Analysis: Speculation rife around the cryptocurrency’s future after outburst from key developer.
Bitcoin is doomed. Over centralised. Under powered. Fundamentally flawed. That, at least, is the view of Mike Hearn, who until recently was a prominent developer in the cryptocurrency who has abandoned working on it to focus on other things, as he sees the problems and insurmountable.
It leaves the questions, where next for bitcoin?
On the 14th January 2016, Hearn wrote a no holds barred attack against some the key figures behind Bitcoin. He said: "The now inescapable conclusion that [Bitcoin] has failed still saddens me greatly. The fundamentals are broken and whatever happens to the price in the short term, the long term trend should probably be downwards."
He blames the centralised nature of power within Bitcoin, and the position of key infrastructure in China with its firewall and limited bandwidth internet as key reasons for this failure.
Hearn’s view is utterly damning. "[Bitcoin] has failed because the community has failed," he wrote. "What was meant to be a new, decentralised form of money that lacked "systemically important institutions" and "too big to fail" has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse."
He says the block chain technology itself is now flawed. "The block chain is full. You may wonder how it is possible for what is essentially a series of files to be "full". The answer is that an entirely artificial capacity cap of one megabyte per block, put in place as a temporary kludge a long time ago, has not been removed and as a result the network’s capacity is now almost completely exhausted."
More than Bitcoin, it has been this core block chain technology underneath it that has interested the finance world, and there was significant investment from major financial institutions into block chain technology during 2015.
Following on from the success of its London fintech accelerator, Barclays launched a similar project in New York, which featured two firms working on block chain technology. RBS is also thought to be preparing to pilot using block chain technology in 2016, and IBM is planning on using it for a digital cash and payment system.
Steve Davies, FinTech EMEA lead at PWC is optimistic that this can continue, telling CBR that "Blockchain will move out of labs and into the real world of banking," in 2016, "the key is in practical business applications – getting Blockchain away from the being something very few people understand."
Despite Hearn’s gloom, Davies says that "Almost on a daily basis, it’s getting more traction in the real world. You have a lot of different people in different types of businesses talking about it, wondering what to do about it, thinking about opportunities.
"I think it’s going to get significantly bigger over the next year, a lot of people investing, a lot of people experimenting with proof of concepts."
Michael Kent, CEO of Azimo, also believes that this year will be positive for Bitcoin and block chain to the extent that he thinks firms are going to require a strategy for Bitcoin and block chain. "Five years ago every business needed a ‘mobile strategy’ and ten years before that it was a ‘web strategy’. In 2016 every financial services firm – consumer or institutional – will need Bitcoin/block chain strategy", he said.
Given the growth in the technology, those seem reasonable predictions, especially as Kent is clear that the transformation will not happen overnight. "While it is unlikely to have a massive impact on core business processes next year or even the year after – everyone needs to start building a plan, as like every major tech revolution, when the change comes the game will change completely," he said.
However, it will need some major overhauls in the fundamentals behind the technology. Hearn says that the growth in Bitcoin and blockchain that Davies and Kent foresee is being restricted because power is in the hands of a limited number of Bitcoin miners – people who use powerful computer infrastructure to run the algorithms that create new Bitcoin, and they will not raise the limits and increase capacity.
"The block chain is controlled by Chinese miners, just two of whom control more than 50% of the hash power," he said. The hash rate is measuring unit of the processing power of the Bit coin network.
He said that there was a recent conference at which at 95% of hashing power was controlled amongst a collection of eight men who were sitting on the stage.
He concludes that "Bitcoin has no future whilst it’s controlled by fewer than 10 people."
The deep irony of block chain, a financial system that was supposed to overcome authoritarian powers and too big to fail, being in the hands of so few people is not lost on Hearn.
It has long been expected that the growing prominence of Bitcoin and block chains technologies will inevitably mean that there will be great regulatory and legal scrutiny on them, with Davies believing that "It will be tested in terms of how it holds up against regulatory and legal scrutiny."
Kent said: "Government and regulatory acceptance will rise following the EU ‘VAT exempt’ and US ‘commoditisation’ rulings."
Given the insight that Hearn gives, it seems as of this improved scrutiny cannot come soon enough. He details something of a civil war over technology within different factions of the Bitcoin community that he claims was kept under wraps for fear of scaring investors.
He says that "In August 2015 it became clear that due to severe mismanagement, the "Bitcoin Core" project that maintains the program that runs the peer-to-peer network wasn’t going to release a version that raised the block size limit."
Hearn then goes on to detail what he claims are cyber attacks against those supporting or using alternative software, notably one called XT.
He hardly paints the developing cryptocurrency community as the Utopian decentralised hub of alternative finance that original creator Satoshi had dreamed of.
"For the first time, investors have no obvious way to get a clear picture of what’s going on," he says.
Bitcoin itself can be bought on various markets, and at the time of writing it was worth $383.46 on Coinbase, one of the most prominent platforms. Not surprisingly, on the back of Hearn’s comments the price of Bitcoin, which is often thought of more as a commodity than a currency, fell 15% according to the Coinbase USD Bitcoin Price Index (BPI).
This is exactly the kind of price fall that Hearn claims the powerful miners were trying to avoid by all getting behind one technology, despite the issues highlighted by Hearn and some others.
Bitcoin has been on the way to mainstream acceptance. An ecosystem of start-ups developed around it and the block chain, with major firms also putting money in. In 2015, Bitcoin came to be recognised as the world’s 6th largest reserve currency.
Hearn’s comments leave all that up in the air though, turning into reality the concerns that many had always had about cryptocurriencies,