To Replace Gold, Bitcoin Needs a Massive Increase in Transaction Capacity

Bitcoin is often referred to as “digital gold.” A major attraction of the cryptocurrency is its fixed supply and lack of connection to fiat money like the US dollar. But unlike gold, bitcoin has no storage costs and is hard to steal. Given these facts, bitcoin could be poised to replace gold as a store of value and inflation hedge.

But it faces one huge hurdle in doing so: the bitcoin system can only process seven transactions per second:

As a piece of global financial infrastructure, the Bitcoin network is hobbled by severely limited capacity. The worldwide network of miners can process a maximum of only seven transactions a second, and today the rate is running at around five, according to de Vries’s estimates. In comparison, Visa can process up to 65,000 payments per second. Hence, any spike in the volume of payments or transfers causes a backlog.

De Vries adds that Bitcoin performs poorly at the checkout counter. If you were to buy $100 in groceries using Bitcoin, it may take an hour to receive adequate confirmation.

Not only does this make bitcoin unsuited to processing daily transactions like grocery trips, it may even limit its use as a store of value. There are currently $22 billion in bitcoin transactions per day, and transactions already take a long time to settle.

Gold does $146 billion in transactions daily. To match that, bitcoin would have to increase its transaction throughput approximately five fold (if the current $22 billion in transactions represents 5/7ths of possible volume). Is that feasible when trades already settle so slowly?

And what if bitcoin becomes a lot more widely held? It’s very difficult to determine the number of bitcoin holders, but some estimates put the number at around 100 million people out of a world population of over 7 billion. That’s a ton of new potential bitcoin buyers, but the currency is likely to struggle to accomodate them given its low transaction bandwidth.

In all, this rapidly growing currency faces some significant barriers to wide adoption as a store of value like gold. I’m curious to see what workarounds blockchain developers come up with to meet these challenges.

Dig into these posts for more on bitcoin:

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Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0


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