Bitcoin, Critical Mass & Interface

Whether we talk about Bitcoin BTC or Bitcoin Cash, the use of bitcoin continues to grow, but it is still unknown to most people in the world. The truth is that it is not ready to be used by the masses. It remains too technically difficult for the average user to handle security properly, and that needs to be solved, and it's on its way to be so. The major remaining issue, however, is about interface.

All digital currencies and payment systems so far have fallen over the problem with interface, starting from e-gold and ahead. It is not difficult to create a closed system, the problem is to create safe interfaces.

Interfaces come on many levels. Basically, a digital system has an interface wherever it is in direct contact with the non-digital world. E-gold went down because the gold backing that had to be stored physically - it was available to the jurisdiction of a state, and in the end, the state stole it. E-gold was only semi-digital. Transactions were made digitally, but the whole system was not fully digital.

Even having a central server is a form of interface, because this central server must be situated in a place under the jurisdiction of a State. That's the reason why a distributed system is superior. There is no central point to attack.

By eliminating the need of backing, and by being distributed, Bitcoin has solved many aspects of the problem. But there is still the very difficult interface between Bitcoin and other currencies. People want to buy bitcoins or sell bitcoins, just as they buy and sell currencies on the forex market. Not only for speculation, there is also a practical need for this. That is a major problem with cryptocurrencies. They are not existing in an isolated digital world; if they are to assume the function of money, that money must be used in the real world. This is simple, if people can just send bitcoins as cash between computers and mobile phones. But they cannot, because they still need to buy and sell their bitcoins. The typical bitcoin transaction between user A and user B follows this pattern:

1. A buys bitcoin from an exchanger. To do that, he has to transfer fiat currency to the exchanger. To most people that means an international bank transfer, which might include an additional exchange between currencies, resulting in a loss of privacy. He also has to pay for the bank transfer, and a fee to the exchanger.

2. A transfers bitcoin to B.

3. B transfers the bitcoin to an exchanger for out-exchange and receives a transfer of fiat currency from the exchanger through the ordinary bank system. B pays for the bank transfer and exchange and loses his privacy in the process.

These in- and out-exchanges expose the user to many of the disadvantages of ordinary money, disadvantages Bitcoin is designed to eliminate. The exchangers are, and will increasingly be, exposed to legal regulation (KYC etc.) creating a back-door for states and governments to monitor and control users.

A lot of energy is spent on trying to develop distributed and/or decentralised exchanging, or private exchanging between individual users. That's fine, it is needed, but I think much of that discussion is missing the main point: If bitcoin shall ever become mainstream, the need of in- and out-exchanging must be close to eliminated.

Many users claim that Bitcoin is not suited as a currency system, but is well suited for international transfers. They also claim that for this purpose, it is cheap. This is not true. Look at the transaction above, which, provided users A and B are in different countries, shows exactly what they talk about. When they say it is cheap, they choose to see only step 2. If the whole procedure includes buying Bitcoin, transferring them, and then selling Bitcoin, then it is neither simple nor cheap. In my opinion, Bitcoin is very well suited to be a currency system (that no longer applies for BTC, which has gone astray completely, but it applies well for BCH), but ill suited for the sort of transfers where it just becomes an extra step.

To use Bitcoin is simple and cheap when the payer already has bitcoins and the receiver needs and can use them without an out-exchange. In short, Bitcoin serves well as a currency if it can circulate as cash in exchange for goods and services. You are paid in Bitcoin, you pay with Bitcoin - as when you use currency in your everyday life within the currency area where you live. In- and out-exchanges cannot be eliminated completely, there will always be some need for that service, but that need must be reduced. As it is now, in- and out-exchanging probably constitute the great majority of transactions with Bitcoin. This needs to change.

The problem is a classical one, it is about a critical mass. Today you can buy Bitcoin, but can you use it? Yes, a little, but not to a point where you can manage a whole economy using it. That means that most of the users buy bitcoins to speculate, not to use it as money. The user base must grow to a point where all sorts of goods and services can be bought or sold for Bitcoin. At that point, the user base will grow by its own momentum. But there is a threshold somewhere, a critical mass, and we are not quite there yet for a while.

I have added to my INDEX as a separate label/topic: Cryptocurrency & Digital Money.

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