When it was introduced to the world a decade ago, bitcoin was supposed to be a revolution in the finance ecosystem. But that revolution has hardly come to pass. The cryptocurrency’s tumultuous first decade has been marked by scandals, missteps, and wild price swings. The slump in bitcoin’s price this year has been accompanied by a fusillade of criticism it. But investors and the cryptocurrency’s enthusiasts have doubled down on their optimism regarding its future. As such, the coming decade could prove to be pivotal to its existence.
A Compromised Vision
As set forth by its inventor Satoshi Nakamoto in a seminal paper released on Oct. 31, 2008, bitcoin was supposed to be a borderless and decentralized alternative to government- and central bank-controlled fiat currencies. Consensus regarding a transaction within the bitcoin network does not depend on third-party mediators. Instead, it is achieved with the help of blockchain – a peer-to-peer network of systems with electronic ledgers – to verify and authenticate a transaction. “The cost of mediation (by financial institutions) increases transaction costs limiting the minimum practical transaction size and cutting off the possibility for small and casual transactions,” wrote Nakamoto to make his case for removing mediation and replacing it with a peer-to-peer network.
At the end of bitcoin’s first decade, however, that original vision seems compromised.
Decentralization has given way to centralization. Bitcoin whales, or investors who have massive holdings of the cryptocurrency, are said to control its price in the markets. The democratization of printing money through mining has been sacrificed for the efficiency of massive mining farms. For example, Chinese company Bitmain, which is valued at $12 billion in private markets and is considering an IPO, controls approximately 75 percent of bitcoin mining operations. Even bitcoin’s technology has frayed and is afflicted with scaling problems.
But those negatives are balanced by the growth of a thriving and vibrant ecosystem for crypto. The cryptocurrency market, which did not exist less than a decade ago, is worth $205 billion, as of this writing. (Earlier this year, it vaunted to more than $800 billion in valuation). More than 1500 cryptocurrencies have been created and are being traded on exchanges since bitcoin’s debut. Blockchain has become a household word and is being touted as a solution to complex problems. After initial hesitation, institutional investors are also making a beeline towards crypto-assets as a form of investment.
Evaluating Bitcoin’s Next Decade
The next decade could prove is important in bitcoin’s evolution. Revolutions within the financial ecosystem apart, there are a couple of areas in bitcoin’s ecosystem that investors should pay close attention to.
Currently, the cryptocurrency is poised between being a store of value and a medium for daily transactions. Institutional investors are eager to get in on the action and profit from the volatility in its prices even as governments around the world, such as Japan, have declared it a valid form of payment for goods.
But problems with scaling and security have prevented both occurrences from happening. “...arguably the biggest failings for bitcoin and other cryptocurrencies over the previous years lies with security,” said Chakib Bonda, CTO at Rambus – a payment firm. He is referring to the billions of dollars’ worth of bitcoin and other cryptocurrencies that have been stolen from exchanges by hackers. According to him, a secure bitcoin ecosystem will lead to widespread adoption. “...we expect in 10 years time, bitcoin will become mainstream and have a remarkably different reputation,” he said.
The mainstreaming of bitcoin (or, for that matter, increase in its attractiveness as an asset class) as a payment mechanism will not occur without technological improvements in its ecosystem. To be considered a viable investment asset or form of payment, bitcoin’s blockchain should be able to handle millions of transactions in a short span of time. Several new technologies, such as Lightning Network, promise scale in its operations.
Along with improvements in bitcoin’s blockchain, Ripple’s CTO David Schwartz, compares bitcoin to Ford’s Model T. The automobile's manufacturer heralded a revolution in transportation and an entire ecosystem, from highways to gas stations, evolved to serve the automobile. Thanks to extensive media coverage, the beginnings of an ecosystem have already taken root in the last couple of years. As regulation evolves to keep pace, it is likely that the ecosystem will expand. Schwartz predicts that the next decade will “bring an explosion of low-cost, high-speed payments that will transform value exchange the way the Internet transformed information exchange.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoin and 1 Litecoin.