Bitcoin’s Three Biggest Weaknesses

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At this point, you’ve heard it all about Bitcoin.

You’ve heard the diehards call it the “next internet,” and you’ve heard the detractors refer to it as the biggest bubble of all time. 

While all those opinions may have some reasoning behind them, there are certain objective Bitcoin facts that cannot be refuted or argued. 

These facts are all rooted in the Bitcoin mechanism itself: physical attributes of the technology that have always been known, even though the extent of their effects is only becoming clear today, as the mania spreads. 

The following are three of the biggest technical limitations of Bitcoin, limitations anybody considering it as an investment should be familiar with…

Transaction Delays

One of the things we love most about electronic transactions is the speed at which money can be moved around. 

With our common credit and debit cards, it takes mere seconds for a transaction to debit money from an account (or, in the case of a credit card, place a charge on the account) and then transfer those funds to the recipient account. 

Modern systems operate faster than an average cashier can accept a paper bill and make change, to say nothing of the time and effort wasted on driving to the bank to deposit hard currency. 

So, with the speed aspect taken care of long ago, you would expect a newfangled thing like Bitcoin to raise the promptness factor to an even higher level. 

The problem is, it doesn’t. 

The reason why is, well, pretty technical — so much so that most people go into a mini-coma just listening to the explanation — so I won’t bother getting into it. 

Essentially, it all comes down to the fact that a Bitcoin transaction requires no fewer than six confirmations before it is executed. 

The “block” (an individual chunk of the blockchain) that must be created in order to register these transactions needs to be created by individuals, referred to as “miners,” with access to powerful, networked processors.

Transaction times were once in the single-digit minutes, but now, with the glut of incoming Bitcoin users (yes, people do actually use this as a currency), that time has gone up into the hours. 

According to CoinCentral.com, the average time it takes to mine a block is about 10 minutes, meaning a full transaction would take about an hour. 

That time has swelled greatly in recent weeks, however, with some transactions taking up to 16 hours to complete. 

Across the entire network, the average rate has remained around four transactions per second. 

Putting that into perspective, try to imagine how many credit card transactions are happening across the world each and every second of each and every day. 

That should give you an idea of just how small a scale the biggest player in the crypto universe is operating on — for now, at least. 

Where transaction times will go if mainstream adoption really does take effect, only time will tell… But the truth is, there is no solution. 

Not as far as Bitcoin is concerned. 

The limitation is part of the architecture, and the only thing that can fill the vacuum created by the inefficiency is, well, another coin. 

Bitcoin Cash was an attempt at spinning off the parent cryptocurrency into a more efficient package. 

Consider that a band-aid, considering that the potential size of the user base makes today’s transaction volumes look like a trickle. 

Soaring Transaction Fees

One way around these extreme delays, and this shouldn’t be a shocker to anybody, is to pay higher transaction fees. 

You see, Bitcoin employs a transaction fee system to handle situations where demand for the network outstrips capacity.

Enter a transaction into the network, and you’re given an option to add a transaction fee that goes to the miner who is willing to include your transaction in a newly mined block.

It’s a free market, so if there are more incoming transactions than will fit into a given block, miners will go with the highest fee-payers first.

With expansion of the user base, fees have also been increasing steadily.

In fact, the rate of increase in the fees has virtually mirrored the explosion in Bitcoin price

bitcoin transaction price

Of course, this built-in limitation makes timely transactions very expensive and most likely will be reserved for highly sensitive, bigger-ticket items that warrant such extra cost.

Leaving the question of just when and why Bitcoin is justified as a more casual payment medium, when already established alternatives already exist… without the shortcomings. 

The Energy Cost of Production

Perhaps the most shocking and potentially disruptive aspect of Bitcoin is the cost of keeping the system going. 

The numbers are hard to grasp, but what’s even more mind-blowing is that they’re growing. 

So, how much energy does it take those Bitcoin mining rigs to keep running day and night, producing coins that eat up more energy the more coins enter circulation?

According to the Bitcoin Energy Consumption Index, as of December 12, Bitcoin’s estimated annual energy consumption is 32 terawatt-hours of energy. 

That’s over $1.6 billion worth of electricity, or roughly the amount consumed by the entire country of Denmark. 

In the U.S., it’s enough energy to power more than 3 million homes, with each individual transaction taking up the power it takes to feed eight U.S. households for a full day. 

If you’re into preserving the environment at all — even on the most superficial “getting outraged at Thanksgiving dinner” basis — that’s especially bad news for you because the nation with the largest population of Bitcoin miners is none other than China. 

Preferred for its cheap energy, China is also by far the world’s biggest consumer of coal. 

It accounts for 49% of global consumption — almost five times as much as the number two consumer, the United States. 

Seems strange, doesn’t it, that the vanguard of one of the most transformative technologies of the 21st century depends upon a source of energy that’s been powering industry since the dawn of the industrial revolution?

So What’s Next?

Bitcoin is the first. It is the biggest. It will be the one that’s remembered for starting a revolution.

But will it be the most popular and longest-lived? I seriously doubt that. 

Because even as prices swell and the list of vendors accepting Bitcoin grows, the technology itself becomes more inefficient, cumbersome, and energy-hungry. 

There needs to be an evolution, and by all indicators, it’s already here. 

I’ve been researching the question of what comes after Bitcoin, and I’ve come up with two answers.

Two cryptocurrencies that today are virtually unknown to all but the most determined crypto-junkies have answered the questions Bitcoin doesn’t. 

Most important from an investment standpoint, however, is that both of these coins are currently valued at tiny fractions of Bitcoin’s gargantuan market capitalization — less than 1/1000, in fact. 

Which means the growth potential is that much greater. How great?

Just imagine buying Bitcoin at $10 or $15… and then selling at today’s price: over $17,000.

That’s the magnitude of this opportunity. 

I’ve just published this report, and you can access it right now for free.

Just bear in mind that with the speed at which these coins move, this window could close forever in just a few weeks’, maybe even just a few days’ time. 

Click here for instant access.

Fortune favors the bold,

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Alex Koyfman

follow basic@AlexKoyfman on Twitter

Coming to us from an already impressive career as an independent trader and private investor, Alex’s specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.

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