Is Bitcoin Losing its Way?

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  • Bitcoin had lofty ideals when it was launched in 2009, but it looks to have failed in many of them
  • Bitcoin’s price has become by far the most discussed and analysed metric
  • Does Bitcoin have any remaining use cases except as a potential wealth generator?

Bitcoin has gone through a tumultuous 13 years on the planet, during which time it has been used for many things, from a way of buying illegal contraband to being a hedge against currency debasement. Over time it has been many things to many men, but recent events have raised an uncomfortable question – is Bitcoin failing? Let’s look at some of the key use cases Bitcoin has been associated with and see how well it is faring.

An Alternative Currency

Bitcoin has not been useful as a currency, at least on-chain, since about 2015. The time it takes for transactions to be completed, plus the cost to transact ever since the block size began to be consistently maxed out in early 2016, makes it very prohibitive for on-chain transactions to take place. Other cryptocurrencies have emerged in the meantime that are more suitable as digital currencies, leaving Bitcoin trailing in their wake as a viable currency.

Bitcoin supporters can however point to the Lightning Network as being the method by which Bitcoin is achieving its currency dreams, and indeed this is a viable argument, given that the layer 2 solution has seen more adoption in the real world than any other competing cryptocurrency. This shows that there is, theoretically, more demand for Bitcoin as a currency than any other coin, but we have to look at real world examples of Bitcoin’s use as a currency to get a clear gauge of its success.

The most obvious of these is of course El Salvador, which remains the largest country to legally adopt Bitcoin as a currency (the next largest is the Central African Republic). El Salvador’s president is of course a huge Bitcoin supporter, but he is among the minority – a survey out this week found that 71% of Salvadorans experienced no benefit from Bitcoin adoption in the country, and only 20% of those who used the Chivo Wallet when it first came out ever did so again.

What we can surmise from this, then, is that while Bitcoin is an alternative currency in theory, and may be the most in-demand cryptocurrency inside the space for payment, when it comes to actual real world usage it has not hit anything like the heights it was intended to. It can only be considered equal to a currency in terms of technical equivalence when used in conjunction with the Lightning Network, and, in its raw form, it is still not accepted by as many merchants and institutions as would have been hoped by now.

An Inflation Hedge

Bitcoin thrived in 2020/21 when money was extremely easy to come by for institutions, who ploughed their cheap loans into risk-on assets like stocks and Bitcoin and made a killing. However, with inflation rising at levels not seen for decades, Bitcoin has proved itself to be essentially a tech stock, falling in value as institutions become more risk averse and retail investors use their ever-dwindling finances on essentials like energy and food rather than speculating in the market.

If Bitcoin were truly an inflation hedge its price would have at the very least stabilised in 2022, but we have seen the opposite, exemplified by its posting nine weekly red candles in a row between March and May as it fell from $48,000 to $30,000 today. Anyone swapping their fiat currency for Bitcoin in the hope that it would save them from the impact of rampant inflation will be regretting their decision.

Bitcoin was born out of the 2008 financial crash, and with another recession or perhaps a depression looming, Bitcoin’s performance so far won’t fill many with hope that it can buck the trend seen so far and act as the safe haven it was touted to be.

A Decentralised Asset

Bitcoin ceased being a decentralised asset the moment that institutions came aboard. There is debate over when that was, but they came in en-masse after the 2016-17 bull run. The result is that Bitcoin is highly correlated to stock markets like the S&P 500 and the Nasdaq, reacting to every decision the Federal Reserve makes on monetary policy just like its cousins.

Bitcoin was supposed to be immune to all this, and yet crypto Twitter is full of traders and investors eager to see what the Fed will do next and acting accordingly. Price is now manipulated by Wall Street as much as the whales that have been in control for years, shaking out the retail investors Bitcoin was supposed to help.

This is not what Satoshi had in mind, but was always likely to be a possible scenario once Bitcoin’s financial potential was realised. Bitcoin is still a decentralised asset at heart, in that it still works just as well as it did 13 years ago with no interference from a central body, but it can no longer claim to be an asset made by the people for the people.

Bitcoin Price is Everything

The fact that 99.9% of the discussions about Bitcoin, both in mainstream media and within crypto circles, is about price rather than utility tells you all you need to know about how Bitcoin is viewed today. Unless you’re building something to do with the Lightning Network, Bitcoin is only a vehicle to increase wealth. This is no bad thing in and of itself of course, but Bitcoin was built with grander and more idealistic visions in mind.

The largely failed goals outlined above are still trotted out as reasons why Bitcoin remains a desirable asset, but this is a mirage. Everything is geared around price, and has been for some years now. Bitcoin built its reputation, and its early price rises, on these pillars, but given that they have now been largely removed, what remains? There is some utility, but certainly not as much as had been hoped by this point, leaving important questions as to what Bitcoin actually does anymore.

This isn’t to say that everything good about Bitcoin has been stripped away – its underlying technology is still breathtaking once you understand it and sufficiently decentralised in nature to give it that label, but how something is made does not confer value to it alone. Bitcoin needs to succeed in some capacity, either as digital gold or something similar, or price will be the only thing it is known for, like a celebrity who is famous for being famous rather than being famous for doing something amazing.