Bitcoin: The pros and cons of the number 1 cryptocurrency

An in-depth look at the advantages and disadvantages of Bitcoin compared to other cryptocurrencies

Bitcoin is the king. It was the first properly decentralised cryptocurrency and has the largest market cap of all the cryptocurrencies. In this post I will go over both the advantages and disadvantages of Bitcoin

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Advantages

Easy to verify (High decentralisation)

Proof of work is seen as very slow and energy inefficient, and for miners it is.

However, miners aren’t the only people in the network and for nodes, who are the real backbone of the network, proof of work is actually very efficient. Whilst it takes a huge amount of time and energy to generate a proof of work hash, it’s incredibly quick and easy to verify them.

All you need to verify one is to take the block header from a block and hash it. If it matches the proof of work hash and has the appropriate number of leading zeroes for the difficulty level, then it’s a valid proof of work hash.

Apparently, you can download all the bitcoin block headers since genesis and verify the proof of work hashes from them all in under a second on a modern computer.

This ease of being able to verify consensus, along with bitcoin having low throughput from its small block size and 10 minute block time, means you can run a bitcoin node and verify the chain yourself on very lightweight hardware. This makes running nodes very accessible which allows for high decentralisation.

Block production may be somewhat centralised around a few mining pools but block verification (which is far more important) is highly decentralised.

Strong core values

Bitcoin has a strong community with fairly concrete core values for what they want from bitcoin.

Ultimately, the properties of a cryptocurrency are decided by the community of people running nodes. If everyone running a bitcoin node decided tomorrow to double everyone’s bitcoin, they could do it. However good luck trying to get the bitcoin community to do that.

21 Million bitcoin is all that will ever exist and it would take a massive crisis to get the community to move away from that.

Simplicity

To the average person, bitcoin may be complex, but compared to almost all other cryptocurrencies, it’s very simple.

Bitcoin has a strong emphasis on running your own node so you can personally validate that everything on the chain is correct and can decide yourself if you want to accept any changes from the developers. The simplicity of the code base means any updates can be properly vetted by a large number of people so the chances of the developers being able to sneak in anything malicious or against the community values is small.

Low to zero inflation

The vast majority of cryptocurrencies use newly minted tokens as a reward for people who help secure the network. Bitcoin is no different and currently rewards miners with newly minted tokens.

However, the inflation rate for bitcoin is currently only around 1.8% per year and will decrease every 4 years until eventually it will reach zero and miners will only be rewarded through fees. This level of inflation is far lower than the vast majority of cryptocurrencies (and fiat currencies) which allows bitcoin to potentially be a great store of value.

Good distribution

Generally the distribution of a cryptocurrency gets better over time. As the market cap increases, more of the previous holders will have made profits and will sell to new holders. Bitcoin is the longest running cryptocurrency and has the highest market cap so is naturally the best distributed currently.

Secondly, unlike most other cryptocurrencies who initially distribute large amounts of their tokens to their team and insiders, 100% of bitcoin was distributed through mining to miners who were securing the network. Mining costs a lot, so when a miner receives newly minted bitcoin as a reward, they typically have to sell a significant chunk of the reward to cover operating costs. This means newly minted tokens get distributed into the market a lot faster compared to other cryptocurrencies that don’t use proof of work.

Strongest brand

Everyone knows about bitcoin. Even your grandparents will have heard of it. There is a strong demand for bitcoin and the chances of it disappearing are almost none.

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However whilst it does have these big advantages over other cryptocurrencies, nothing is perfect. Here are the disadvantages:

Disadvantages

Long term security concerns

There are still question marks over the long term security of bitcoins consensus method. The incentive to take part in consensus is one of the most important parts of a consensus method. People don’t set up expensive mining rigs for nothing, the incentives to do so are incredibly important.

There is a big difference between a proof of work method where miners are rewarded through newly minted tokens and a proof of work method where miners are rewarded through fees. If the block rewards were removed tomorrow, would bitcoin still be secure? In 2140, bitcoin is switching to this model but we have no certainty whether it’s secure or not.

120 more years of uncertainty

Taking this point further, when you change the block reward for the consensus method, it can be argued you are changing the consensus method itself. This means you could say that every 4 years for the next ~120 years, when bitcoin halves its block rewards, it will be changing its consensus method. This is obviously not ideal and brings inherent volatility and doubts over the future.

This inherent volatility in the consensus method goes against one of bitcoins core values of being a safe store of value that you can trust for potentially hundreds of years. The bitcoin community largely wants an unchanging protocol that they can rely on but the consensus method goes against this value.

Low fees

Huh, low fees in the disadvantage section? Wait bitcoins fees aren’t even that low! Why is this here?

In order to maintain the same security level, miners need the same level of incentive. When you halve the block rewards, you need bitcoins price to double in order for the miner’s incentive to stay the same and security to be maintained.

Eventually the block rewards are going to zero, so the only incentive for miners will be the fees that users pay them. Currently fees are tiny compared to the block rewards. They also vary drastically, often times being 100x greater during bull markets compared to bear markets.

If bitcoin wants to maintain high security, it needs fees to increase massively. Today miners get 6.25 BTC from block rewards per block. This is around $187,500 in todays value ($30k per BTC). There are around 2000 transactions per block so if you want to maintain todays security level without the block reward, you need fees to be consistently ~$100 per transaction for miners to have the same incentive. That’s just for maintaining todays security level which we aren’t even sure is enough.

Generally you don’t need to make many transactions with stores of value like gold so the narrative of bitcoin being a store of value may actually hurt its ability to generate fees. Currently it’s unclear how bitcoin is going to generate a source of fees that will allow it to be secure in the future.

Security coming from outside of the protocol

Many people like the fact that in order to keep bitcoin secure with proof of work, real energy is used. You can’t fake burning energy so you can’t fake having hash power in the network. For many people, this is an advantage.

However, when you start to think about the entities that have more access to energy than bitcoin miners, you realise there will always be bigger players outside of the protocol. The US military could easily take over bitcoin if they wanted. They have more than enough budget to create an ASIC factory and 51% attack the network.

Unless bitcoin miners become the biggest entity in the world, there is always going to be someone bigger with the potential to attack bitcoin.

Low throughput

Bitcoin only does around 4-7 transactions per second. This has pushed people who want to transact with the token away from using the base layer and onto centralised exchanges where they no longer have custody over their tokens.

The lightning network is the main decentralised scalability solution to try and get around the limited throughput of the base layer but it’s largely clunky and difficult to use.

When you open a lightning channel with someone, you need to be online and checking the blockchain at least once every 24 hours to make sure the other person in the channel doesn’t steal your funds. You can pay a watchtower service to do this but that is now another entity you need to trust.

Even if the Lightning network was more usable, every time you want to open or close a lightning channel it requires a transaction on the base layer, which only does 4-7tps, so onboarding people to lightning is bottlenecked by the lack of throughput on the base layer.

There is research out there for ways to improve throughput like CoinPools, Hierarchical channels and even rollups, so there is the potential for bitcoin and the lightning network to improve their throughput. However at the moment, these are still very much in the research stage and may not be possible in practice.

Slow speed

Compared to other cryptocurrencies, bitcoin is very slow. There is only 1 block every 10 minutes and even if you have a transaction included in a block, there is still a chance it may be in a block that is not a part of the longest chain so you should ideally wait for another 5 blocks before considering it final.

High energy consumption

Obviously there are criticisms about proof of work’s energy consumption as it is starting to rival the amount of energy many small countries use. As the world moves towards greener energy sources this will become less of an issue though.

Ossified community

The strong ossified community is sometimes an advantage, but is also sometimes a disadvantage as they are strongly opposed to change.

There were suggestions in the past for things like merge mined chains that could have been used on bitcoin and may have been a good breeding ground for the experimentation of altcoins built on top of bitcoin. However the bitcoin community was too resistant to change and now the gap in the market has largely been filled by Ethereum and the many other alt coins.

Limited scripting capabilities

Again, whilst bitcoins simplicity is an advantage, it is also a disadvantage as the number of more complex transaction types you can do is limited. Due to not being able to have more expressive smart contracts on bitcoin, many users have had to turn to less secure chains or custody solutions in order to fulfil their needs.

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Conclusion

Overall I think the next 10 years will be good for bitcoin. There is still room for the price to grow and keep the block rewards high enough for security. Most people right now don’t think about the security at all so won’t be put off from buying it in the short term.

The current economic climate is one that sees major powers loaded up with large amounts of sovereign debt. It’s at a point where their economic growth barely pays off the interest payments on the debt. The way out of this is to either default and let everything collapse or print more money to make the debt worth less.

Printing money seems like the obvious choice to make and so the strong narrative around bitcoin being a store of value, with its small and predictable level of inflation will be an attractive investment over this time.

However, price of bitcoin is not going to infinity and every 4 year cycle, the price increases less than the previous one. Once the price no longer doubles every four years, the security will start to become questionable unless a way to produce consistent high fees is found. Right now it’s difficult to see a solution to this.

Don’t completely write bitcoin off in the long term though. Human ingenuity is surprising. There are some incredibly clever people working on the problem so whilst it looks like there will be clear issues now, we have no idea how the technology and community will evolve over the next 10 years. The community won’t just let bitcoin die. I would say investing in bitcoin right now is safe, and own some myself, but if we don’t see any solutions to the fee problem in 10 years, start looking at alternatives.

(Money printing doesn’t necessarily mean we are going to have consumer price inflation. If productivity increases to the point where now you can produce a loaf of bread for £0.50 when before it was £1, then central banks can print money and debase the currency until the price of bread is £1 again. Money will be worth less but CPI will have stayed the same. Manufacturing being offboarded to China and robots have allowed mass money printing without CPI for years until the more recent supply shocks from covid. High efficiency renewables/batteries, improved robotics and AI may allow for more money printing without CPI increases again in the future.)

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