View Single Post
Old 02-03-2019, 01:56 PM
nesta is offline
Join Date: Aug 2000
Location: St. Louis Metro-East, IL
Posts: 446
Originally Posted by Chronos View Post
For that matter, why was anyone storing wealth in bitcoins controlled by someone else? The whole point of bitcoin is that you can store them yourself, without having to trust anyone else. If you're going to make use of a third party financial institution, why not just use a regular bank?
I see three reasons someone would want to own bitcoins rather than have money in a regular bank: investment, ideology, and anonymity. Those are valid reasons, even if using bitcoin for any of those might seem foolish to most of us.

I think the reasons why centralized exchanges, or de facto banks, became necessary for bitcoin despite one of its primary goals being to avoid centralization are:

1. Keeping track of your own bitcoins (or wallet) has its own risks, and is perceived as being difficult.
2. Converting bitcoin to US dollars or other currency requires trust, so exchanges are needed.
3. Very few people actually use bitcoin to buy anything.

There are many news articles about people losing millions of dollars worth of bitcoins because they threw away a computer, or had a hard drive fail. Most people don't have a good computer backup strategy, and it's easy to forget a password. We are used to trusting financial institutions, and only have a vague idea of what types of protections the regulations provide us, and that those regulations don't apply to cryptocurrency exchanges. When a non-savvy person decides to buy some bitcoins, they evaluate the risk of losing it if they have a problem with their computer, versus the risk of a bitcoin "bank" losing it. They think the bank has a much higher stake in utilizing proper backups and security, so they trust them. Even if it's just some random guy on the internet. That random guy has thousands of customers and millions in assets, so they must be doing something right.

There's also the fact that to even convert your dollars to bitcoin you most likely had to go through an exchange in the first place. It's easier to leave the bitcoin where it is, rather than research how to install a wallet and transfer your bitcoin back out of the exchange. Most people will probably be thinking that they are just going to convert it back to dollars anyway, so why go through the hassle?

I don't speak from experience, because I haven't owned a bitcoin or plan to, but from what I've read actually using bitcoin isn't very intuitive. You have a wallet, which is basically just a program to manage your addresses and keys. That wallet generates something like a hundred addresses. The goal is to use a different address for each transaction to help keep things anonymous. Each address will have its own balance, and you can generate more addresses or consolidate as you see fit (but consolidation will incur a transaction fee and remove some of the anonymity). These addresses are just numbers, and each has its own private key that the wallet manages. If you lose the password to the wallet, or it gets corrupted, your bitcoins are gone.

To send money to someone you need the recipient to give you their address, which again is just a bunch of numbers, and you have to go to your wallet, choose one of your addresses or combination that has enough to cover it, plus the transaction fee, and have your wallet generate the transaction to send to the network. Using an exchange for transactions hides a lot of the complexity.

That's a lot of hassle and worry to go through if I just want to buy a loaf a bread. In addition, transaction fees have been high in the past. Someone in this thread back in 2017 said transaction fees were at $1. It's currently $0.10, but in January it peaked at almost $0.40. If I want to buy a loaf a bread, that's more than my credit card is charging for the transaction.

For a cryptocurrency to gain widespread use for actually buying things the usability and transaction cost problems will need to be solved. It's a bit of a chicken or egg problem. If bitcoin isn't really being used to buy things there's little reason for people not to just leave the money in the "bank".

TLDR: Many cryptocurrency owners don't really care about the ideology behind decentralization enough to overcome the technical challenges.