The Bitcoin Gamble: Fools Rush In

Investing in Bitcoin has been described as stupid by some financial experts. This is due to a variety of reasons, including the fact that there is no limit to the number of other cryptocurrencies that can be created, the slow transaction times, and the high transaction fees associated with Bitcoin. Additionally, Bitcoin is not widely accepted as a form of payment, and its value is extremely volatile. Furthermore, it is not anonymous, contrary to popular belief, and has been associated with illegal activities. However, some people have made significant profits by investing in Bitcoin, and it is important to note that cryptocurrency and blockchain technology are likely to play a significant role in the future of finance.

Bitcoin transactions are slow and expensive

The average time to solve one of the complex mathematical problems that verify a transaction is 10 minutes, and there is a limit of 7 transactions per second. In contrast, Visa allows a rate of 2000 transactions per second. The limited transaction capacity is due to an artificial limit placed into the code by Bitcoin Core developers, which has been kept in place intentionally. This limit means that users must compete with others to have their transactions processed, leading to higher fees.

Additionally, the transaction fee a user sets can impact the speed of the transaction. If the fee is set too low, the transaction may be rejected by the Mempool, causing further delays.

The number of miners can also impact transaction speed. If there are not enough miners, or if they are located in areas with slow internet connections, it can take longer to process transactions.

Finally, other factors such as block validation and size, block propagation, and spam or dusting attacks can contribute to slow and expensive Bitcoin transactions.

Bitcoin isn't scalable

Bitcoin's scalability problem refers to the limited capability of the Bitcoin network to handle large amounts of transaction data on its platform in a short span of time. This is due to the size and frequency of blocks in the Bitcoin blockchain being limited.

Bitcoin's blocks contain transaction data, and the average block creation time is 10 minutes, with a 1-megabyte size limit. These factors constrain the network's throughput, resulting in a maximum transaction processing capacity of between 3.3 and 7 transactions per second. This limitation can lead to increasing transaction fees and delayed processing of transactions that do not fit into a block.

The debate around scaling Bitcoin has resulted in a contentious ideological battle over its future. Scaling Bitcoin requires making changes to its technical workings through a process known as a fork, which can be a hard fork or a soft fork. A hard fork is a change to the blockchain protocol that is not backward compatible, requiring all users to upgrade their software to continue participating in the network. On the other hand, a soft fork is a backward-compatible change that allows new rules to be introduced without requiring all users to upgrade their software.

Various solutions have been proposed to address Bitcoin's scalability problem, including increasing the block size limit, implementing Segregated Witness (SegWit), and utilising the Lightning Network. SegWit is designed to separate signature data from Bitcoin transactions, effectively increasing the block size limit without changing the transaction size limit. The Lightning Network, on the other hand, is a protocol built on top of the blockchain that enables rapid and low-cost transactions within payment channels.

While these solutions offer temporary relief, Bitcoin's scalability problem persists and requires continuous attention as the network continues to grow. Without the necessary changes to improve scalability, Bitcoin may eventually lose its prominence in the cryptocurrency market.

Bitcoin has no alternative uses

Bitcoin is a cryptocurrency, a virtual or digital money that takes the form of "tokens" or "coins". It is a cryptographic protocol, which is why it is also referred to as a "crypto-currency". The protocol creates unique pieces of digital property that can be transferred from one person to another.

Bitcoin is not backed by any physical commodity, like gold or silver, and it does not have any utility beyond being a speculative asset. It is not like a stock or a bond, which typically represent ownership in a company or entity and entitle the owner to certain benefits, such as dividends or interest payments.

Bitcoin's sole function is to be used as a medium of exchange or a store of value. It is important to note that Bitcoin is not widely accepted as a medium of exchange. Its value is highly volatile, and it is subject to capital gains tax. Additionally, there are high transaction fees associated with using Bitcoin, which can be as high as $60 or more.

Some people may argue that Bitcoin has alternative uses, such as its ability to facilitate illegal activities due to the anonymity and decentralization it offers. However, this is not a legitimate alternative use and only serves to highlight the negative aspects of Bitcoin.

In conclusion, Bitcoin has no alternative uses beyond being a speculative asset and a medium of exchange. Its value is derived solely from its limited supply and the demand for it, which is largely driven by speculation and the hope that it will be widely adopted in the future.

There are lots of other cryptocurrencies

There are indeed many other cryptocurrencies besides Bitcoin. As of August 2024, there were over 9,000 crypto projects in existence. These include Ethereum, Tether, Binance Coin, Solana, USD Coin, XRP, Dogecoin, Toncoin, Cardano, Shiba Inu, and Avalanche.

Ethereum is both a cryptocurrency and a blockchain platform. It is a favourite of program developers because of its potential applications, like smart contracts and non-fungible tokens (NFTs). Its price has experienced tremendous growth, increasing by 22,242% from April 2016 to the end of August 2024.

Tether and USD Coin are examples of stablecoins, which are cryptocurrencies that are tied to the value of a specific asset, usually the U.S. dollar. This means that their value is supposed to remain consistent and not fluctuate like other cryptocurrencies.

Binance Coin is a cryptocurrency that can be used to trade and pay fees on Binance, one of the largest crypto exchanges in the world. It can also be traded or exchanged for other forms of cryptocurrency, such as Ethereum or Bitcoin.

Solana, which launched in 2020, is a newer cryptocurrency that touts its speed at completing transactions and the robustness of its "web-scale" platform.

XRP, formerly known as Ripple, offers a way to pay in many different real-world currencies and can be useful in cross-border transactions.

Dogecoin was famously started as a joke in 2013 but rapidly evolved due to a dedicated community and creative memes. It can be used for payments or sending money.

Toncoin was originally developed as a layer-1 blockchain for Telegram's encrypted messaging platform but was abandoned and then taken over by the TON Foundation. Its price spiked in 2023 after Telegram announced it would integrate a TON-based wallet into its platform.

Cardano, created by the co-founder of Ethereum, also uses smart contracts and enables identity management.

Shiba Inu is an Ethereum-based altcoin that was created anonymously in August 2020, featuring a Shiba Inu dog as its mascot. It is widely considered to be an alternative to Dogecoin.

Avalanche is a blockchain that was launched in 2020 and competes with Ethereum as one of the most popular blockchains for smart contracts. AVAX is the native currency of the Avalanche blockchain.

Bitcoin isn't anonymous

Bitcoin is often touted as a way to send and receive money anonymously. However, this is a myth. While it is possible to send and receive bitcoins without giving any personally identifying information, Bitcoin is not anonymous but pseudonymous, meaning all your activity is tied to an alias.

How Pseudonymous Transactions Work

When you make a transaction on the Bitcoin blockchain, you do so using a wallet address. This address is like a pseudonym—it hides your real name but doesn't offer complete anonymity. If your wallet address is ever linked to your identity, every transaction associated with that address will be linked to you.

Deanonymization Techniques

There are two main approaches to deanonymizing Bitcoin transactions: analysing the public transaction ledger and exposing the IP addresses of the computers originating the transactions.

Transaction Graph Analysis

Transaction graph analysis involves examining the approximately 57 million transactions taking place between 62 million addresses and linking them to a subset of unique Bitcoin holders. This allows for the mapping of transactional relationships between Bitcoin holders.

One basic technique looks at transactions with more than one input address. By definition, these inputs are controlled by the same person, and if either address appears elsewhere on the blockchain, the associated transactions can also be linked to the same person.

Another technique takes advantage of the recommended practice of using a new address for each transaction. If exactly one of the output addresses in a transaction has never appeared on the blockchain before, it is likely that this new address is the change address.

A third technique looks at the numerical precision of the amounts involved in a transaction. For example, in a transaction generating two outputs to two new Bitcoin addresses, where one output is 3 BTC and the other is 2.12791 BTC, it is likely that the first number corresponds to the recipient and the second to the change.

IP Address Deanonymization

Every computer that participates in the decentralised Bitcoin transaction network by hosting a node has access to the set of IP addresses of the computers that announce new transactions. By connecting to a majority of nodes, it is possible to identify the first node to relay a transaction, which is on average the originator of that transaction. The risk increases if multiple transactions are relayed from the same IP address.

Protecting Your Privacy

While Bitcoin transactions are not truly anonymous, there are steps you can take to increase your privacy. One way is to use privacy-focused software wallets like Wasabi or Samourai, which offer the possibility of mixing your coins in a Coinjoin. A Coinjoin is a transaction where your BTC is mixed with BTC from other parties, making it difficult for an external observer to tell who is who after the transaction.

Another way to increase your privacy is to use the Lightning Network, a second layer on top of the Bitcoin blockchain. The Lightning Network allows you to lock some BTC in the base layer and then exchange or spend it using the Lightning Network, performing multiple transactions instantly and with negligible fees. Transactions made on the Lightning Network are not recorded on the blockchain, making them much more difficult to trace.

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