today. But just like fiat currencies, the only value of Bitcoin has no underlying value and it will never be worth more than the faith and confidence the public puts into it.
Ultimately, Bitcoin will be relegated to the history books unless structural changes are made. It will never be fully adopted in its current form, being nothing more than a neat concept for people to lose money on.