Investor Series #1 Addendum

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In Investor Series #1 – Bitcoin, we looked at the possibility of Bitcoin replacing all transactions in the SWIFT network. The article leaves off with a list of factors which have kept Bitcoin from already doing so.

Without second-layer scaling solutions, Bitcoin (BTC) is unable to scale to the thousands of transactions per seconds it would need to effectively replace global settlements. Or at least, this is the argument given by various Bitcoin Core developers. For reasons that have frequently been rebutted, these developers wish to avoid scaling on-chain as described by Satoshi Nakamoto.

Scaling ‘Solutions’

While BTC is pursuing off-chain scaling solutions, it’s far from certain that these will work, let alone on a proper timescale.

The Lightning Network, one proposed solution is just now gaining traction. Although it’s far from ready. Bitcoin developer Gavin Andresen recently described Lightning as “an order of magnitude more complex than Bitcoin.”

Andresen’s suggestion, “18 more months” is also an indirect jab at Lightning Network developers, and Lightning Labs CEO Elizabeth Stark.

Despite taking nearly three years to roll out a six-month project, Lightning developers have yet to solve the most critical aspect of Lightning’s operations: routing payments. This is a gross oversight, since Lightning’s ability to route transactions is its scaling mechanism.

The Lightning Network routes Bitcoin payments much like SWIFT does for the existing banking system, relaying payments between nodes to reach a final recipient. But because Lightning has separate consensus mechanisms, it doesn’t need Bitcoin in order to operate – any provably scarce digital asset will do.

Even if Lightning existed in full, functioning form, it would work better using Bitcoin’s competitors: other cryptocurrencies, or even a digital dollar. While Lightning transactions themselves are cheap, users must bear the cost of an on-chain transaction in the currency they’re transacting.

Because all of Bitcoin’s competitors have lower fees, users would be better off using those in the Lightning Network. The only reasons to use Bitcoin are ideological.

Adoption

Adoption is the critical metric by which Bitcoin’s success can be measured. And adoption can only be defined as use in commerce. But because Bitcoin and the Lightning Network appeal very little to those outside narrow circles, adoption is curbed indefinitely. As the chart below shows, Bitcoin’s adoption and price are closely correlated.

This common sense relationship was taken for granted during Bitcoin’s price rise through the Silk Road years, 2011-2014. After the Silk Road was shut down, there was less demand for Bitcoin as a medium of exchange. Nothing comparable replaced Silk Road as an online marketplace requiring cryptocurrency, and coins with better privacy features have since filled the niche for illicit transactions.

Those who had lost sight of Bitcoin’s history as a currency instead began to push a narrative of Bitcoin as a “store of value,” independent of its utility.

Bitcoin Cash

After many years of debate in the community and attempts to fight malicious actors in Bitcoin, a few developers who recognized the ignorance of abandoning Bitcoin’s utility forked the chain to create Bitcoin Cash, which follows the original roadmap for scaling Bitcoin. We’ll be examining the future potential of Bitcoin Cash (BCH) in the next article, Investor Series #2.

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