Bitcoin has been proclaimed dead 89 times. It has been labeled a Ponzi scheme and a failed experiment. Writers have argued for it to be forgotten and for developers to move on to greener pastures. But moving beyond this rhetoric, it’s not all that difficult to compare the rise of bitcoin to that of another technology: the World Wide Web.
As with the web, the early days were filled with excitement, over-enthusiasm, and bubble-like behaviors, commonly referred to as the hype-cycle. On October 13, 1994, the Mosaic Netscape 0.9 browser was launched. Six years later, the world experienced the 2000 dot-com collapse, resulting in many companies completely evaporating.
The excitement of the web resulted in venture capitalists throwing money at any company whose name ended with a “.com”. The idea that a company would achieve profitability was irrelevant — all investors cared about was growth. Venture capitalists got greedy.
But that greed was not inherently bad. Fred Wilson, venture partner at Union Square Ventures, commented on the tech bubble in Boom & Bust: A Look at Economic Bubbles:
“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases, and server structure. All that stuff has allowed what we have today, which has changed our lives … that’s what all this speculative mania built.”
Due to that same speculative mania, the valuation of companies skyrocketed. Then the bubble burst. Amazon.com went from $107 per share down to $7 per share. Many other companies went bankrupt. The same investors who had been touting the perpetual rise in tech stock valuations were the same ones that lost billions — if not trillions — of dollars. It was greed and ignorance that resulted in the bubble.
But what came out on the other side was a framework for incredible companies to be launched.
Take, for example, Facebook, which launched on February 4, 2004. Without the infrastructure that had been built during the boom and bust, would Facebook have been able to launch? What about Uber? How about the collection of all the world’s information from Google?
With hindsight, no one doubts that the web was going to become a reality one way or the other. But at the time, when investors were shutting down funds because they had bet on one too many Pets.com or iWon.com, many doubted its survivability.
And yet here we are on the web.
It’s still early for bitcoin
Bitcoin is seven years old and it is experiencing many problems that early technologies have experienced. In many respects, even at seven, it is still not even October 13, 1994 for the technology.
Despite this, investors have thrown incredible amounts of money — perhaps too much — at the space. If you were a wallet provider, a remittance company, or a payment processor, investors would give you money. In 2014 and early 2015, starting a bitcoin company was one of the easiest ways to get funding.
There was irrational exuberance. Truthfully, bitcoin didn’t warrant that kind of money from a rational perspective. And yet, investors were throwing it at them primarily because of greed.
And as with all technologies, there are growing pains. Early bitcoin was filled with inefficient companies and poor custodians. Mt. Gox resulted in individuals losing hundreds of millions of dollars collectively. Silk Road made people believe that bitcoin was only for drugs.
Yet bitcoin is growing and that perception is changing. Old exchanges are dead or dying. The next stage of exchanges, such as Coinbase, takes both security and regulation seriously. Millions of dollars are spent on security analysts and individuals to work with regulators. In many cases, companies that are incapable of building out their own secure platforms rely on BitGo, the leading provider of security software in the bitcoin space. The companies built on top of its technology have sent over $1 billion in transactions and not a single penny has been stolen.
Further, the number of users on the network and the number of transactions they send are growing. Companies like Purse, ChangeTip, and ZapChain are offering actual use cases for the technology. Purse enables people to buy goods on Amazon; ChangeTip allows for micro-transactions; and ZapChain is creating an incentive for create high quality discussion.
Bitcoin’s existential crisis
As has been covered by the New York Times and Mike Hearn, bitcoin is going through an existential crisis. But while their message is one of failure, it’s simply another growing pain for the network.
Despite the insistence from many in the bitcoin community to increase the block size, the Core development team has developed its own roadmap on how to scale bitcoin, including an implementation of Segregated Witness via a soft fork. And there’s no denying that scaling is necessary. Presently, bitcoin can only handle about 3 transactions per second (TPS). For bitcoin to become the payment protocol for the Internet, it will need to be able to support more.
Dissatisfied with the proposal put forth by the Core development team, a handful of developers have launched an alternative client for the bitcoin protocol, Bitcoin Classic. The proposal is to hard fork to a 2MB block size, which is double what the block size presently is. Further, the majority of the miners, including Bitmain, Bitfury, and BW.com have agreed to support this hard fork. The largest wallets and exchanges, including Coinbase, Xapo, and Blockchain.info are on board.
What’s clear is that bitcoin is experiencing an existential crisis. What is bitcoin? Should it be a competitor to Visa, MasterCard, and PayPal or should it be a settlement layer with all the major transactions done on a second layer? Can bitcoin remain decentralized and censorship-free if it scales?
While there is certainly a crisis taking place, it’s not one that will result in the death of bitcoin. To say otherwise is to be led by emotion and negativity rather than reality.
The future of bitcoin
What is increasingly likely is that the future of bitcoin is bright. It is the seventh year in the development of this network. It takes years to build out a protocol, which is what bitcoin is. As Joel Spolsky says, “Good software takes 10 years. Get used to it.”
“Bitcoin is comparable to the pre-web-browser 1992-era Internet. This is still the very early days of bitcoin’s life. The base layer protocol is now stable (TCP/IP). Now engineers are building the second layer (HTTP) that makes bitcoin usable for average people and machines,” Jeff Garzik, founder of Bloq and Core developer of bitcoin, told me.
Once the infrastructure is built, which still has many more years ahead of it, with companies like Bloq, BitGo, 21.co, and Coinbase leading the charge, we’ll begin to see solid programs built in the application layer.
But even while we wait for the infrastructure to be built, it’s clear that bitcoin is evolving.
Take mining, for example. There is no doubt that bitcoin mining is enormously centralized, particularly in China with over 50% of the hash rate. However, that is going to change thanks to the efforts of companies like 21.co.
According to the company’s about page, “someone needs to build the full-stack infrastructure for bitcoin, from silicon to software … that someone is us.” In November, the company released its first product, the 21 Bitcoin Computer, which was a dev kit to introduce developers to bitcoin.
Yet, this is the first step. As 21.co improves the design of its chips, it’s possible that it could roll out a router that perpetually mines for you. Or, it could integrate a tiny miner into your cell phone. But this mining is not so that individuals can get rich on the block reward. Rather, the goal is for bitcoin to become the fuel for participating on the Internet.
Right now, if you wanted to do a search on Google, you’d have to trade being inundated with ads and tracking cookies that follow you around the web. A developer could build a search engine over the 21 Bitcoin Computer whereby a user would have to pay a minuscule amount of bitcoin to make their search.
Once you abstract away the idea of procuring bitcoin that sits within a single user’s wallet, our idea of what the Internet is and how it works begins to change. Instead of companies taking individual’s data, those same companies might have to pay a consumer for their data. Want to know that I am a 27-year-old male in New York? That’ll cost 5,000 satoshis, the smallest divisible unit of a bitcoin. In the future, this can all be automated.
What about the killer application that everyone talks about? Taking away the fact that hundreds — if not thousands — of products will be built over the coming years, there are some that have the potential to be the killer app now. Fred Wilson, who I mentioned above, believes that in 2016, “Bitcoin finally finds a killer app with the emergence of Open Bazaar protocol powered zero take rate marketplaces.”
And none of this even touches on the potential for bitcoin to help the underserved markets of the world. While remittance has yet to be solved, companies are attempting to make progress. Fortunately, the markets that are underserved and under-banked happen to have tremendous mobile-phone exposure. That will make remittance easier as more people learn about bitcoin.
Finally, we return to what many considered bitcoin’s first, fundamental use case: digital gold. While bitcoin remains volatile today, it’s certainly not the only volatile asset in the world. And before we lament a 10% drop in the price of a still new asset, consider that the stock market has experienced 10% drops in similar time frames. What about oil? Or gold? Or coal? Even mature assets can experience price fluctuations.
Consider the fact that trading volume is up in many of the same countries that are likely to benefit the most from digital gold. Argentina is experiencing some of its highest points of volume. Brazil, which is dealing with debt problems, is also at its highest point. India has had tremendous growth in the number of people using bitcoin. Even Russia, which is considering making bitcoin illegal, has seen outsized growth in volume.
Bitcoin is not perfect. It has a lot of problems that it is going to have to overcome. But to label it dead or to call for it to be replaced by something new is naive and shortsighted. This battle in the civil war will end, likely with Bitcoin Classic rolling out a hard fork with significant consensus. New applications will be built that provide more use cases for different audiences. And ultimately, the Internet will get its first, true payment protocol.
But Bitcoin is seven years old. It will take many years for the infrastructure to be laid and for these applications to reach critical mass. Facebook had nearly 20 years after the browser was released to reach a billion users. To imagine bitcoin’s true potential, we need to think in decades, not in months or years. Fortunately, we’re well on our way.