In the informational age, technology and innovation are advancing at an almost untraceable rate. Not many disciplines exist, if any, that haven’t experienced innovation. One major financial innovation is cryptocurrencies. Cryptocurrencies are digital online currencies that exist only virtually. Many cryptocurrencies exist today, however, the most dominant is Bitcoin.
According to an article written by Yellin, Aratari, and Pagliery18 (2018) titled, “What is Bitcoin?” the cryptocurrency was launched by an entity named Satoshi Nakamoto in 2009. No one knows who Nakamoto is or if that’s the creator’s real name.
Nonetheless, today, nearly ten years later Bitcoin has gripped the world stage. Yellin, Aratari, and Pagliery are authors for CNN and their article, “What is Bitcoin?” provides basic information about Bitcoin and its features.
Prior to entering the complex debate which surrounds Bitcoin, it is important to understand some of the basics regarding the cryptocurrency. Bitcoin has many aspects that make it unique compared to traditional currencies. First, the currency itself has no intrinsic value and isn’t a tangible item like the US dollar. Second, Bitcoin is decentralized meaning that no central authority has control over it. According to an article titled “What is Cryptocurrency,” (2018) published by blockgeeks.com, the authority is shared between every Bitcoin user. Users perform and validate transactions. Blockgeeks is a “blockchain technology company” that promotes cryptocurrencies and provides detailed information regarding decentralization and Bitcoin’s blockchain.
Third, Bitcoin is unregulated. This is largely due to the currency being decentralized. There is no central authority, thus there is no single entity that regulates it. Fourth, Bitcoin uses a ledger system dubbed the blockchain. The blockchain houses every Bitcoin transaction that has ever happened. Fifth, Bitcoin transactions are completely anonymous. This means that users can send or receive money and maintain anonymity. Lastly, new Bitcoin is created by mining, a process similar to mining gold or silver, except Bitcoin mining is entirely virtual. The process of mining involves solving complex algorithms and mathematical problems. Those are six of the basics regarding Bitcoin, necessary to understand when evaluating the cryptocurrency.
According to Ranasinghe (2013), Bitcoin has risen in popularity and has become the topic of much financial discussion. Though the article is a little dated what it says regarding the popularity of Bitcoin has not changed. Further, some investors and Bitcoin users believe that Bitcoin is a reliable and realistic means of performing financial transactions and that the currency will one day take the place of tangible currencies. Although Bitcoin has been a good attempt at creating a sustainable and realistic long-term virtual currency, the currency itself faces too many problems and challenges to become a widely used, accepted, and dominant currency on the world stage.
This claim can be evaluated by analyzing the most relevant issues facing Bitcoin which are decentralization, anonymity, the blockchain, competition, and digitalization.
First, consider decentralization. Decentralization means that Bitcoin has no central authority. Essentially, no single entity controls Bitcoin. This is unlike any currency seen before. The United States government controls and regulates the American dollar and the British parliament controls the English pound. Bitcoin, however, is entirely dependent on its various users. According to Blockgeek’s article titled, “What is Cryptocurrency,” (2018), it’s the users that acquire new Bitcoin and it’s the users that perform and verify transactions. As noted before, Blockgeeks is a company that promotes cryptocurrencies and their site offers detailed information on the different facets of Bitcoin.
Decentralization is one of Bitcoin’s primary features. However, decentralization poses substantial problems for the cryptocurrency. One major problem is the lack of defense against fraud. Very simply, who does a Bitcoin user call if someone steals their money? Professor Ross Anderson of the University of Cambridge points out that there is no one to call (Computerphile, 2016). Unlike a bank that has systems in place and federal insurance policies to protect against fraud, Bitcoin has no such systems or policies. Computerphile is a YouTube channel that interviews experts about the latest in technology. They offer content on a wide array of technical topics and seem to be fairly objective in their approach.
Having no one to call leads into another major problem with decentralization, Bitcoin transactions cannot be reversed. Once money has been sent or received from one entity to another, that transaction is added to the blockchain and is thereby irreversible. This means that if a Bitcoin user sends money to the wrong person, the money is gone for good. This too is different from a centralized financial system. If something goes wrong in a centralized system, policies exist that ensure users can be reimbursed.
The third and final problem with decentralization is that of belief. Traditional financial systems ultimately work not because the medium of exchange used (I.e. the American dollar) has any true value itself, but because Americans believe it does. Essentially, the dollar holds value because Americans believe that the dollar holds value. They have faith in the government’s central authority over the US dollar. However, with Bitcoin and its decentralization, who is there to believe in? Other users? What authority is there to hold the currency up? Traditionally, people feel a certain level of security when they can believe in a central authority. Contrary, when there isn’t one, it tends to set people on edge.
As one can see, decentralization poses big problems to the success of Bitcoin on a large scale. The next topic discussed is that of anonymity. As stated before, Bitcoin transactions are completely anonymous. But how does this work? Each individual has a Bitcoin ID otherwise called a private key. According to Sudhir Khatwani (2017), a private key is a complex web address that can be changed at any time. Khatwani is an author for CoinSutra, a site that promotes the use of cryptocurrencies. In addition, according to PensionCraft (2017), the reason Bitcoin transactions are anonymous is because a private key cannot be traced back to any one individual. PensionCraft is a YouTube channel that discusses finances and investments. Thus, instead of money being sent from one person to another, when a Bitcoin transaction is made, Bitcoin is sent from one private key to another private key, then the transaction is added to the blockchain and cannot be reversed. This process enables Bitcoin users to remain anonymous when performing transactions. However, although Bitcoin is proud of this feature and highly publicizes it, the fact that Bitcoin transactions are anonymous poses some major problems for the currency.
The biggest problem with anonymity is illegal activity. It’s every criminal’s dream to remain anonymous. Thus, what better way to perform illegal financial transactions than with Bitcoin?
Consider this, if one individual wanted to send money to another in payment for illegal drugs or weapons, that individual could do so with no questions asked using Bitcoin. Contrary, this sort of illegal activity is much more difficult to perform when going through a centralized and regulated financial system where anonymity doesn’t exist. Further, not only are transactions not anonymous in a centralized system but in countries like the US for example, banks require vast information to open an account such as social security, employment history, etc. In addition, the activity on everyone’s account is consistently monitored.
The second reason why anonymity poses problems for Bitcoin is that it’s difficult to ensure that money is being sent to the right person. How do you know that you’re sending Bitcoin to the right person if all you have is a private key? It would be all too easy for the user to input the wrong private key or have the wrong private key to begin with. If this happens, then what? The transaction was anonymous on both ends so there is no way to track down the person that received the Bitcoin and demand it back.
Both decentralization and anonymity pose big problems to Bitcoin’s success on a large scale. The third problem Bitcoin faces is the blockchain. According to Blockgeek’s article cited earlier, titled, “What is Cryptocurrency” (2018), the blockchain is a ledger system where all Bitcoin transactions are stored Each transaction is added to a block and that block is added to the blockchain. The blockchain is permanent, hence the reason why transactions cannot be reversed. As stated before, Blockgeeks is a “blockchain technology company” that supports cryptocurrencies.
In addition, an updated copy of the blockchain is automatically downloaded to the hardware of Bitcoin users the moment they enter into the virtual world, and therein lies the first problem. According to Prableen Bajpai (2014), an author for Investopedia, the blockchain is too large. Investopedia is a reliable and widely used financial site. The site is objective to Bitcoin, not claiming the currency to be good or bad.
Because the blockchain is too large Bitcoin users are overwhelmed with the amount of time it takes to download the latest updates of the blockchain when they attempt to access Bitcoin. Imagine every time you reach into your wallet, having to wait several minutes before you can touch the cash. Not only does the growing size of the blockchain take up time but it also takes up space. Users must have enough space on their devices to house and store vast amounts of blockchain data. If the size of the blockchain is an issue now, imagine one hundred years from today, considering that Bitcoin is still only within its first ten years of existence.
Another problem with the blockchain is mining. Mining is the process through which transactions are added to the blockchain. According to John Kelleher (2014), also an author for Investopedia, mining is performed by Bitcoin users using high tech computer hardware systems that solve complex mathematical algorithms in an effort to authorize and complete recent transactions. In return for their efforts, miners are awarded one new Bitcoin. New Bitcoin is awarded roughly every ten minutes and the difficulty of mathematical algorithms solved during mining varies depending on the number of miners online. All in all, mining is an essential aspect of Bitcoin’s existence because it completes Bitcoin transactions and releases new Bitcoin. As stated before, Investopedia is a reliable and widely used financial site.
So, mining is essential, but what happens if the number of Bitcoin miners dwindles down? According to Professor Ross Anderson of Cambridge University (Computerphile, 2016), cited earlier, this is a legitimate problem. He says, “as the money available to miners goes down, so the willingness of people who do Bitcoin mining might go down.”
Another problem, according to Kelleher (2014) of Investopedia, is that mining has become very expensive between the equipment which is now necessary and the high amounts of electrical energy required to mine. No longer can users mine on their spare laptop but now mining is only successful using an ASIC hardware system that costs well over two thousand dollars.
As one can see, decentralization, anonymity, and the blockchain all pose major threats to Bitcoin’s long-term success. The next and fourth problem is competition. When Bitcoin first emerged on the scene it was in a category all of its own. The currency faced no competition because the world had never seen anything like it. However, times have changed and according to coinmarketcap.com, over two hundred cryptocurrencies exist today (“Cryptocurrency Market Capitalizations,” 2018). These major cryptocurrency competitors include Litecoin and Ethereum. Coinmarketcap.com is an objective site that offers market statistics on existing cryptos.
Not only do other cryptocurrencies pose a threat to Bitcoin but so do prospective centralized cryptocurrencies. According to Bob Mason (n.d.) of FX Empire, countries such as Japan and Russia have discussed possibly releasing their own national cryptocurrency, similar to that of Bitcoin and the likes. FX Empire is a news outlet that reports on activity in the business and financial sector.
So, why would a centralized crypto pose problems to Bitcoin? Well, a centralized cryptocurrency would need to provide all the same security and insurance benefits that traditional centralized currencies do. Further, a centralized crypto would integrate the virtual feature that makes Bitcoin what it is. Thus, a centralized cryptocurrency would likely blow Bitcoin out of the water. Not to mention, nations with their own cryptocurrency may ban decentralized cryptos such as Bitcoin altogether.
The final problem Bitcoin faces in terms of its long-term success is digitalization. Digitalization is the “online” aspect of Bitcoin. Although, Bitcoin’s online and virtual features are precisely what make the currency unique, how realistic is it really to have a currency that can never be physically touched? Professor Ross Anderson (Computerphile, 2016), cited earlier, states that digitalization poses substantial problems to third world countries and others. Although many countries have become tech savvy and have integrated the virtual world into their cultures, still many have not. How would a third world country manage and participate in Bitcoin? The answer is that they couldn’t. They simply do not have the resources to sustain a virtual currency. Professor Anderson is an expert in the financial and technological world. Admittedly, he doesn’t see Bitcoin as a sustainable currency on the world stage.
Further, because Bitcoin is digital, it needs to be stored digitally as well. According to Nicholas Deleon (2017), of consumerreports.org, this opens the currency up to threats of hard-drive failures and hacking. Deleon made this statement, “Having a hard drive with Bitcoin fail is something like opening a leather wallet and discovering that your paper money has disintegrated.”
In addition, Deleon discussed the threat hackers pose to Bitcoin. He said that Bitcoin exchanges (websites where Bitcoin can be converted into other currencies), are at risk of being hacked and that a major exchange in South Korea was forced to shut down as a result of being hacked. Deleon is a Senior Reporter for Consumer Reports, a site that provides objective product reviews. In a separate article done by CNN Business, the statement was made that approximately “a third of all cryptocurrency exchanges have been hacked at some point,” (Shane, 2018).
In conclusion, Bitcoin is a revolutionary currency that has stunned many experts in the financial domain. Bitcoin has had good intentions in its attempt to make currency and financial transactions more convenient and modern.
Nonetheless, Bitcoin faces too many problems when considering it to be a legitimate, widely accepted, and dominant currency on the world stage. Decentralization, anonymity, the blockchain, competition, and digitalization are all issues Bitcoin faces. Moving forward these problems will prohibit Bitcoin from becoming the virtual currency of the future.
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