While I think that Bitcoin is my generation’s greatest innovation and is here to stay, I see some big hurdles that need to be overcome before it can really go mainstream.
Investors in the crypto space should weigh both the benefits and problems of the space when putting their money into any crypto project or asset. The benefits and problems are not set in stone, both can change over time.
Many people believe that Bitcoin has already gone mainstream, but the reality is that outside of the world’s most developed nations and, ironically, some of the most troubled nations (Venezuela, Argentina are two examples) the vast majority of the world’s population has little or no knowledge of Bitcoin, let alone any holdings.
I, therefore, believe that it is still very early days for the crypto space, and that there is enormous potential for growth both in terms of technology and in terms of valuation. However, there are some important hurdles that need to be progressively overcome in order for this crazy experiment to succeed long-term.
Bitcoin’s Confused Narrative
Bitcoin was created to serve as “a peer-to-peer electronic cash system”, to quote Satoshi Nakamoto in the whitepaper that was released in 2008.
Over time, however, the narrative has mutated and we still don’t have a clear idea of what is really the biggest purpose for holding Bitcoin.
In my view, at the moment, it is clearly the “digital gold” narrative that wins out over all other narratives. The peer-to-peer cash narrative never really took off. People in developed countries nowadays can easily send money to each other using digital banks such as Revolut or N26, and even traditional banks have developed ways for their users to easily send cash to each other. Big transfers remain a good use case for Bitcoin, but most potential users are not really seeking a solution for transferring thousands or millions of dollars between them.
Bitcoin’s Bad Reputation
There are a couple of things that hurt Bitcoin’s reputation, and that of the whole crypto space in general.
- The myth that Bitcoin is mostly used for nefarious reasons (money laundering, arms dealing, drugs etc). This myth has been disproved many times but was popular a few years back and many people still believe it.
- The second myth that Bitcoin is for those who want to hide their monetary activity and evade taxes. The reality is that Bitcoin only offers pseudonymous privacy and there are several blockchain analysis firms that can determine who is behind an account and to whom they are sending and receiving money from.
- Get rich quick schemes, which can be further divided into two:
- The ICO craze of 2017 – many people lost money trying to get rich quick investing in things they didn’t really understand.
- There are many scams that use crypto as a vehicle. They prey on people’s poor financial and technical knowledge by making ridiculous promises and either cheating them out of their precious Bitcoin or else use the lack of regulation within the crypto space to run their scams with impunity.
When people lose money, they tend to turn against whatever and whoever they blame for that loss, and write off that space completely. It is easier to do that than to admit that you went in beyond your head and didn’t know what you were doing.
The rational thing to do would be to double down on your learning and add a new and higher dose of skepticism when evaluating investments. The emotional thing that is most likely to happen is to write off the whole crypto space as money black hole and vow to stay away from it.
Then there are thoes people who are a bit more experienced and have seen their fair share of scams or even have been burned by some of them (not in the crypto space). Crypto enthusiasts tend to talk about their trading and investments in a way that is very similar to the marketing machines used by scams, so that usually puts these experienced guys on the alert. They then proceed to write off the investment due to this and it being “too complicated”.
Holding Bitcoin is Still Complicated, Cumbersome and Prone to Loss
Not your keys, not your Bitcoin, is a phrase we hear over and over in the Bitcoin community. The idea here is that you should take possession of your private keys by pulling your Bitcoin off exchanges and into your hot or cold wallet.
That’s all well and good, however, the majority of people don’t want to deal wit the anxiety, stress and technical complications of self-custody.
Self-custody usually involves a cold storage device such as a Ledger Nano or a Trezor, which has to be bought and set up. Then you have to transfer your crypto from the exchange to your device, which in itself can lead to losing all your Bitcoin if you copy the addresses incorrectly, although this is a relatively small risk.
It’s too easy to lose or misplace a seed phrase. Inheritance of such crypto asset setups can be very complicated, as in many cases only the original owner has clear knowledge of how to access the crypto that was stored in cold wallets. The incentive of the holder is to prevent anyone else to have access to their Bitcoin, which is generally a good incentive but becomes a major stumbling block in an inheritance situation.
Solutions such as Casa are a move in the right direction, as they eliminate the need for the seed phrase backup and introduce multisig transactions. They introduce a 3 of 5 key setup. If you misplace one of those keys, it can be rotated out and replaced. By putting customer support in place they also hope that people will be more inclined to practice self-custody, as they are never alone in the whole process but have someone to call if they need help in setting things up or if they are having problems transacting or accessing your Bitcoin. This paradigm is much closer to how people think of their relationship with their banks.
Inheritance is also taken care of through Casa covenant. This involves a 3 of 6 key setup. The 6th key is held by your lawyer who holds it until you pass. Two other keys are accessible within the legal system upon your passing. One of them is held by Casa and the other one is held in a safety deposit box. The latter two keys require a court order issued upon the original owner’s passing to access them.
I think that although Casa’s solution is more robust when compared to a DIY setup, it’s still too complicated for the average person, hence adding one more stumbling block to mass adoption of Bitcoin.
Another solution for inheritance is the dead man’s switch, which passes on information about recovering your Bitcoin to someone else unless you take a particular pre-determined action within a pre-established timeframe. The problem, of course, is that if the owner forgets or is impeded by the tribulations of life from taking that action, then that critical information might end up being passed on before it was intended to.
I think Casa’s solution is a step in the right direction, but its cost might be prohibitive for many people, and hence is probably most suitable for people with significant holdings of crypto assets. The overall problem of Bitcoin/crypto custody remains.
The solution to this problem? I think it’s three-pronged.
- I believe there will be a rise of Bitcoin banks in the next few years. These will be licensed and regulated institutions that will be able to hold your crypto assets at a low cost while also insuring those assets against loss. Basically the same way we think of storing our fiat money in banks. This system has been in place for many years and people are used to offloading the responsibility for storing their assets to a third party, so we need to replicate that in the crypto space for mass adoption to take place.
- An improvement in the technology and user experience for hot and cold wallets and multi sig solutions. Once the technical barrier is sufficiently lowered, significant portions of the general population will be open to self custody, especially the younger, more tech-savvy generations.
- Companies like Casa and Unchained Capital will become ubiquitous and provide the sovereignty and non-confiscatory advantages of self-custody while providing the peace of mind and customer support typically associated with banking institutions.
There is probably another possible solution, and that is that the biggest exchanges will in time start having their holdings insured and become as robust as today’s banks in terms of guaranteeing their customers’ crypto holdings. In that case, self-custody will become less important from the point of view of protecting your investment from loss due to security breaches or bad actions on the exchange’s end.
As far back as 2010, Hal Finney had posted about this topic in the bitcointalk forum, saying that he thought the ultimate fate of Bitcoin would be as a reserve currency for banks that issue their own digital cash.
Time will tell, but it’s exciting to see all the different solutions being proposed and implemented at the moment.
Bitcoin’s Correlation with the Stock Market
Although Bitcoin is frequently touted as an uncorrelated asset and this is, in fact, one of its major narratives, we have seen how it’s behavior has at times mirrored the stock market very closely. It has behaved very similarly to a tech stock.
For those who are specifically looking for an uncorrelated asset, especially if they are looking at Bitcoin as a potential gold alternative, this is a major downer.
I don’t see this correlation as a big issue and expect Bitcoin to become less correlated as it matures.
This topic has been discussed ad nauseum, and I really don’t think it presents any issues, although it is frequently mentioned as a downside or problem with Bitcoin. Read this article and this follow-up.
Over to You
What are your opinions on Bitcoin and the whole crypto space in general? What are the hurdles that you see going forward, and do you agree with my ideas? Let me know in the comments section below.
Many of the problems I mentioned are not unique to Bitcoin. Read this excellent post that highlights many problems in the way we interact with other chains like Ethereum especially when performing operations in DeFi or the NFT space.