Jameson Berkow

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Someday, someone might just invent a better bitcoin.

Today, with a market cap north of a quarter-trillion American dollars, bitcoin is leading the cryptocurrency race; experts warn it cannot possibly win. 

Thousands of other digital currencies exist — collectively worth hundreds of billions of dollars on their own — and new ones are launched seemingly every day. Odds are, according to Marc-David Seidel, none of them will win either. 

“The long-term winner of the cryptocurrency race has not been created yet,” Seidel, director of the W. Maurice Young Centre for Entrepreneurship and Venture Capital Research at the University of British Columbia, told BNN in a telephone interview.

The future promised by bitcoin and its underlying blockchain technology — of a world where trust can exist directly between strangers and billions of the so-called “unbanked” can join the modern world economy — is still coming, Seidel argues. It’s just that the current crop of coins are not up to the challenge. 

Bitcoin has problems that, unless they are solved quickly, will make it virtually impossible for it to replace government-issued fiat money as a mainstream currency. Truly massive amounts of electricity are required to keep the system functioning and more energy is constantly being devoted to the global mining network. While forecasts for the bitcoin network to be consuming as much electricity by February 2020 as the entire world does today has been largely debunked by Seidel and others who note the growth in the network’s energy usage is not linear, it is far from the only foundational issue facing bitcoin.

Its main value proposition, for consumers at least, is dramatically lower transaction costs by cutting out financial middlemen. However, the average cost of a transaction on the bitcoin network has grown tenfold in recent months to as much as US$27. That is no accident.

It is, in fact, a central component of the bitcoin network’s core architecture.

Without getting too technical, this is how it works: Individual computers spread around the world that are referred to as “miners” compete to solve increasingly complex math problems in hopes of winning rights to the next block in the bitcoin blockchain. The software is designed to generate a new block roughly every 10 minutes using the collective computing power of every miner.

Not only does the winning miner get all the new bitcoins released in that new block, it also collects any fees for transactions included in the block. Only a limited number of transactions can fit into each block and since the miner gets to pick which ones get included, the miner will naturally choose transactions offering the highest fees.

That is why the vast majority of still-pending bitcoin transactions (held in what is called the “mempool”) are those offering the lowest fees. Transactions in the mempool can often end up waiting days for confirmation by getting added to the blockchain.

“There will be alternate technologies that displace bitcoin and adapt,” Seidel said. “Other technologies will come and solve the current problems of distributed trust and scalability and lowering transaction costs and energy consumption and there is no way to predict which ones will ultimately shake out.”

Bitcoiners — as the core group of bitcoin programmers and enthusiasts are known — are actively working on solving those issues. Many of the roughly 1,400 other digital currencies in existence claim to at least partially address bitcoin’s challenges, and some have soared to new record highs on those claims. While none have come anywhere close to the popularity of bitcoin, their rapid proliferation serves as a constant reminder of the cryptocurrency world’s relative youth.

“We may end up discovering that [bitcoin] is like Napster,” Ripple CEO Brad Garlinghouse told BNN via email. (Ripple is the third-most-popular cryptocurrency behind bitcoin and Ethereum, boasting a US$30 billion market cap.) “[Bitcoin was the] first mover, but took an anarchistic approach.”

Those directly involved in the bitcoin ecosystem, however, tend to vehemently disagree with that position.

Unocoin CEO Sunny Ray, whose company allows Indian web users to buy bitcoins in exchange for a one-per-cent fee, is among those who believe bitcoin can survive its growing pains, outpace its rivals and ultimately prove its critics wrong.

“There is one key important factor for bitcoin that matters more than any other in this case,” Ray told BNN via telephone from California. “Bitcoin is open source, so you can foreseeably build on top of bitcoin to find solutions to the current issues that exist.”

Solutions to the problems of high fees and energy usage do exist, at least the technology capable of solving them exists. Yet what is arguably bitcoin’s greatest feature — its lack of a central authority — also represents the greatest barrier to implementing those solutions, as the community has often failed to achieve consensus over how to implement necessary upgrades.

Even if the bitcoin community succeeds in addressing its technical challenges, one financial expert warns that a core aspect of its design makes it impossible to ever serve as a mainstream currency: scarcity.

“Bitcoin has a limited supply so it has value only to people who believe it will increase in value in the future,” Andreas Park, finance professor at the University of Toronto’s Rotman School of Management, told BNN via telephone. “That eventually leads to deflation and that is toxic for an economy.”

The number of new bitcoins issued with each block is designed to be cut in half every four years. It started at 50 new coins with the so-called “genesis block” in 2009, fell to 25 per block in 2012, 12.5 in 2016 and will fall again to 6.25 coins per block in June of 2020. That process will continue until supply tops out at 21 million bitcoins sometime in 2140.

Critics are often quick to claim bitcoin is a bubble. Major central bankers across the western world have either used that word or some version of “speculative” to explain their views on the leading cryptocurrency. Yet despite its flaws, some of the biggest bitcoin bears seem at least partially convinced that the promises of bitcoin will eventually be delivered, just not necessarily by bitcoin itself.  

After declaring it a “misnomer” to call bitcoin a cryptocurrency because he does not consider it actual money, Bank of Canada Governor Stephen Poloz used a speech on Thursday to strike a positive tone on the potential of its underlying technology.

“Bank staff are exploring the circumstances under which it might be appropriate for the central bank to issue its own digital currency for retail transactions,” Poloz said. “All central banks are researching this.”

Poloz warned investing in bitcoin was “closer to gambling than investing,” echoing concerned raised in another speech delivered earlier this week by his Australian counterpart.

Reserve Bank of Australia Governor Philip Lowe said the recent surge in bitcoin prices was the result of “speculative mania.” Then he continued: “This is not to say that other efficient and low-cost electronic payments methods will not emerge.”

“No doubt,” he said, “this evolution will continue.”