What Exactly Is Bitcoin Good For? A Theory

Bitcoin’s future as a payment system is more plausible, because it would not need to dethrone other currencies, something that the governments that run those currencies are apt to get rather testy about.

But if you think bitcoin is a payments system, you quickly run into a few problems.

The first is that bitcoin has severe scaling problems. It is designed for transactions to take 10 minutes to clear (a modern miracle, but those of us used to the modern miracle of debit cards are probably not willing to stand at the grocery checkout queue for 10 minutes after our groceries are bagged). And its overall architecture means it simply can’t clear very many transactions — a tiny fraction of what Visa and Mastercard handle every day. Already people are complaining about rising fees and longer wait times for payments to clear.

For bitcoin to compete as a payment system, it has to offer the same benefits that Visa does: rapid transfers of funds, immense scale, protection against theft (in the U.S., at least), and the ability to dispute charges, all at a reasonably low transaction fee. Otherwise, it has to be better at something than Visa is. The only area where it can really be said to better than a credit card lies in the privacy.

But I’ve yet to see evidence that people other than current bitcoin enthusiasts actually value privacy all that highly. I doubt they value it enough to support current bitcoin valuations. So bitcoin is going to have to deliver on some of Visa’s other advantages. There’s no sign it can. Which makes it hard to see how bitcoin-as-payment-system can justify current valuations.

There are ways to fix these problems. For example, you can increase the size of the transaction ledger that posts every 10 minutes (in fact, bitcoin’s digital architecture just had a “fork” that did this). But then the total ledger of every transaction that was ever done will also get bigger — and bitcoin’s peer-to-peer architecture means that this bloated ledger would have to be stored on every computer in the network. That’s unlikely to be practical.

Alternatively, third-party systems can develop on top of bitcoin, so that most of the transactions are posted inside the third-party systems, and netted out, so that only some of the transactions have to be posted to the mass ledger. But then those third parties are really the ones competing with Visa, and bitcoin starts to look more like money.

In a column next week I’ll assess bitcoin’s plausibility as money. (Check out the new TV series “Ozark” if you want some homework before then.)

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