The original use case for bitcoin might have fallen flat, but the innovation it unleashed continues to push blockchain implementation forward.
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Blockchain and cryptoassets were developed, which at this point is well known, to disrupt, disintermediate, or otherwise topple the incumbent financial infrastructure. Democratizing access to financial resources and information, the argument went, was a slam dunk idea in the aftermath of the financial crisis. That said, and despite the billions of dollars invested, thousands of individuals working on the issue, and the media focus on this potential, bitcoin remains a medium of exchange only used for a small portion of its total trading volume.
Trading volume across different exchanges for bitcoin and other cryptoassets may total in the tens of billions, but utilization of bitcoin as a legitimate fiat alternative remains slower than might have been anticipated. Reasons as to why this has occurred have been documented extensively, so let’s just summarize them briefly. This is not to say that bitcoin will never catch on, but as of June 2020 that simply is not the case.
The issues
First, price volatility and the near obsession over price levels discourage both retail investors and merchants from using bitcoin as an effective medium of exchange to conduct transactions. Second, and even though bitcoin is thought of as anonymous, the reality is that transactions and holdings can (and have) been traced back to real world owners. Lastly, but perhaps most importantly, the lack of understanding and the lingering association of crypto with criminal activity may lead many non-experts to steer clear.
So why is all of this good for the crypto space at large? If the flagship cryptoasset, and regardless of personal views, bitcoin has received the most coverage and is the most well known cryptoasset, falters in its initial use case, how can this be a positive? It is a positive because, and exactly because of the faltering adoption of bitcoin as a fiat alternative, the cryptoasset space has grown and developed so rapidly as a result. Bitcoin, without a doubt, is a tremendous innovation that will be celebrated for decades to come, but the issues forestalling wider adoption are being addressed by new market entrants.
Fixing the issues
The great thing about competition and free markets is that there does not need to be one singular answer, winner, or solution for every market participant. Simply because bitcoin has not caught on as a widely used fiat alternative as of 2020 does not mean the entire space will collapse and fade away. To the contrary, several separate cryptoasset sectors have emerged, and continue to grow rapidly seeking to address some of the very issues that have kept bitcoin from breaking into the mainstream.
Stablecoins have been widely discussed, but it is important to remember the fundamental issue these cryptoassets seek to address. Tether, Circle USD Coin, Paxos, and the Gemini dollar are simply the tip of the iceberg of a market that has grown to be worth billions of dollars since its introduction. Price volatility can destroy the use case of any medium of exchange, and by stabilizing these cryptoassets, stablecoins seek to lead the way to mass market adoption.
Privacy coins seek to address the fact that, even though bitcoin is pseudo-anonymous, it is definitely possible for transactions to be traced to wallet addresses, IP addresses, and eventually the participants behind these transactions. Monero and Zcash are two of the largest coins that seek to both remain in compliance with anti-money laundering (and other) regulations, while improving the privacy of cryptoasset transactions.
Central bank digital currencies may be the most recent entrant into the cryptoasset space, but despite that, the ripple effects are already being felt. Issued and governed by a central bank or other governmental entity, these cryptoassets (in theory) would operate in compliance with all applicable regulations. Better yet, the implicit backstop of governmental support would encourage individuals and merchants alike to use these cryptoassets as a legitimatized medium of exchange.
The bitcoin blockchain changed the technology, accounting, and financial markets world; that can be said without a doubt. Despite this impact, however, crypto in its original form has not been able to gain much of a toehold among consumers and business owners. Like any free market, entrepreneurs and innovative organizations continue to launch and develop new iterations of cryptoassets specifically designed to address these existing flaws.
Bitcoin’s original use case may have fallen flat, but those stumbles opened the door to an entire ecosystem of innovative solutions, and that is a great thing.