The 7 Biggest Challenges Facing Bitcoin

Markets Motley Fool

Bitcoin has come a long way in the eight or so years it's been in existence, but there's still a long way to go before the digital currency becomes a widely used method of paying for goods and services. Here are seven of the biggest challenges facing mainstream adoption of bitcoin, and what would need to happen for consumers to start using the digital currency on a large scale.

Continue Reading Below

1. Volatility

Bitcoin has been incredibly volatile since its inception. I wrote in September that $10 worth of bitcoin in 2010 would be worth millions of dollars today. And the volatility isn't slowing down -- in fact, since I wrote that article less than two months ago, the value of a bitcoin has more than doubled.

This environment has made bitcoin extremely popular among speculators who buy bitcoin hoping the price will continue to rise, but it isn't helping to fuel bitcoin's popularity as a currency. For example, if I plan to go on vacation in two weeks and want to set aside $1,000 in spending money, if I choose to store this money in bitcoin, its buying power could climb or fall significantly by the time I leave. Most people simply don't want to deal with that level of currency risk. Before bitcoin achieves mainstream adoption as a currency, I believe the price is going to need to become much more stable.

2. Ease of use

To be fair, it has gotten much easier to buy, sell, and use bitcoin over the past several years, but it still isn't user-friendly enough to encourage mainstream adoption. Currently, if the average person wants to buy bitcoin, he or she needs to open an account at a bitcoin exchange such as Coinbase, link a checking account (or credit card, which generally comes with a higher fee), and in many cases wait several days for the transaction to clear. I consider myself knowledgeable about bitcoin, and I can buy virtually any product online with greater ease than I could buy, say, $200 in bitcoin.

Continue Reading Below

The entry of Square (NYSE: SQ) and similar companies into the bitcoin game has the potential to fix this issue. In other words, if bitcoin could be purchased through an app that millions of people are using anyway, like Square Cash, with just the touch of a button, it could get many more less tech-savvy consumers interested in the world of digital currencies.

3. Widespread acceptance

There are many retailers, particularly online, through which consumers can pay for transactions in bitcoin, but the digital currency still isn't anywhere close to being widely accepted. If Square, or another big payment processing company, decides to allow retailers that use their hardware to start accepting bitcoin payments easily, it could be a game-changer for the mainstream adoption of bitcoin.

4. Potential for theft

Security measures exist that make bitcoin virtually impossible to steal, but taking advantage of them involves a somewhat complex knowledge of how bitcoin works and can often require significantly more effort on the part of the user. While true bitcoin enthusiasts don't mind taking extra security measures, this is an example of the ease-of-use challenge I discussed earlier. And with online bitcoin wallets, there's always some chance that the currency could be stolen. It's happened before and could certainly happen again.

5. Reputation for criminal activity

Bitcoin, especially in its early days, was well known for its use on the Dark Web, in money-laundering activities, or to purchase illegal items. And it makes sense. As the only true anonymous source of payment, bitcoin became the natural choice for people who wanted to buy drugs, illegal weapons, you name it. And to be fair, since it's an anonymous payment source, it will be difficult, if not impossible, to fully solve this problem.

Anonymity is one of the positive aspects of bitcoin, but it does create the potential for illicit use.

6. Tax issues

Under current law, the IRS considers bitcoin and other digital currencies to be "intangible property," which means they're subject to capital gains taxes.

If you buy bitcoin and then sell it for more than you paid, you'll need to report the difference on your taxes. Even worse from a currency perspective, every time you use bitcoin to buy something, it is a potentially taxable event. For example, if I pay for a $5 cup of coffee with bitcoin that originally cost me $4, that dollar in profit is technically a capital gain. As you might imagine, this situation can create the need for an exhausting amount of record-keeping, and bitcoin users have three choices: Keep detailed records of every bitcoin purchase and transaction, risk getting into trouble with the IRS, or don't use bitcoin at all.

To be fair, gains resulting from other currencies also can result in taxable income, but this generally isn't an issue on a day-to-day basis. After all, few people in the U.S. regularly pay for goods and services with euros or yen.

7. Scalability

Without getting too deep into the technical details, bitcoin has a serious scalability problem. The underlying technology behind bitcoin, the blockchain, limits the amount of information that can be contained in each block to 1 megabyte of data. This limitation allows for a maximum network capacity of about three transactions per second.

In other words, as more and more bitcoin trades and purchase transactions are executed, the network will have a more difficult time keeping up, which could result in serious processing delays. For comparison, Visa's network processes roughly 2,000 transactions per second. So if bitcoin ever wants to achieve a larger scale, something will need to be done. There are several proposals on the table, but the eventual long-term solution remains unclear.

Can these problems be solved?

The bottom line is that bitcoin and the general concept of a digital currency is still very much in its infancy, and several problems need to be solved before bitcoin achieves mainstream adoption as a form of currency. It's also important to point out that this isn't an exhaustive list -- there are other challenges facing bitcoin. As one example, there's always the lingering threat of government regulation that could render bitcoin illegal in certain areas of the world.

However, most of the problems facing bitcoin can be solved or worked out, and the recent news involving Square Cash is certainly a step in the right direction. Just be aware that it will take some time before you can walk through the mall or local craft market and see crowds of people all paying for their various purchases with bitcoin.

10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017
The author(s) may have a position in any stocks mentioned.

 

Matthew Frankel owns shares of Square. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.