The Bitcoin community has, obviously, already become convinced of the viability and efficacy of Bitcoin as a monetary system. It provides instant payments with virtually nonexistent transaction fees and it requires minimal physical storage space—you can even store bitcoins in your brain! Bitcoin is pseudonymous, meaning that a Bitcoin user can employ proper cybersecurity methods and keep his or her monetary transactions away from prying eyes. Lastly, the Bitcoin network itself requires very little hardware to operate; people in developing countries, such as African states, can use—and are using—Bitcoin to send and receive money over cellphone networks.
Those advantages of using Bitcoin can be enjoyed right now, in the present. Bitcoin has, however, much larger implications that are on the distant horizon of the future. If the digital currency is ever widely accepted by the majority of the global population, and the price rises to unthinkable heights, the banking industry as we know it would disappear. Bitcoin requires no massive physical institutions to store or loan out its currency. Everything can be done from a computer or smartphone. Furthermore, Bitcoin has a fixed supply, meaning that banks would not be able to use it to create money out of thin air—thus eliminating the cause of devastating business cycles.
The Ultimate Potential of Bitcoin’s Success
Bitcoin also has the potential to challenge the authority of government itself, if its full potential is ever realized. Given its fixed supply, the central banks of the world cannot manipulate it in any way. They cannot even use paper substitutes for bitcoins, which they could print infinitely beyond the available bitcoin supply, like they did with gold in the 20th century.
Therefore, as mentioned above, the banks—namely the central banks—could not manipulate the money supply and cause business cycles if Bitcoin was the currency of choice by the majority of the population. Its pseudonymous nature also makes Bitcoin users harder to track down for taxation purposes, given that the individuals in question have employed proper cybersecurity measures. So, if everyone used Bitcoin, the government would find it very difficult to exercise its power of compulsory taxation. This restriction in power, along with the death of central banks, would force governments to rely upon voluntary donations in order to continue operating. Thus, governments would have to provide services that people actually valued and found worthwhile. In other words, in a Bitcoin Utopia, governments would essentially be private companies, competing on a free market for your patronage.
But these possibilities are a long way from being realized and Bitcoin is, in reality, far from being perfect; it has some definite flaws.
The most severe flaw present in the digital currency is the possibility of Bitcoin mining centralization. One of the greatest virtues of Bitcoin is that it is decentralized—there is no need to trust a middle man in processing your transactions, everything on the Bitcoin network is done through direct, peer-to-peer technology. But Bitcoin mining centralization eliminates the protocol’s trustless nature.
Miners verify all Bitcoin transactions; therefore, if one miner—or a Bitcoin mining pool, such as Ghash.io—gets 51% of the available hashing power, then that entity is responsible for processing the majority of the Bitcoin transactions. Essentially, they control the payment network. This control gives them the ability to successfully execute a double spend, which many believe would ruin the credibility of Bitcoin and thereby destroy its value.
To make matters worse, there is little to no funding being allocated towards the development end of Bitcoin, so the flaws in the protocol may take quite a while to be solved. This lack of funding is primarily the fault of the Bitcoin Foundation, an organization that has assumed the responsibility of spreading Bitcoin acceptance across the globe, as well as funding vital development work on the protocol. However, according to Mike Hearn, the Foundation is only paying for three developers to work on Bitcoin Core full time—and only one of them is actually doing anything. The other two developers are afraid to make any updates to the protocol because of the political backlash they might receive from people inside the Foundation and from the community at large.
Hearn hopes to solve this problem with Lighthouse, an open source, decentralized, crowdfunding platform. But this platform has not yet been implemented and no one is certain whether or not it will be successful.
What Should Actually Happen if Bitcoin Fails?
The Difference Between Technical Failure and an Invalid Economic Theory
These major issues with Bitcoin raise the question: what happens if it fails? Many people have hinged the success of crypto-currency in general on the success of Bitcoin. So, if Bitcoin fails, does that mean that all crypto-currencies can never be as successful as precious metals or paper money? Could the anti-Bitcoin pundits, such as Peter Schiff, be right? No. Although Bitcoin may fail at some point in the future, it has still created a discussion in economic circles that could potentially advance the entire monetary theory in general. The failure of one crypto-currency, even if it is the most successful one, does not mean the entire economic theory surrounding these currencies is invalid.
This question is where many people mistakenly tie the technical inner workings of Bitcoin together with the economic theory of crypto-currency. In reality, they are two very independent things; the economic theory of these currencies even extends beyond the crypto landscape and applies to the theory of money in general. Therefore, when we talk about the failure of Bitcoin, we must discuss both the failure of its technical aspects and the validity of the economic theory behind the entire concept of digital currency.
Bitcoin may very well fail as a monetary system as some point in the future, but that would not mean that the entire theory is wrong. In fact, no system will last forever, so it must fail, or be replaced, at some point. However, my focus is on the possibility of Bitcoin failing in the relatively near future, rather than decades from now.
As we know, and often remind Bitcoin skeptics, the flaws in the protocol are not inherent to the idea of Bitcoin. They can be fixed; if the flaw is too major to be repaired through modifying the code, then an entirely new coin can be created that does not have that problem. These currencies are just like cars, a certain type of car may have a problem with its construction that makes it unreliable or even impossible to use, but it does not mean that all cars have the same problem.
Regardless of the Bitcoin’s flaws and bugs, or the flaws of any existing currency, the economic discussion it has created lends much value to the standing monetary theory. Thinkers are now trying to figure out whether or not a good actually needs a use value to become money, and whether or not Ludwig von Mises’ regression theorem is valid. In this author’s opinion, it is indeed possible for a crypto-currency to become successful once all of the major bugs have been fixed. The economic theory behind these currencies are sound. Bitcoin as a functioning monetary system may be flawed, but it is completely valid as an economic concept.
So, what will happen if Bitcoin fails? There will be lots of drama, people who have heavily invested their fiat currency into Bitcoin will lose lots of money, and then development will begin on the next big crypto-currency. Economics and mechanics are two entirely different things. The fact that people are actually creating these coins means that crypto-currency is another stop in the economic evolution of money. In other words, the fact that we are actively developing these currencies, and are holding them as supplements to our cash balances, means that the currencies are valid products of human action. The only problem is finding out how to fix the flaws in Bitcoin, or build a currency without any destructive flaws.