The fatal flaw in using bitcoin as a currency - Financial Times

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Source: Financial Times

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Q1: What are the primary reasons Bitcoin is considered to have a fatal flaw as a currency?

A1: Bitcoin is considered to have a fatal flaw as a currency mainly due to its high volatility, environmental impact, and the complexity of transactions. Its decentralized nature and lack of regulation also make it susceptible to use for illegal activities. Furthermore, the energy consumption required for mining Bitcoin is substantial, leading to environmental concerns. These factors contribute to its unsuitability as a stable currency for everyday transactions.

Q2: How did El Salvador's experiment with Bitcoin as legal tender unfold?

A2: El Salvador adopted Bitcoin as legal tender in 2021, promoted by President Nayib Bukele to improve the economy and encourage foreign investment. However, the experiment faced criticism due to Bitcoin's volatility and the environmental impact. By 2025, Bitcoin was rescinded as legal tender due to these issues and its limited use by the public, marking the experiment more costly than beneficial for the economy.

Q3: What are the environmental impacts associated with Bitcoin mining?

A3: Bitcoin mining involves a process called 'proof of work,' which requires substantial computational power, leading to significant electricity consumption. This process has been criticized for its environmental impact, as it contributes to increased carbon emissions and energy waste. The environmental concerns have raised questions about the sustainability of Bitcoin as a currency.

Q4: What scholarly insights have been provided on the use of Bitcoin's OP_RETURN metadata?

A4: A study titled 'An analysis of Bitcoin OP_RETURN metadata' examines the use of Bitcoin's blockchain for storing arbitrary data through OP_RETURN. It highlights how this feature is used by various protocols, potentially affecting the network's performance. The study provides empirical data on the space consumption and application domains of these protocols, indicating a growing trend in using Bitcoin's blockchain beyond mere currency transactions.

Q5: What technological developments have been proposed to improve Bitcoin's transaction process?

A5: Technological developments like the Niji protocol have been proposed to enhance Bitcoin transactions. This protocol allows secure virtual Bitcoin payments on consortium chains without third-party intervention. It introduces transaction templates and a bi-directional payment channel, making cross-chain Bitcoin payments efficient and feasible, thus potentially improving the usability of Bitcoin in secure financial services.

Q6: How does Bitcoin's network structure impact its market effects?

A6: Research on Bitcoin's network structure, such as the study 'Inferring the interplay of network structure and market effects in Bitcoin,' shows that the transaction network's structure significantly impacts market prices. Changes in the network's active users and transaction patterns can lead to significant price variations, highlighting the complex interplay between network dynamics and market behavior.

Q7: What were the key challenges faced by Bitcoin as a medium of exchange in its early years?

A7: In its early years, Bitcoin faced challenges as a medium of exchange due to its limited acceptance, regulatory scrutiny, and perception as a tool for illicit activities. The lack of user-friendly interfaces and scalability issues also hindered its adoption. Over time, while Bitcoin gained recognition as a store of value, these challenges persisted, affecting its viability as a stable currency.