When you talk to technology practitioners about the future of Bitcoin, there are inevitably two very different comparisons: the Tulip Bubble and the Internet.
Bitcoin critics say the digital token is like a 17th-century Dutch tulip, which sparked a frenzied speculative boom, but soon disappeared, leaving only a meager flower and a terrible bank account.
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On the other hand, Bitcoin supporters want us to think of cryptocurrencies as the Internet: this is a broad technology category that takes some time to reach its potential, although in the early years, people's expectations always preceded reality. If this is true, last year's collapse in bitcoin prices, like the bursting of the Internet bubble, was a brief setback before the great idea was realized.
After studying Bitcoin for several years, I think these two comparisons are not suitable. Bitcoin is neither an irreparable failure nor an economic miracle.
So what is bitcoin? It will take us a few more years to figure out how this technology works in the world. If we want to predict where it might go, we need to set aside its fluctuating prices to understand how it is used today and the identity of users.
Speculators, drug dealers, and oppressed people: the current state of application of cryptocurrency
At the most basic level, Bitcoin introduces a new way to hold and send value online. Everyone can open a Bitcoin wallet and collect money from friends or strangers. Because it is similar to a computer network that supports the Internet, the system can operate without a central authority.
According to the data on the chain, even after the bubble burst last year, Bitcoin users are still sending $400 million to $800 million in bitcoin through the blockchain every day. The blockchain is a public ledger that records all bitcoin transactions.
(Bitcoin monthly trading volume, source: New York Times )
This day's trading volume is less than half of PayPal's average daily trading volume. But the level of activity far exceeds the price spike in 2017.
People who believe that Bitcoin is a tulip bubble will tell you that most of today's transactions are speculative: people buy and sell Bitcoin because they believe they will appreciate in the future. More people compare Bitcoin to gold. Gold is a scarce commodity whose value fluctuates, providing an alternative to the national currency.
According to Chainalysis, a startup that provides blockchain analysis services for large companies and governments, speculative transactions account for about 60% to 80% of all transactions in the blockchain. Most of these speculative transactions come from various cryptocurrency exchanges around the world.
As for the other 20% to 40% of the transactions, there are still quite a few mysteries. No one can force Bitcoin users to identify themselves, so Chainalysis and other companies know nothing about many transactions. But they have found some useful information.
When Bitcoin came out in 2009, it was called a new way of paying online, without having to pay for it like using a credit card. Chainalysis estimates that last year, companies dealing with bitcoin payments accounted for 0.3% of all bitcoin transactions, or about $2.4 billion.
This is clearly a good medicine for legitimate business activities, but Chanalysis data shows that bitcoin transactions have been shrinking most of the time when bitcoin prices fell last year, which is not a good sign for bitcoin.
Many Bitcoin supporters I have met admit that Bitcoin has not brought much improvement compared to traditional electronic payment methods. In some ways, the situation is even worse. Due to its volatility price, paying with Bitcoin requires you to become a speculator during the time you hold the token and wait for payment.
Payment data raises the question: Where is the vent of this technology besides speculation? The most compelling use of bitcoin enthusiasts is their value to dictatorships or authoritarian countries whose currencies are even more unstable than bitcoin.
For example, in Venezuela, Bitcoin allows people to transfer money out of the expanding Bolivar. Due to the openness of Bitcoin, Venezuelans can buy Bitcoin completely freely.
We have heard stories of Venezuelans using Bitcoin to save their assets. According to data analyst Matt Ahlborg, Venezuelans bought more than $230 million in bitcoin at LocalBitcoins last year. During the decline in bitcoin prices, bitcoin purchases are still growing.
But Bitcoin is only popular with a small number of Venezuelans. We have reason to suspect that some of these transactions are only corrupt government officials or wealthy Venezuelans who transfer funds abroad.
Some people who have been to Venezuela have told me that most ordinary people who pass through them prefer the dollar rather than the bitcoin.
The bigger problem facing Bitcoin is that its actual and legitimate use has been difficult to transcend illegal or apparently unethical activities.
As it turns out, Bitcoin is becoming more and more useful to criminals, from locking computer files in exchange for ransoms – even hostages – to drug trafficking.
(Dark net monthly bitcoin transaction amount, source: New York Times )
Many of these illegal acts are difficult to quantify, but Chainalysis has managed to calculate the amount of bitcoin used to buy drugs on the dark net. The data from Chainalysis shows that although the price of Bitcoin is falling, the amount of drug purchases has increased last year.
In 2018, the total amount of bitcoin transactions in the Darknet was approximately $620 million, more than double the total amount of Venezuelan Bitcoin transactions.
Bitcoin supporters will tell you that this is just a drop in the ocean. But all the data I have seen shows that the proportion of drug trade in the bitcoin economy is far greater than the proportion of drug trade in the dollar economy.
Illegal activities played an important role in the early Internet, but it was completely different from the bitcoin we saw earlier.
Bitcoin is open to everyone – no different from the Internet. The problem is that, apart from speculation, its legitimate use has not developed as rapidly as illegal activities.
Ethereum, Dapp and Facebook: Looking to the future
This technology has not been favored by ordinary people for the time being, but this does not mean that it will not be welcomed in the future. Smart entrepreneurs believe that the openness of cryptocurrencies is still useful in many areas.
Many VCs bet on Ethereum and EOS. EOS is also a cryptocurrency network that can be used to build more complex applications, such as financial contracts, than Bitcoin.
Developers have built a number of decentralized applications (Dapps) that use EOS and Ethereum tokens. Many Dapps still work today. These Dapps can transfer funds and record ownership of digital products (such as items in the game) without the need for a central agency to keep these records.
But most Dapps still travel in the gray areas of the law, such as gambling. So far, the most compelling application of Ethereum is still to raise funds through ICO, and does not comply with securities regulatory rules, many of these activities are fraud.
I hardly see any indication that in addition to supporters, the legitimate use of cryptocurrencies can easily attract a large number of users.
Perhaps the biggest advantage of cryptocurrencies is that there are still people who want to solve the problem. The value of digital tokens, no matter how unstable they are, has motivated people to start using it.
The big company that has recently been confirmed to be the cryptocurrency "player" is Facebook, which is said to be developing its own digital tokens, as well as several other major communications companies.
I can't predict the future of online money like those who are determined dreamers and opponents. But because large sums of money are still entering this market, it is still too early to completely negate the cryptocurrency.