Bitcoin’s Fatal Flaw Leaves Room for a New Crypto King
You walk into your favorite coffee shop on Tuesday morning and order a vanilla latte.
The barista rings you up on a touch-screen register. She turns it to you and asks how you want to pay.
Your options are U.S. dollars or bitcoin.
You choose bitcoin and hover your phone over the screen. It beeps and says: “Transaction processing, waiting for the network.”
The register sent your bitcoin transaction to the network. If there’s no third-party middleman, such as Square Cash or Venmo, your bitcoin payment isn’t approved until the blockchain confirms your transaction.
Six minutes later, it’s still processing. Your latte is getting cold.
The line of irate coffee seekers behind you is now impatient. Patrons grumble because they need their caffeine fix.
Since the card reader is still tied up, the barista announces that it’s “cash only.”
A scruffy gentleman near the door says: “You gotta be kiddin’ me!”
He storms out.
This nightmare is how things would have played out at my favorite coffee place in Brooklyn (and others) had the owners decided to start accepting bitcoin as payment.
As you can see, bitcoin isn’t ready to be a medium of exchange.
But there are a number of potential solutions that may help make credit cards a thing of the past.
Bitcoin Can’t Compete With Credit Cards
Bitcoin’s biggest limitation is that it can’t compete with credit and debit cards to process transactions.
Bitcoin transactions must be approved by the entire network. And this network can only handle a measly seven transactions per second.
It’s a different planet from Visa, which can handle 25,000 to 50,000 transactions per second.
That means you have to wait up to 10 minutes to pay for your latte with bitcoin. And when the network is crowded, the transaction might take even longer than that.
At the peak of bitcoin mania in 2017, it took as long as several hours to buy or sell the digital currency.
Without lightning-fast approval time, bitcoin is useless as a medium of exchange.
There’s No Magic Bullet Yet
We could treat bitcoin as a digital store of value, the way gold is a physical store of value.
After all, you would never bring a gold nugget into a coffee shop and clip some yellow metal off to pay for a muffin. (Well, some of the true gold bugs might.)
Without quick payments, there’s no advantage to bitcoin over credit cards.
In the crypto community, this is a known problem. And while there are plenty of potential solutions, there’s no magic bullet yet:
- Bitcoin spinoffs such as bitcoin cash and litecoin share bitcoin’s core DNA and offer faster confirmation times. But neither of these cryptocurrencies can compete with credit card transaction speed. Bitcoin cash is faster than bitcoin but can still only handle 61 transactions per second. And it doesn’t have bitcoin’s global network or universal acceptance.
- The lightning network allows groups of transactions between known parties to be combined as one payment. Hopes for this project were high, but development has slowed over concerns of network security and high fees.
- The Bakkt exchange wants to facilitate bitcoin transactions. For instance, if the coffee shop also has an account at Bakkt, then the transaction only needs to be approved by Bakkt. This transaction is later added to the bitcoin network. The main problem is this doesn’t cut out the banking middleman. Bakkt replaces the role of the credit card processor while charging another fee.
The Crux of the Crypto’s Problem
This brings us to the crux of the problem: how bitcoin functions.
The network uses up computational power to process transactions. And that processing time hinders the speed of day-to-day bitcoin transactions.
But the developers of Ethereum, the world’s second-largest cryptocurrency, have been planning a big upgrade for a few years now.
If it goes off without a hitch, it will be the biggest event in crypto this year (even bigger than the halving).
And you might be able to pay for coffee in an instant with Ethereum someday.
Editor, Automatic Fortunes
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives