Bitcoin's Missing Link to the World

[dnprock]

I put down some thoughts on what I see as missing in Bitcoin adoption. I'm obviously biased.

Original post: https://bitflate.org/post/2019/08/26/bitcoin-missing-link-to-the-world.html

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With halving expected in May 2020, Bitcoin is building up momentum to rise to the next level. Bitcoin bulls tout rising hash rate, halving reward, lightning network, global instability as major reasons for price appreciation. Maybe, it will reach trillion dollar market cap. The 2018 bull run was catalyzed with altcoins and ICOs. Some argue that ICO was distraction. But it’s difficult to say Bitcoin price would rise to almost $20k without the hype of ICOs. This time, the market for altcoins and ICOs seem dead. Bitcoin market cap dominance continues to rise. The lonely king will need to prove to the world.

But it is naive to think that these known fundamentals will drive Bitcoin price to the next level. I believe Bitcoin adoption is the key driver of price. Being able to use it is important. In this post, I describe what I see as the missing link of Bitcoin to the world.

Bitcoin Centralization of Personal Finance

Despite of talk about decentralization and financial freedom, the most dominant narrative around Bitcoin leads to centralization of people’s finance. In this model, users put all of their money in Bitcoin. When they need to spend, they use or convert the needed amount of Bitcoin. Figure 1 depicts money flow in this model.



Figure 1: Bitcoin Centralization

This model probably comes from engineering mindset. It’s logical and optimal. But real world is usually neither logical nor optimal. People categorize and separate things. Money is one thing that needs separation. Mixing money use case leads to loss. This is why recurring and passive investing often delivers better result than actively managed investing.

The Messy World of Personal Finance

Real life situations are more complicated. Over time, people accumulate assets and liabilities. Bitcoin may enter the picture as a new asset class. Figure 2 depicts a more typical picture of personal finance.



Figure 2: Personal Finance

In this model, Bitcoin is an asset class. User buys and sells Bitcoin into fiat currencies to spend. Bitcoin is treated as an investment, Store of Value rather than a bank account for spending. Conversion between Bitcoin and fiat currencies for spending is a complicated process.

Can Bitcoin ever be used for direct spending?

I think the answer is mostly No. The reason for it is mostly psychological.

As I mentioned in the first section, people don’t like to mix money use case. If it is possible, people are already using their saving and investment for direct spending. Figure 3 depicts a model of direct spending using investment or Store of Value. I think it is unlikely to happen.



Figure 3: Direct Spending using Investment or Store of Value

The Missing Link: Crypto Currency for Spending

I think the missing piece in this puzzle is a crypto currency for spending. It is nerve wrecking to open your Bitcoin account each time you want to buy a small item like coffee. If we separate spending out of saving, we introduce familiar setup of personal finance into the picture. Figure 4 adds an adjustment to Figure 1.



Figure 4: Separate Saving and Spending Accounts

A crypto currency for spending gets users familiar with crypto software. User can swap between Bitcoin Store of Value (saving) and spending coins. Spending tokens are also less valuable than bitcoins. Account separation provides additional layers of security and peace of mind.

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[pooya87]

With halving expected in May 2020, Bitcoin is building up momentum to rise to the next level. Bitcoin bulls tout rising hash rate, halving reward, lightning network, global instability as major reasons for price appreciation.

the only thing that has ever led to any major price rising and will continue to do so is real adoption of bitcoin in real world as a currency. the rest such as halving, LN stats,... are short term hypes. and hashrate of all things has nothing to do with leading to price rise, it changes based on price not the other way around.
in short what you are explaining here as something needed for the future has been happening all along but on a smaller scale.

The 2018 bull run was catalyzed with altcoins and ICOs.

first of all it was 2017 not 2018.
secondly ICOs had nothing to do with bitcoin, people bought ETH to invest in ICOs and that is why it got pumped up to 0.15BTC and that is why ETH got dumped hard 90% as they died without recovering.

When they need to spend, they use or convert the needed amount of Bitcoin.

that doesn't make bitcoin centralized! that only shows that the mass adoption has not yet happened so people still have to convert their bitcoin to another currency to use. and that is not always the case though, there still are a lot of places where they can spend and are spending their bitcoins directly.

Can Bitcoin ever be used for direct spending?
I think the answer is mostly No. The reason for it is mostly psychological.

well when we are theorycrafting anything is possible but the real question is how close to reality are our theories. to answer that you'll have to check the stats. one thing i like to quote is the annual stats that BitPay (a bitcoin payment processors for merchants) reports. it always shows a great annually increase in amount of bitcoin they process. and the interesting part is that it shoots up during price rises.

A crypto currency for spending gets users familiar with crypto software. User can swap between Bitcoin Store of Value (saving) and spending coins. Spending tokens are also less valuable than bitcoins. Account separation provides additional layers of security and peace of mind.

then you just removed one problem and replaced it with the same problem but with a different face. your arguments started with people who convert their bitcoin to fiat and then spend that. now you are saying they should convert it to another cryptocurrency and spend that. the way i see it, this is the same problem!

[avikz]

But it is naive to think that these known fundamentals will drive Bitcoin price to the next level. I believe Bitcoin adoption is the key driver of price. Being able to use it is important. In this post, I describe what I see as the missing link of Bitcoin to the world.

Bitcoin adoption is definitely the key to to drive its price. But you are missing one major matter which will drive bitcoin's adoption, which is government regulation! Psychological reasons may come to play at a later stage but before all these happens, it is important to have the respective government recognizes cryptos as a currency and regulates it so that common people first come out of their misconception about cryptos.

Take an example of Japan. They are the first country in the world to regulate and adopt bitcoin within their own mainstream economy. Which paved the way for licensed businesses around cryptos and encouraged their countrymen to receive their salaries in cryptos. Once it happens, then only we can analyze the diagrams in your post as to what the people want to do with them.

Regulation is the key here which will drive bitcoin's adoption to the next level and increase the demand in the market. What people want to do with them, is the question that comes at a later stage!

[dnprock]

then you just removed one problem and replaced it with the same problem but with a different face. your arguments started with people who convert their bitcoin to fiat and then spend that. now you are saying they should convert it to another cryptocurrency and spend that. the way i see it, this is the same problem!

My idea is to separate 2 types of token: saving/investment (store of value) and spending. We've been thinking of Bitcoin as a token that can do both. That is the issue that prevents adoption of Bitcoin itself.

Spending token needs to have different characteristics. For example, it should not have limited supply. Its price should be more stable than Bitcoin.

But you are missing one major matter which will drive bitcoin's adoption, which is government regulation!

I agree with this. But I don't think government regulation is a major hurdle to adoption, at least, in the US. Cryptocurrencies are just hard to use. Try to send some bitcoin. It's super scary.

[Kakmakr]

It is not actually a missing link, it is just a behavior change. Most people I know already split their coins into different use cases, because you do not want people to access your main hoard, every time when you want to buy something small. I move most of the coins I buy to my hardware wallet first and then I decide how much I want to spend and the rest is send to my Paper wallets for long-term storage.

The hardware wallet is very convenient, because it is easy to use it on a daily basis. You do not want to dip into your long-term storage on a daily basis. 

[dnprock]

It is not actually a missing link, it is just a behavior change. Most people I know already split their coins into different use cases, because you do not want people to access your main hoard, every time when you want to buy something small. I move most of the coins I buy to my hardware wallet first and then I decide how much I want to spend and the rest is send to my Paper wallets for long-term storage.

The hardware wallet is very convenient, because it is easy to use it on a daily basis. You do not want to dip into your long-term storage on a daily basis.  

I think you highlight the problem better than me . To secure their stash, Bitcoin users are expected to learn how to do complicated wallet, key manipulation. It's hard to know which one is best practice. You can say it's a behavior change. But stashing away our treasure is a common human behavior. Even animals do that. It's difficult to change this behavior. People don't want to touch their stash unless they absolutely have to. Bitcoin common use case includes lots of deposits and rare withdrawals.

I chatted with a prominent Bitcoin product manager. I pitched my solution of using another token for spending. He insisted that Bitcoin can do both. With up coming multi-sig, there'll be more security. It'll enable more spending with Bitcoin. The problem with Bitcoin is UX. I don't think Bitcoin product designers see the problem. It's not UX. It's human psychology. If the problem is in UX, I guess we'll have a fix and Bitcoin will go to the moon. If not, I hope to chat with him again in the future.  

[Slow death]

How many countries in the world have created good laws that are favorable to bitcoin? I speak of laws that allow people to buy bitcoin, sell bitcoin, and use bitcoin to buy anything in that same country. The problem is that there are still no clear bitcoin laws, most countries only allow people to use bitcoin, they have not created bitcoin laws.

If most countries in the world had created laws that were beneficial to bitcoin, you would see that many people would use bitcoin to pay for water, electricity, TV and internet, buy cars, houses, buy food, clothes and many things, even with high volatility, people would use bitcoin as a means of payment. But without clear laws, everything is limited.

[jostorres]

One thing that I use to believe is that if there was no altcoins, bitcoin would have been in a special state, but the invention of these so called altcoins are the one slowing down the growth of bitcoin because they tend to divert attention of users and investors from focus on bitcoin to those projects that are not with real use case, and they also diverted their attention for the payment purpose of bitcoin to store of value alone, which makes most people you see more keen about the store of value of it.

We still have very low proportion of people that are using bitcoin for payment, but it is a wise idea as you said that before we get to that stage where the use of bitcoin for payments will become wide, there is need that we separate our spending coin to that of the ones that we use for store of value.

[tranthidung]

One thing that I use to believe is that if there was no altcoins, bitcoin would have been in a special state, but the invention of these so called altcoins are the one slowing down the growth of bitcoin because they tend to divert attention of users and investors from focus on bitcoin to those projects that are not with real use case, and they also diverted their attention for the payment purpose of bitcoin to store of value alone, which makes most people you see more keen about the store of value of it.

We still have very low proportion of people that are using bitcoin for payment, but it is a wise idea as you said that before we get to that stage where the use of bitcoin for payments will become wide, there is need that we separate our spending coin to that of the ones that we use for store of value.

I disagreed.
As basic fact of natural selection, without altcoins, bitcoin would have not reached what it has as of writing.
Without altcoins, without competitors, bitcoin developers would have not upgraded bitcoin fastly and significantly like we have witnessed so far.
Without altcoins, there would have been less people known about crypto currencies, and less capital flow into crypto currencies like we have witnessed so far
It is undeniable fact that there are some things altcoins have done, but bitcoin has not yet made, such as smart contracts with Ethereum is a good case study.

I don't think it will be a healthy blockchain industry if in which we have only bitcoin, or only altcoins (without bitcoin). We need both bitcoin and altcoins grow and compete each other in mutual relationships.

[dnprock]

I think too many coins were trying to fix so-called problems in Bitcoin. They all have their bags of coins that they want to promote. So rather solving any real problem, people just promote their coins/bags. Bitcoin is doing better job at being a Store of Value.

I see some coins have interesting features like privacy. But they're still Store of Value. I have only Bitcoin. I think missing piece is transaction. We can't have a coin for transaction/spending if we hang on to limited supply. I ended up design a new coin. This is a Bitcoin thread so I won't discuss much about my coin design. If you want to know more, please follow the original post link.

[vtcdthui]

What's your coin?
why you don't want to discuss about it?