TECHNOLOGY

Why Cryptocurrencies Have Not Yet Become A Single Means Of Payment

Cryptocurrencies

The bitcoin network processes an average of 320,000 transactions per day, but basically, these are not purchases but the transfer of cryptocurrency from one owner to another. These are more like games on the stock exchange – people buy and sell bitcoin to capitalize on rate fluctuations. Several disadvantages prevent cryptocurrencies from being used as regular money.

Inability to contact support and cancel the operation: The banking system can return an erroneous transfer, but you lose them if you send bitcoins to the wrong addressee. The same will happen if you have forgotten, lost, or stolen your private wallet key.

The Instability Of The Digital Coin’s Rate

Imagine today you paid 1000 rubles for groceries in a supermarket, tomorrow – 1400, and the day after tomorrow – 700. With classic money, this happens only in default, but with cryptocurrencies – regularly. It is tough to perceive an asset as a payment instrument that can rise or fall by 30-40% in a day.

Low scalability: Visa conducts 65,000 transactions per second, bitcoin – no more than seven. The problem is now being solved using the Lightning Network protocol. This is an add-on for the bitcoin blockchain, where users can make payments without loading the blockchain – only the final balance is recorded there. Lightning Network makes it easier to pay for small purchases.

Too low capitalization: It shows the share of an asset in the global economy. During 2019, the cryptocurrency market capitalization fluctuated between $ 110-350 billion. Bitcoin capitalization as of December 9, 2019 – $ 135 billion.This is a lot for an asset worth nothing ten years ago, but tiny (less than 1%) compared to all the money in the world.

The total money supply is estimated at $ 75 trillion; gold capitalization is about $ 10 trillion. For cryptocurrencies to seriously compete with fiat, or at least with gold, their capitalization must grow significantly.

An increase in the capitalization of bitcoin is possible only due to solid growth in the rate since the number of bitcoins themselves is limited. They cannot be made as much as needed to increase capitalization – the code states that there can be only 21 million coins. Eighteen million have already been mined and are in circulation.

Let’s say bitcoin will be worth a million dollars someday. Let’s say all the coins are mined by that time; its capitalization will be $ 21 trillion – twice as much as the capitalization of gold. In this case, the cryptocurrency will have a sufficient share in the global economy to compete with fiat. But so far, this is far from it.

Low capitalization has another drawback: the market is volatile and depends on the actions of prominent players. There are several dozen wallets containing tens of thousands of bitcoins. The owners of these wallets (the so-called “whales”, that is, large holders) can influence the rate: if they put their bitcoins up for sale, the rate will collapse.

There is no security other than the trust of users: This means that the price may fall to zero if people suddenly lose confidence in cryptocurrencies.

The first months after the appearance of bitcoin, its very existence was in question – if no one were interested in it, the project would have come to nought. Now a whole infrastructure has been built for the owners of bitcoins. Bitcoin derivatives (futures, options) are traded on the traditional financial market. But there is still no such trust as in the classical money provided by the state.

Use for illegal transactions: Europol’s annual Internet-Based Threat Assessment (IOCTA) confirms that BTC remains the most widely used cryptocurrency among criminals. According to the report of the Center for International Security and Defense Policy of the American corporation RAND

“The Use of Cryptocurrencies by Terrorists: Technical and Organizational Difficulties and Future Threats” Cryptocurrencies in their current form do not pose any global threat as a tool for financing international terrorism. Still, the emergence of a new anonymous cryptocurrency is not excluded, which is better suited for these purposes. Therefore, the cryptocurrency industry needs regulation.

Bitcoin mining requires a lot of electricity, which poses a threat to the environment: According to the Center for Alternative Finance at Cambridge, the bitcoin network consumes 69.98 TWh (terawatt hour) per year – more than Austria or Colombia. According to a study by Nature Climate Change, in 20 years, due to mining, the temperature on Earth may rise by 2 ° C, which will lead to irreversible consequences. Today, mining releases 22 megatons of carbon dioxide into the atmosphere every year – more than Jordan, Sri Lanka, and the American Kansas City combined.

According to other studies, the actual volume of carbon dioxide emissions into the atmosphere is less – 17.2 megatons.

The legal status of cryptocurrencies in most countries is undefined: The owners of digital assets are at risk – their investments can be prohibited entirely at the legislative level.

So far, regulators around the world are trying to develop a unified approach to this issue. In July 2018, the fifth directive of the European Commission against Money Laundering (AML) was issued on the regulation of cryptocurrencies with new standards for ensuring the transparency of transactions. Member States of the EU must implement these rules in their national laws. 

In Japan and some other countries, bitcoin is recognized as a means of payment, but it is considered an asset in most countries, including Russia. Cryptocurrency can participate in barter transactions; 

it has already been precedents for inclusion in the authorized capital of an enterprise and payment of alimony with bitcoins. But the final legal status of cryptocurrencies in Russia and the world has not yet been determined.

The regulators’ initiatives say that they do not plan to ban cryptocurrencies. Still, they want to nullify user anonymity, make payments as transparent as possible for tax and law enforcement agencies.

Cryptocurrency networks can be hacked (for example, by taking control of most mining pools): In theory, people with enormous computing power can control the network, start creating alternative chains and confirm transactions that benefit them. To do this, you need to carry out the so-called “51% attack”.

But cryptocurrency networks are resistant to hacking, and the more extensive the network, the higher its stability. In addition, blocks in the blockchain are linked through cryptographic evidence. The longer the blockchain on the blockchain, the more difficult it becomes to change previously confirmed blocks. Even a successful attack is likely to only change the transactions of a few recent blocks for a short period.

For the Bitcoin network, the cost of such an attack will be higher than the benefit from its implementation. Hacking the bitcoin network today takes vast amounts of power and vast amounts of money. If some organization can do this, it still won’t get access to all the mined bitcoins. The obtained advantages: the ability to confirm the necessary transactions and create new chains – will not cover the cost of the attack 51%. Even if the network is disrupted, the community will quickly agree to change the Bitcoin software and protocol in response to this attack.

Also Read: Bitcoin Insurance, Solutions For Hedging Risks

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