Bitcoin’s dilemma: Will the digital currency go the way of MySpace and floppy disks?

When cafe co-owner Ben Kim started to invest in cryptocurrencies six months ago it seemed only natural that he accept Bitcoin as a method of payment at his business.

“I considered it as an investment,” Mr Kim said.

“I wanted to get more Bitcoin because this thing is going up a lot in value, it was getting so much attention, so I wanted more.”

Mr Kim, a crypto convert, put a sticker on his coffee machine informing customers that he would accept Bitcoin.

And while customers would notice the sign and ask questions, almost no-one would actually buy their coffee with the cryptocurrency because it was too confusing or expensive to do so.

“It’s not easy to access,” Mr Kim said.

“It could take two days, three days for me to receive money for a coffee from you.”

Mr Kim has since taken down the Bitcoin sign, although he still believes cryptocurrency has a valuable future.

“For now, I’m thinking of using other cryptocurrencies instead of Bitcoin,” he said.

Bitcoin ‘unable to scale to keep up’

Bitcoin has attracted a lot of attention in recent months as the price surged to an all-time high of around $25,000 late last year before crashing back down to below $8,000 on Tuesday.

Little more than a year ago it was valued at about $1,000.

The massive price movements, as well as a growing appreciation for the technology behind Bitcoin, known as blockchain, has seen an influx of new users and investors.

But the newfound demand put a stress on the network, and things started to become expensive and relatively slow.

At the height of its price movements, a $100 transaction could attract a 40 per cent fee, and Bitcoin would take hours instead of minutes to send.

During Tuesday’s sell-off, traders were also complaining about the virtual currency’s transaction times.

“Bitcoin started as a digital currency or cryptocurrency, as a way of transacting value around the world in a pretty frictionless way,” trader Alex Saunders, who runs the YouTube channel Nugget’s News, explained.

“As it’s grown in popularity it’s been unable to scale to keep up with demands of the network.”

When Bitcoin was launched nine years ago it was intended to be a decentralised currency that relied on a vast network of users to process transfers, known as “mining”.

Internet capacity plus a desire to keep Bitcoin mining for the common folk meant the maximum data that could be processed at a time was capped at 1 megabyte.

But things have not worked out as initially planned.

Giant “farming” operations that use specialised machines and consume a lot of electricity now dominate Bitcoin mining.

And transfers were getting stuck in the network’s bottlenecks during busy trading periods, giving miners the power to charge exorbitant fees.

The Bitcoin network can only handle around seven transactions per second, which is a tiny amount compared to Visa’s 24,000 transactions per second.

Several options have been put forward to speed up Bitcoin, but programmers and major exchanges are yet to fully implement the reforms, which has led to breakaway or copycat currencies like Bitcoin Cash.

As an early adopter, Mr Saunders was concerned Bitcoin was suffering death by “a thousand cuts”, although he was buoyed after hearing a major exchange was close to implementing reform.

“We’ve seen some payment providers, like Stripe, remove Bitcoin as a method of payment because the fees are too high,” he said.

“We’ve also seen the world largest trading exchange, Bitfinex, add Ethereum as a trading pair for all their coins. It used to be just Bitcoin.

“After nine years you’d hate to see it stumble at this final hurdle.”

Innovators ‘often displaced’ by second movers

Bitcoin’s inability to keep up with demand is not a unique problem.

Economics expert Jason Potts from RMIT said technology has struggled to cope with growth dating as far back as the 1980s.

“The internet has always been perpetually broken,” Professor Potts said.

“Before the internet the previous scaling problem was phone lines.

“The minute you solve the scaling problem it enables more people to come into it and the network clogs up again and then you need the next generation.

“It’s always the case that whoever can solve that will take market share or facilitate growth.”

While Bitcoin may have been the first on scene there are now many different cryptos that claim to be superior to Bitcoin — whether that’s faster, cheaper, scalable or provide more anonymity.

Other platforms want to be more than a digital currency by offering services such as peer-to-peer trading of electricity, tracking goods from across the globe, or even being a ‘safe’ space to store medical records.

Professor Potts said it stood to reason that Bitcoin could one day fall by the wayside, as newer and superior technology often replaced the old.

Just think MySpace, Netscape Navigator and Nokia mobile phones being replaced with Facebook, Google, and iPhones.

“This is a pattern that we’ve seen with almost every new technological development,” Professor Potts said.

“Whoever goes second doesn’t have to pay the upfront development costs and whoever goes second already knows where the market is and what successful products will look like.”

“Often the first movers that come in end up getting displaced by the second movers and the third movers and the fourth movers.”

But Professor Potts said having superior technology did not guarantee success. For instance, in the videotape format wars, Betamax had superior video quality but it lost to VHS as the latter cornered the rental movie market.

Professor Potts describes this as the “network effect.”

That is, people will gravitate to the same technology that others are using for convenience, simplicity or a safety-in-numbers type approach.

“If customers are very sticky, it’s very hard for them to switch,” Professor Potts said.

“In the crypto space you’ve got a lot of really good technical platforms and coins and so on. Their problem is they can’t build a community.”

“No one wants to develop on a platform that people aren’t going to use. No one wants to use a platform that doesn’t have developers. It’s a chicken and egg problem.”

It is a point trader Alex Saunders agrees with.

“Just because something’s better doesn’t mean someone’s going to use it,” Mr Saunders said.

“A lot of people would argue that Apple don’t make the best phone.”

PHOTO: Ben Kim, the owner of Annoying Brother cafe in Fitzroy, has not given up on crypto-currencies. (ABC News: James Oaten)

He also warned that many of the newer crypto currencies would also struggle if they had the same number of users as Bitcoin.

“It’s not really the technology bogging down Bitcoin, it’s the number of people using it,” Mr Saunders said.

“Even though there is Litecoin or Ethereum, which is faster and cheaper at the moment, if everyone jumped over to that network they would be severely bogged down.”

As for cafe owner Ben Kim, he is hoping his customers would be able to pay for their coffee with crypto-currency in a simpler way.

“We can’t run away from blockchain. It’s the future.”