While Bitcoin is reaching a new all-time high ($40000 at the time of this writing), several actors from the professional financial world are still not convinced it is a useful product. Indeed, Bitcoin and more generally all Blockchain related projects suffer from a fundamental design flaw that make them mostly useless. We are going to demonstrate this thesis in this article.
Some very promising technologies
Bitcoin's main value comes from the ability to exchange money in a decentralized manner. It means that a person can transfer Bitcoin to another person without using a third-party institution like a bank for instance.
Hence Bitcoin sells the promise that we can at last bypass banks, which are often accused of creating assets bubbles, triggering financial crisis, engaging in political lobbying and exploiting labor from workers. The Blockchain is the underlying mechanism supporting Bitcoin and it can be generalized to other applications like trading stocks or real estate property titles.
Bitcoin (and more generally the Blockchain) use a quite complex mechanism in order to function securely. To summarize, it is based on the following concept : the person who wants to send money owns a password (also called "private key"), and this password is mandatory to transfer Bitcoin on the internet.
A fundamental and unsolvable problem : the loss of private key
In Bitcoin's futuristic world, no more banks ! Each citizen of the world owns a private password for his Bitcoin account and is capable of transferring Bitcoin without using any intermediary.
Unfortunately, there is a problem : when you lose your password, you lose all your Bitcoin ! Moreover, there is no more institution that can help you recovering your Bitcoin in exchange of a passport, fingerprints or any other proof of identity.
Then why not simply create official desks whose sole purpose will be to securely store the passwords of Bitcoin users, in order to recover them in the event of a loss ? Simply because such an infrastructure would be centralized and would work thanks to third-party institutions like a city service or a bank !
The main Bitcoin trading platforms like Coinbase, Kraken and Binance all suffer from the same flaw : they act as third-party institutions and users rely on them in order to access their Bitcoins.
Bitcoin is considered useless by several institutions
As we saw earlier, a centralized Bitcoin has no value and is just an ultra complex database. Also, it has additional flaws : it is an energy guzzler and its environmental footprint is huge.
Do these reasons make Bitcoin totally useless ? That's the conclusion of many financial actors. The SEC for instance, which is the American federal organism for financial markets, thinks so. To this day, the SEC still hasn't validated the creation of a Bitcoin fund (ETF), which would allow people to speculate on the price of Bitcoin without actually owning it.