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Bitcoin’s path to adoption

Bitcoin is described as a peer-to-peer electronic cash system in its whitepaper. Early adopters hoped it would be used by anyone across the globe. Ten years later, bitcoin has not yet become a universally accepted currency and has instead evolved to become different things to different people.

Bitcoin skeptics often cite the digital currency’s lack of real-world adoption as a reason why the cryptocurrency is a fad, of limited interest, and why its value will eventually go to zero.

While it is unlikely that Bitcoin will ever go to zero, critics do have a point about the currency’s low adoption level. There is no city in the world where you can use bitcoin for day-to-day spending. Globally, there are very few high street retailers, restaurants, and entertainment venues that accept bitcoin.

Online, the picture is somewhat different. There is a long list of merchants that accept bitcoin, and there are several apps and credit cards that enable bitcoin users to spend bitcoin at shops where the digital currency is not accepted. Nonetheless, bitcoin is not yet “the currency of the Internet,” that it is sometimes described as.

Instead, in its first ten years of existence, bitcoin has evolved to become more than just a digital payment system. Today, bitcoin is starting to be understood as a powerful alternative investment asset and a censorship-resistant store of value. Of course, for some – those in the bitcoin industry who may be paid in bitcoin, and early adopters – it is also a medium of exchange. Finally, for true believers, Bitcoin is our best bet for “sound money” in the future.

Bitcoin as an asset class

In the last ten years, by almost any measure, Bitcoin is the best performing asset on the planet.

As a result, both retail investors and institutional investors continue to show increasing interest in the asset as an investment class.

Moreover, the number of crypto exchanges and “buy bitcoin” apps has exploded in the past three years while financial companies have launched a number of bitcoin-based financial products to address the demand for digital asset investments.

According to a report by Grayscale Investments, more than a third of US investors are interested in bitcoin, which speaks volumes about bitcoin’s potential popularity as an alternative asset.

Bitcoin as a censorship-resistant store of value

Perhaps Bitcoin’s most powerful feature is that it acts as a decentralized, censorship-resistant store of value that enables anyone to be their own bank (or gold vault).

Bitcoin can, therefore, be understood as “digital gold” due to the features it shares with the precious metal.

In light of the political and economic uncertainty across the globe and the growing concern that we may experience another 2008-like global recession, more and more people are flocking towards bitcoin as a store of value.

While bitcoin may be more volatile than gold, the fact that it is censorship-resistant and its holders truly own their coins means that no bank failure or bail-in can affect bitcoin ownership. During difficult economic times, this is a tremendously powerful feature of bitcoin.

Layer 2 solutions for buying coffee

The Bitcoin blockchain is currently not able to process the number of transactions per second that would be needed for bitcoin to function seamlessly as a transactional currency for everyday purchases.

Transaction fees would be too high, and transaction speeds, too slow. These issues were partly addressed with the introduction of SegWit but as more users flock towards bitcoin, the more it becomes clear that other scaling solutions are needed for bitcoin to succeed as a currency. That is where Layer 2 scaling solutions, such as the Lightning Network LN) come into play.

The Lightning Network, which enables high-speed, low-cost, off-chain bitcoin transactions in payment channels, launched in beta in March 2018. It has since seen substantial growth. While the LN can currently only process microtransactions, many believe that it is the first step to enabling bitcoin to be used as a day-to-day spending currency.

Nick Szabo, a computer scientist and cryptographer known for his research in digital currency, tweeted on August 3: “Layer 1 is a settlement layer, its trust minimization akin to gold but able to be settled online. Layer 2 is retail cash (among other applications). This falls out of the computer science and trust minimization being the essential top priority for a seamlessly global currency.”

Sound money for everyone?

If bitcoin continues on the path it is on, if layer 2 scaling solutions succeed, and challenges such as fungibility are addressed, bitcoin may yet become the globally accepted sound money that free-market proponents have wished for since the end of the gold standard in 1971.

Sound money is fungible, secure, divisible, stable, portable, indestructible, censorship-resistant, and has value. It is not prone to sudden appreciation or depreciation in purchasing power over the long-term nor can it be manipulated by governments in the way that fiat currencies are. For many cryptocurrency advocates, that is the end goal for bitcoin. If it succeeds, then it will be the best investment opportunity in a generation.


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