Is Bitcoin Too Big Too Fail?

David Beiner
The Abacus Crypto Journal
4 min readNov 2, 2017

--

Bitcoins first mover advantage may be enough for now.

When it was $5,000 they said it was a fad, then it hit $6,000 and they said it would fall, now it’s breached $7,000 and in the words of the ever illustrious Bloomberg News, they’re saying maybe this Bitcoin phenomenon is “going legit.” Without question, Bitcoin mania has reached a fever pitch, with the latest price surge following news that the world’s largest options exchange (CME Group) will offer Bitcoin futures as early as Q4 of this year. This development, along with rumors that China may reopen trading for Bitcoin (and the upcoming infusion of capital for BTC holders in the form of the November Segwit2X fork) has made Bitcoin the star of this week’s cryptocurrency spectacle.

There are two legs propping up Bitcoin’s value and (for the moment) maintaining its position atop the crypto throne. BTC’s strengths are based on its first mover status and its straightforward cryptoeconomic model predicated on built in scarcity and rewards for those who secure the network. If either of these were punctured or threatened, the cryptoworld could be following a new leader.

The unfortunate truth is that Bitcoin works just fine (for now). We say unfortunate because while Bitcoin started the party, it has many issues endemic to it’s rather primitive underlying architecture. There are other blockchains that process transactions much faster and for less cost than Bitcoin including Ethereum, Dash, Litecoin, Ripple, Vertcoin, Viacoin, Stellar Lumens… you get the point. While there are several proposals to upgrade the Bitcoin protocol, the fact of the matter is Bitcoin is currently slow compared to its blockchain peers.

The expediency or functional utility of Bitcoin doesn’t matter for the majority of first-time adopters and due to Bitcoins prevalence on customer friendly exchanges like Coinbase, a users first cryptocurrency purchase is most likely to be BTC. After purchasing their first Bitcoin, if someone decides to become part of the crypto-race and begin trading altcoins, they will likely purchase more Bitcoins as it’s the undisputed king of the exchanges. On a macroeconomic level, if a mainstream institution (like CME group this week) is going to offer cryptocurrency related products, they almost have to start with Bitcoin thanks to its first mover advantage. Point is, Bitcoin has become deeply entrenched in the marketplace, has by the far the highest market cap, and currently serves as the primary intermediary vehicle across cryptocurrency exchanges.

As much as it may be illogical for an inherently slow protocol to become king of the crypto kingdom, there is merit to the argument that Bitcoin is truly digital gold. While employing this mindset, the latency of the protocol does not really matter because as a store of value, Bitcoin doesn’t necessarily need to be used, it just needs to have enough people who believe in its scarcity and inherent security. To that end, a limited supply is an element that Bitcoin’s cryptoeconomic model indisputably possesses.

If one believes that digital networks will continue to thrive well into the 21st century and the quantity of actions that take place online will continually increase, it’s not farfetched to imagine digital marketplaces necessitating a digital gold equivalent. Bitcoin supporters love this argument and it holds water. One major piece of the Bitcoin cryptoeconomic puzzle that remains unnerving is the reality that mining requires vasts amounts of electricity thanks to Bitcoin’s already extremely outdated mining protocol, one that seems increasingly immutable as every attempt to change the way Bitcoin is created seems to end in a new fork rather than adoption. Ethereum has plans to switch to Proof of Stake and other protocols like NEMs Proof of Importance (related to Proof of Stake) are far cleaner options than the energy burning, global warming inducing churn of Bitcoin miners. Maybe digital gold is worth it — after all, so many people have already bought into the concept, how can it stop now?

Perhaps Bitcoin has become “too big to fail.” Too many people profit off Bitcoin mining, too many people use their bitcoin stacks to trade in and out of other cryptocurrencies, and now perhaps too many mainstream financial institutions will throw their hats into the Bitcoin ring, further propelling Bitcoin’s unrelenting rise. However, at some point, “too big to fail” won’t be enough and the concept of Bitcoin acting as digital gold — limited, original, and beautiful as it may be — could very well lose favor. In the meantime, the party continues and the revolution that Bitcoin has kicked off shows few signs of slowing down.

--

--

Making sense of chaos. Which doesn’t make sense. Mine as well give it a try though.