Sunday, August 30, 2015

The Economist: Bitcoin Battles

It seems that Bitcoin is not exempt from power struggles. This article in the Economist describes the "geek war" now fully underway. While Bitcoin has a devout following in its niche, we have long maintained here that it will never obtain widespread adoption for a variety of reasons. For those who do follow it, below are some quotes from the article in The Economist.


“FEDERAL Reserve deeply split. Renegade group of board members to create separate American dollar.” Such a headline seems highly unlikely, but this in essence is what is happening in the land of Bitcoin, a digital currency. On August 15th two of its main developers released a competing version of the software that powers the currency. With no easy way to resolve feuds, some are warning that this “fork” could result in a full-blown schism."

"The dispute is predictably arcane. The bone of contention is the size of a “block”, the name given to the batches into which Bitcoin transactions are assembled before they are processed. Satoshi Nakamoto, the crypto-buff who created the currency before disappearing from view in 2011, limited the block size to one megabyte. That is enough to handle about 300,000 transactions per day—suitable for a currency used mainly by geeks, as Bitcoin once was, but nowhere near enough to satisfy the growth aspirations of its boosters. Conventional payment systems like Visa and MasterCard can process tens of thousands of payments per second if needed."

"By how much and when to increase this limit has long been a matter of a heated debate within the Bitcoin community. Overlapping cabals of “core maintainers” and “main developers” serve as de facto keepers of the currency, especially in Mr Nakamoto’s continued absence. Now one camp wants to increase block sizes, and do it soon. Otherwise, they argue, the system could crash as it runs out of capacity as early as next year. Transactions could take hours to confirm and fees could rocket, warns Mike Hearn, a leading Bitcoin developer. “Bitcoin would survive,” he wrote in a blog post in May, “but it would have lost critical momentum.

My added comments:

A reader here who I view as an expert on this topic explained to me last year how Bitcoin would run into problems like this (and others related to the enormous power consumption it takes to run the system). Bitcoin will probably remain an option for those who feel a need to try and bypass the current banking system, but this is only going to be a tiny fraction of the public in my view. Also, they can't really bypass the system anyway because when they try to convert Bitcoins back into something usable (to spend them), the system will capture those transactions for tax collection purposes since most nations treat Bitcoin gains and losses like capital gains (and not like a currency).

Unless something happens to shake confidence on broad scale in the present banking system, most people will just consider this too big a hassle to fool with. And even then, they would be more likely to revert to more traditional forms of money like precious metals in my view.

Added note 9-1-15: Bloomberg runs this article about the frenzy to try and adapt the "blockchain" technology behind Bitcoin to other uses in the financial industry. At first glance if you know very little about all this, it sounds as if this could be some kind of technology breakthrough for the future. When I ran this article past an expert though, I learned a very different story. The cost per transaction using "blockchain" technology is absurdly high for the benefits it produces. To produce a blockchain transaction it takes a lot of capital investment in equipment and electrical power per transaction.

There is already technology designed which far surpasses this in terms of cost per transaction, speed of transactions, and overall system efficiency per transaction (it's not even close). The "blockchain" technology touted in this Bloomberg article was described to me as an obsolete 20 years behind the curve system in comparison to what exists as an alternative.

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