The Year is 2140. Everyone uses Bitcoin for Daily Transactions…
Recently, I was reminded of Bitcoin’s position right now being similar to an inside joke from a two-decade-year-old game called Super Smash Bros. Melee (SSBM). SSBM is considered one of the fastest games that ever existed and is rivaled by StarCraft 2 and a few others. There is a character in SSBM that properly fits the description of being very fast. That character being Fox.
You see, there’s a theory that in the year 20XX, a dystopian future, everyone will play Fox and only Fox at levels of perfection. As a result, all other characters become extinct because of how crushing Fox can be if played well. A good portion of the top players use Fox as one of their mains. As a result, he has been considered the best character for years.
Taken from this site,
Tier list as of December 10th, 2015
Consider this, if there was some an entity that outclasses all the others in MOST ways, would it make everything else obsolete or the very least, used considerably less? Bitcoin in many ways can be comparable to Fox in this regard. The only question that needs answering is, will Bitcoin ever rival gold and maybe even fiat money?
There are already many areas Bitcoin excels in, far more than money. What is holding it back? Bitcoin’s volatility keeps it from being considered a medium of exchange. Bitcoin’s market cap is relatively small, and as a result, there’s uncertainty about the actual value of Bitcoin. You could say that Bitcoin will never have an “actual value”, but the same case can apply to gold. There will eventually be a point where we all agree where it should be. If you compare Bitcoin’s market cap with gold, you will notice that Bitcoin is $620 billion while gold sits at $10 trillion. In the short-term, it will still be relatively volatile. As the market cap grows and more people adopt it, the price will eventually steady out. If this occurs, Bitcoin, realistically, can be a viable candidate as a currency. However, there are still a few obstacles that will prevent Bitcoin from being made as a standard currency.
Becoming the De Facto Standard
The first question that needs addressing is if Bitcoin behaves more like a store of value or a medium of exchange? In other words, should Bitcoin act more like gold or a currency? Although money can be considered both, the principles between the two are different. It all boils down to if it’s better to use now or later.
Gold is considered an inflation hedge is because there’s a finite supply of it in the world. As demand increases, gold prices will only go up. Another factor is that gold will eventually be harder to find. As all the relatively “easy gold” has been depleted, miners will have to put in more effort to find the ones that haven’t been found yet. For these reasons, there is an incentive of holding it instead of spending it as the price will rise.
Money has the opposite effect. The value of it constantly erodes due to money being printed every year. As a result, this makes people prefer to spend it now instead of later. If the value never lessened, fewer people would be using money and this can ruin the economy.
Bitcoin follows gold more closely than money in this regard. Bitcoin can be a great way of dealing with inflation and could worth more in the future. Although Bitcoin does share the same characteristics as gold, there are key differences. Bitcoin is still relatively new compared to gold as Bitcoin gets its value from the belief that in the future, transactions will take place with their peer-to-peer networks and that eventually, there won’t be a need to have a middle man to conduct transactions.
Now, this is where Bitcoin is in an awkward position. Bitcoin’s value stems from people believing that it is a medium of exchange. However, most people are treating Bitcoin as an investment. This problem again circles back to Bitcoin’s market cap. In the beginning, Bitcoin needs to be treated as an investment until the market cap gets large enough. As it gets larger, demand eventually will get exhausted which induces diminishing returns to ramp up. This causes stability, and when it plateaus, it is then a viable candidate for being a medium of exchange.
Another problem arises if Bitcoin ever gets large enough in the market cap and eventually used as a medium of exchange. That is the continuous clogging from Bitcoin’s block size.
The Scalability Problem
In a nutshell, Bitcoin has a scaling problem. Due to the size of Bitcoin’s mempool, which is the size of transactions that still need to be confirmed, it is overflowing. Currently, it’s sitting at 90 million bytes. The higher the mempool size, the longer the confirmation time as well as higher priority fees. The bitcoin network is limited by the block size, currently at 1MB, and the average time it takes to create a new block is 10 minutes. The average block size that is coming in per day is 1.27MB. As Bitcoin gets more popular, the mempool size will make the priority fees (money required to “skip the line”) increase, up to the point where only big institutions can make transactions.
So if the block size is too small, there becomes too much traffic for transactions to function efficiently. This will stagnate Bitcoin’s growth as users would not use Bitcoin altogether and take their business elsewhere. So why don’t we make the block sizes bigger?
Enlarging block sizes also yields consequences and does come with a cost. Bitcoin operates by using a proof of work system that makes double-spending extremely hard. Any other way of cheating such as modifying and deleting a transaction is more difficult. You would need way too much computing power to overpower all the other miners and makes the blocks effectively immutable.
By making the block size too big, the cost to operate as a Bitcoin miner also increases. Downloading all past and future transactions alongside the need for higher computing power increases the cost by a fair amount. If the cost to operate a Bitcoin node gets too expensive, fewer validations will occur and as a result, there can be coins that haven’t been validated yet in circulation which creates “dirty money”.
The Coin’s Integrity and Value
Bitcoin has to choose between the lesser of two evils. On one side, if block size were to remain unchanged, it ruins the ideology of Bitcoin being cheap and convenient. On the other hand, if block size increases and fewer miners can afford the costs, validation becomes a problem.
This is a problem as the fungibility of Bitcoin is called into question. Would people pay for a premium if it was newly mined to prevent the risk of their coin not being real? There would be an inequality for each of the coins (Gresham’s Law). After the 21 millionth coin has been mined, the problem of coins being sold at a premium won’t be a problem anymore. This is where the final problem arises. As all the coins have been mined, the supply will start decreasing.
Bitcoin’s Inherent Deflation
The last coin will be mined in the year 2140 account for 21 million coins. The only incentive for miners to keep validating blocks is from transaction fees. This causes fewer miners to participate as the profit doesn’t become worth it anymore. If this were to happen and assuming there is no fork in Bitcoin, transaction fees may start to rise. Of course, transaction fees will already be rising during these coming years. What’s worse is that more coins will stop circulating as people start to forget their passwords and as a result, lose their private keys. These coins can be tracked down, but it will just be another commodity trapped in an unopenable box.
Bitcoin in the Year 2140
Now you may be wondering, did 20XX happen? Has Fox pushed out all the lower tier characters into poverty? This core principle that inhibits Fox from taking over the metagame is the same reason Bitcoin has a tough time evolving and taking a chunk of gold and money’s market cap.
You see, the more everyone does one thing, the more valuable it becomes to do anything else. In the example of SSBM, Fox’s will never reach even close to 100% play rate. The more people that start to main Fox, the more ill-equipped they are to versing any other character. This phenomenon seems to be a slightly modified version of The Tragedy of Commons. It all stems from this beautiful push and pull where resources can be given and taken away.
Now this problem also translates to the issues of Bitcoin being able to grow and pushing money and gold into poverty. The parameters that makeup Bitcoin are all finite resources. Everything that makes Bitcoin great also holds them back. Their limited supply that hedges against inflation create deflation, their block size that makes mining less financially intensive ironically makes the other side even more intensive.
This dystopian future where Bitcoin takes over gold and money is still uncertain to everyone. Me? These problems look too rudimentary and fundamental which gives me skepticism as it seems very difficult and maybe even impossible to solve. There are ways to counter-act these issues but it then opens another can of worms to another set of problems.
Until these core problems are considered and new protocols are created, I don’t see Bitcoin ever succeeding as a currency. Even though Bitcoin succeeds at MOST things, the few parts that Bitcoin lacks is what holds them back.
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Things that helped make this article
How fast is melee? Demonstration of Fox
Quote for 20XX joke:
“The year is 20XX. Everyone plays Fox at TAS levels of perfection. Because of this, the winner of a match depends solely on port priority. The Rock Paper Scissors metagame has evolved to ridiculous levels due to it being the only remaining factor to decide matches. Humanity has reached its pinnacle. The low tier peasants are living in poverty. It seems nothing can stop the great leader of 20XX, Aziz “Hax” Al-Yami, and his army, the Fox monks who live in great monasteries where they levitate while TASing Fox with one hand, and winning tournaments with the other. The tournament metagame has gotten to this point where everything is played out to theoretical perfection, so tournament goers play Rock Paper Scissors for port priority, and that’s the game.”
