- Extreme volatility. Here's the chart of USD against various assets over the past 6 months.
Asset Daily Vol EUR 0.5% CHF 0.8% JPY 0.4% Oil 1.8% BTC 11.4%
This is an extremely serious problem for anyone who wishes to use BTC to transact real goods and services. Lets say you are a low-margin retailer of T-shirts. You buy wholesale in USD and sell online in BTC. Not only do you have to continually update your BTC prices throughout the day, you also have to ensure that as soon as the transaction takes place you convert your BTC back into USD - if you leave it just one day the BTC volatility could wipe out all your margin from the sale. There are also more subtle issues. If someone buys your T-shirt at 5 BTC, then a week later returns it and the price of BTC happens to have risen then you will lose out. The 5 BTC that was worth 25 USD is now worth 50 USD and you the retailer will have to cover the difference. Effectively you have sold a call option for free.
As far as I can see, there are no strong reasons to expect that this volatility will decrease dramatically in future.
- Delayed confirmations. Usually when you make a transaction in the real-world the confirmation takes a few seconds to happen. With bitcoin, it takes something in the region of an hour. This means that in its current form, it is impossible to use it for any conventional retailing where the customer expects to walk away with the product immediately; no one is going to hang around for an hour waiting for his transaction to clear. As a retailer you could admit zero-confirmation transactions, but it's only a matter of time before thieves catch on and target you. There are various websites being setup to allow instant transactions, but then you are relying on them to keep your bitcoins secure. Not only have there been instances of large-scale fraud (or incompetence) with bitcoin banks, it somewhat defeats the purpose of a P2P crypto-currency.
- Client unwieldiness. When I downloaded the bitcoin client, it took about a day to download the whole blockchain from the network before I could start using it. The blockchain takes up something in the region of 1Gb disk-space, which can be very significant for portable devices.
- Blockchain vulnerability. I have posted before on this subject (and here and here). In summary, there is very little to stop a determined attacker from making fraudulent transactions. This is due to the interaction of three fundamental properties of the bitcoin economy:
- Open mining. Anyone can contribute to verifying transactions (or as it's currently called 'mining'), you just need to connect and let your GPU run.
- Free mining. To incentivise people to do it, you get paid to mine / verify transactions. This means the equilibrium state is that the costs and revenues from mining balance and it becomes free for anyone to add compute power.
- Computocracy. If you have access to more than half of the total compute power, you can fake your own transactions.
- Wallet security. It is assumed that someone's wallet file (and hence a person's bitcoins) is secure by virtue of it being on your own computer. This is only true in the case of a 'suitably sophisticated user' who is capable of securing their own system. Unfortunately, the majority of people in the world do not have a secure system and even in the tiny community of bitcoin early-adopters there have been huge problems of stolen wallets. Even the fifth-largest bitcoin exchange failed to secure their wallet. Trojans are now in the wild targeting wallet files. Sadly it seems that there are very very few 'suitably sophisticated users'. Even the most basic level of security - encypting the wallet - is not yet available in the standard client.
Tuesday, 20 September 2011
The Current Problems of Bitcoin
These are the most serious obstacles Bitcoin faces, as I see it.