The problems with Bitcoin stem from its core philosophy viz. decentralised and deflationary.
I'm less confident on the long-term success of Bitcoin, in the article below I'd like to point out the main reasons for this, which are quite different to what they say in the mainstream media.
Firstly, let me state this article is talking about Bitcoin and not the blockchain technology. I strongly believe that blockchain has a future and cryptocurrencies do have a future too, but there are some problems with Bitcoin becoming a currency of the future.
A lot of the fears around using Bitcoin and cyrpto-currencies themselves are that criminals use them, we see this talked about it the media. The fact is, fiat currency is still used by, for example drug dealers as a primary method of exchange. This is media hype. Bitcoin isn't perfectly anonymous, once I know your public address there is a method of tracking your transactions. Criminals don't want to be tracked, exchanging in cash is still a better method. This isn't the real concern for Bitcoin.
The problems with Bitcoin stem from its core philosophy viz. decentralised and deflationary. My argument is how its core philosophy will actually be its own ending. Let me explain.
Decentralised
In the early days, anyone with a home PC (and at the time tech savvy enough) could mine Bitcoin. Now we need ASIC miners to mine profitability. Combine this with pool mining and in the long-run, there is an incentive to move towards centralisation for the crypto-currency.
We now see mining farms, and huge investment by organisations looking to make money from mining. The average person can't compete. Once people do have mining hardware, it's more profitable to be part of a mining pool and not mine individually. Hence, Bitcoin moves towards centralisation.
It is possible to imagine, should Bitcoin surge in value, more investment going into mining. At this point the little guy can't compete. We could even imagine a situation where one organisation invests a substantial amount in an extremely powerful computer which dwarfs the other miners' hashing power. They get rewarded by earning most of the new Bitcoins and the network becomes more centralised.
While it's not likely that the crypto-currency will become completely centralised, this does create problems for it. For more information on the 51% problem of mining, read here. (This is an old article, but illustrates the point)
At the beginning I said this article was on the long-term success of Bitcoin and not on blockchain technology. There are many other coins out there which are beginning to offer solutions to this issue, including making the coin ASIC miner resistant. Until one crypto-currency gets widely adopted, we can't be sure which ones will be successful. It doesn't matter that Bitcoin is currently the most popular coin by market cap, it's still replaceable and this means when something better comes along it's easily replaced. Once something is widely adopted, it becomes harder to replace. Examples of this can be seen in America staying with imperial measurements and organisations in China still using outdated versions of Windows (trust me, I've been there). Until Bitcoin gets widely adopted it risks being replaced. If they want to keep the core concept of decentralisation, they are failing.
Deflationary
Storing fiat currency at home is a bad idea, it loses value over time. That $100 won't buy as much next year as it will this year. Bitcoin is limited to 21 million coins and this is part of its philosophy. It doesn't lose value when government central banks print more, because there will only ever be 21 million. This is actually a problem and more of a concern than decentralisation.
Any purchase I've made with Bitcoin, I currently regret. Granted at the moment there's not a lot of use Bitcoin for, but even if there were, it seems like a bad decision to use it, because I could buy more tomorrow using the same amount of Satoshis. You most likely have read about the pizza purchase, which is an extreme case of this. But I'm even questioning buying Bitcoin to purchase Bitcoin miners. So far my maths would suggest I'm better off to hold Bitcoin than use it for purchasing a miner to make it.
When Bitcoin wasn't worth much, people weren't securing their wallets. The stories of people throwing away their private key are true. So the reality is, there isn't going to be 21 million coins in circulation, even less. As time goes on, more coins will be lost. Yes, if you know what you're doing, it's safe, but a lot of people don't. We must expect that each year a certain amount of coins will end up unusable by people losing their private key. This adds to the long-term value and decentivises spending the coin.
So imagine this, you have dinner with your friends and when the bill comes, one person pays and you send digitally the money to your friend. Should you use Bitcoin, knowing that if you hold that Bitcoin you can buy more later, or use another fintech service, such as Alipay. If you don't know what Alipay is, let me explain. It is used in China, people can send money to anyone with the app, you just scan their QR code and send it instantly and for free, yes free, the only fee they charge is to withdraw money from your wallet and into your bank account, even then it's only 0.1%. Bitcoin is currently slow, it can take up to an hour for a transaction to be verified, has a fee and there is a incentive not to spend it. Litecoin seems even better as a currecny than Bitcoin, offering lower fees and faster transactions, last time I sent a Litecoin the fee was 0.16%.
In saying this there is an opportunity for Bitcoin to be a store of value rather than a currency, more like gold per se. I won't get into this debate here, but the WSJ ran an article on the possible value of BTC as an asset rather than currency.
I think there is a better option out there. A crypto-currency which is fast, has low transaction fees and no incentive to create mining farms. Imagine for example, your phone does some mining and this only cancels out your transaction fees, the coin itself isn’t limited to a certain number, but does allow for lost coins by, for example, allowing 5% more to be made each year.
To reiterate, I’m positive on crypto-currencies and blockchain technology but beginning to doubt the long-term potential of Bitcoin. I don’t spend my coins, and I won’t until they reach a value I’m happy with, then I’ll sell them for fiat currency. Short-term there certainly is room for the value of BTC to go up and it most likely will, but fingers crossed I’m cashed out before people realise Bitcoin has limited its own future.
I could certainly be wrong and there are many other issues to consider. I’d love to hear your opinions in the comments below.