Cryptocurrency Bitcoin has a big problem.
It’s not that people are shying away from using the alternative to cash — it’s just the opposite.
In fact, so many people want to use Bitcoin to conduct transactions that the currency’s infrastructure is basically collapsing in on itself.
According to a report this week in Business Insider:
Bitcoin payments are failing around the world as the digital currency platform that supports it struggles to cope with a surge in demand.
The article goes on to explain the various technological struggles associated with Bitcoin. That is, the decentralized, reportedly "unhackable," "block chain"-powered cryptocurrency that was designed to facilitate fast and inexpensive transaction around the globe.
Unfortunately, Bitcoin’s technical issues have made it neither quick nor cheap.
That spells big trouble for the once-promising alternative to central bank-controlled money. Here’s why …
Due to current technical limits on just how many Bitcoin transactions can be executed per second, there’s been a whole lot of dislocation in the system.
This dislocation really came to the fore this week when Bitcoin’s network basically reached capacity.
The result was a severe lengthening of transaction times of up to 43 minutes.
The usual time it takes for a Bitcoin transaction? About 10 minutes.
Now, because of the extreme extension in transaction time, the volatile value of Bitcoin can really get altered in that 43 minutes. That means customers and clients won’t really be able to lock in a true price for their transactions.
To correct this technical issue, many in the Bitcoin community have advocated fundamental changes to the core system software. One proposed fix is to increase the amount of transactions processed by a specific block chain to 2MB from 1MB.
The capacity increase might solve the problem. But unfortunately, there’s a battle going on. It pits the so-called "Core" Bitcoin software platforms against a rival faction that’s pushing its own version of the open-source code with a block size increase. This is called "Classic."
An article dated in Aug. 28, 2015, in the MIT Technology Review offered up the following prescient prognosis as to the nature of the threat to the Bitcoin system from one of its chief early architects:
The way things are going, the digital currency Bitcoin will start to malfunction early next year. Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away. So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator.
Mr. Andresen nailed it.
Now, all of these technical issues may appear extremely esoteric to all but players in the Bitcoin community. But what’s really important to note here is that we’ve been telling you for some time to steer clear of Bitcoin due in large part to these unknown problems arising from a new technology.
Of course, it wouldn’t be accurate to say that we predicted that the Bitcoin system would be overwhelmed by transaction volume and slow transaction speeds.
What we have said, however, is that this new technology is yet to be vetted by real-world transactions.
And though I generally believe in the concept of a cryptocurrency — as well as the potential for that currency to liberate us from the chains of command-and-control central banks around the world — it’s just not yet time to fully embrace this technology.
For more stories about how "we told you so" on Bitcoin, I invite you to check out these past Afternoon Edition issues.
Do you use Bitcoin? Are you more skeptical about cryptocurrencies than you are the Fed and central banks around the globe? What do you think is the future of this nascent payment method?
Stocks grinded higher in modest trade Friday as markets reacted to the rather ho-hum to the February jobs report. The Dow did manage to close above the psychologically significant 17,000 mark.
Elsewhere in the news today:
• The U.S. economy added a net 242,000 new jobs in February, recovering from January’s disappointing jobs data. The unemployment rate held steady at 4.9%, but the good news was that more than half a million people re-entered the labor force.
• U.S. investors may be risk-averse. But employees may be even more so. A Federal Reserve working paper suggests there’s a lack of trust among U.S. workers that is hurting the job market. This can be seen in workers’ reluctance to change jobs and/or move to different states for fear of losing their positions to other workers or to elimination.
• China’s state economy shrinks, workforce to follow. Some 1.8 million Chinese state employees are facing a pending layoff across its steel and coal industry. But some say the layoffs could surge to some 6 million in the next two to three years across China’s state-owned enterprises. Such a move would represent a 17% shrinkage in state payrolls.
• Oil gained 9.5% this week, closing at $35.92 a barrel here in the United States.
• Gold added to its luster Friday to finish at a 13-month high. The jobs data was just robust enough to not materially pull Fed rate-hike expectations forward, which would have spurred a rally in the dollar (and a sell-off in gold).
Good Luck and Happy Investing,
Uncommon Wisdom Daily