4 Current threats to Bitcoin

In this article I will talk about the biggest threats to Bitcoin. The idea of virtual currency is not new, we have seen it in video games as gold and tokens which can be bought with real money. The real revolution is the blockchain that Bitcoin is based upon. Many compare the blockchain to the TCP/IP protocols when internet was first introduced.

Because of this new peer-to-peer technology known as the blockchain we face unknown threats and vulnerabilities. Just like it took the internet some time to appear at nearly every person’s house, so does Bitcoin take time to be approved, regulated, and accepted.

Adoption

The first problem with Bitcoin and one we are trying to conquer in 2014 is merchant adoptions. While there are many theoretical benefits to using a distributed virtual currency it is hard to put a value on it. As a result the market becomes volatile and merchants become skeptical of it’s use.

The appearance of Bitcoin represents something new to merchants, it offers hope to people jaded by traditional financial institutions. There are quite a few startups which are trying to bring Bitcoin to the merchant. One of such are Circle, Bitreserve, and Xapo.

Circle is a Boston-based bitcoin startup that is a digital bitcoin money platform. It allows for merchant integration and makes it easier to use Bitcoin. Quoted from Jeremy Allaire (CEO) and Sean Neville (CFO):

“We’re an Internet-based consumer finance company. We believe that digital money platforms and associated consumer products and services will revolutionize the way the world uses money.
We want to help people store and use digital money anywhere in the world.”

In other words, Circle is a sort of “digital custodian” for it’s customer and allows to use Bitcoin without running the Bitcoin software which powers the blockchain. Circle offers top level security and architecture to ensure customer satisfaction and ease of payment.

Bitreserve is a startup that qllows fiat-to-fiat transactions at zero cost. It is able to achieve that by using bitcoin as the underlying payment system. It solves the issues of volatility of Bitcoin because it automatically moves the funds to fiat and uses Bitcoin as the platform instead.

Finally, we have Xapo which is a company that aims to bring Bitcoin to life and put it on a Debit Card. The card would run under MasterCard so you will be able to use it at any local store that accepts credit cards – which is everyone. The cards are still on preorder and you can visit their website to order one.

 

Technology Adoption Chart

Technology Adoption Chart

above is shown the Technology Adoption chart which symbolizes how a product gets adopted in the market. Which stage is Bitcoin on? Currently it is in the Early Majority stages as 76 percent of people do not know what Bitcoin is, according to Forbes. We also see that during the transition from Early Majority to Late Majority is where we will see the most activity and rise in price. So at this point we need to promoted Late Majority adoption and bring in new audience to Bitcoin. Merchant adoption is a huge goal to overcome but many are trying and it looks positive.

Mobile Support

Here are some statistics that may help you understand the importance of mobile support. As of January 2014

  • 90% of American adults have a cell phone
  • 58% of American adults have a smartphone
  • 32% of American adults own an e-reader
  • 42% of American adults own a tablet computer

Because so many people use smartphones in order to bring in more audience Bitcoin needs to have strong mobile platforms. As of today Apple Inc. which is one of the biggest companies that regulates mobile apps decided to ban the Blockchain app from it’s app-store. This means that it will be harder for Bitcoin to advance in the mobile platform because one of the biggest mobile platforms has banned it. We still have android which decided to take a different direction and allow apps that are Bitcoin related. Since android is owned by Google we have also seen positive reaction from google when one of the apps on the Google Chrome Store was removed due to a hack was later restored and the app was not banned.

As a reaction to the Apple scandal Coinpunk decided to make a front-end Bitcoin wallet which is mobile-optimized and runs 100% on HTML. Coinpunk’s purpose was to circumvent the Blockchain.info app ban from Apple and serve as a way for iPhone user’s to still have a mobile Bitcoin wallet. For more information regarding coinpunk and a tutorial on how to install it please visit the following links:

Coinpunk info 

How to install Coinpunk on Centos 6.5

 

 The Bad Guys

Another problem facing Bitcoin are the bad actors which give Bitcoin the negative reputation and it’s lack of trust. Because Bitcoin is anonymous is it associated with hacking and fraud. However, witht he right security it can be prevented.

The two main bad actors which hindered Bitcoin’s reputation are The Silk road, and MtGox.

The Silk Road was the online drug market which has been since shut down by the FBI and which used Bitcoin as the currency on the market. This gave Bitcoin the shady reputation. However, neither the creator of Bitcoin nor Bitcoin itself has anything to do with Silk Road. It is not fair to demonize Bitcoin because it was used as a currency in a drug market. Do we demonize USD for use in the drug market? No because it is simply a currency.

The other bad player is MtGox which was supposedly “hacked” and all the user’s with Bitcoin’s on the exchange ended up loosing all their coins. This caused a huge selloff both on MtGox and other exchanges such as BTC-E and Bitstamp. The crash of MtGox caused the price of Bitcoin to plummet.

Now that the bad actor’s are behind us exchanges are still being investigated in regards to connection to the Silk Road. This hurts the Bitcoin economy because now there is a risk in being a Bitcoin exchange because you might end up with Bitcoins that were used on the Silk Road.

Centralization

hashrate chart

Another huge threat to Bitcoin is it’s centralization. Bitcoin is based on the blockchain which is a system that only works in a decentralized state. Bitcoin can be centralized in 2 ways. Either a centralized being hosts all the Bitcoin nodes, or the being hosts all the mining equipment. Take this, you don’t even need to own 100% of Bitcoin nodes or mining rigs but 51% is enough. So let’s say a company comes up with a super strong ASIC which is able to mine at 1 Petahash Per Second. 1 Petahash = 1000 Terahashed.

According to Blockchain the total mining power of the Bitcoin network is around 100 Petahashes. So that means if a company is able to produce 51 Petahashes of power then it will be able to do alot of damage to the Bitcoin network. However, this has not happened yet and the Bitcoin network has been active for quite some time now so the longer it stays active and stable the less risk it will have for centralization.

The other way Bitcoin can be centralized is if it will start to be regulated. If strict regulation takes into place then the Bitcoin network would have to follow arbitrary rules which would hinder the further development of the blockchain. However, it seems that is would be really hard to regulate Bitcoin because there are so many loop holes. The Federal government is looking at regulating bitcoin so we at least know it will not be banned.

An active threat that threatens the decentralization of Bitcoin is that a big corporate can patent the idea of virtual currency and end up making it centralized. We can see evidence of that where Western Union has been granted a patent to Bitcoin related currecncy and that if other corporates such as Gemalto, Paypal, and Ebay get such patents it can mean bad news for Bitcoin.

The above were the top 4 threats to Bitcoin. Quick look at BTC-E as of 5/27 3:42 PST

btc-e5-27

What happened? We were doing so well and had a dump from 580 -> 550. If you would like to find out why we had a dump please follow this blog and stay tuned.