The real problem with investing in Bitcoin

Everyone wants Bitcoin, and everyone realizes it is a dangerous and highly speculative investment. No one invests a significant portion of his wealth into cryptocurrency. But is it because of the belief that it’s a risky investment? or is it something else?

Imagine you would be able to invest your money by trading crypto-assets instead of using your bank account to do it. You get almost zero fees, immediate transaction approval, and complete ownership of your assets in an anonymous manner. Perfect, isn’t it?

Wrong. Something is missing.

Banks don’t just facilitate investments. They insure your money and they keep it for generations to come. You can be 100% confident than your lifetime savings are going to be there when you retire years from now. And why is that? because banks are state-backed, insured, and very, very trustworthy, historically. And cryptocurrencies are the absolute opposite. They are hard to understand, hard to keep safe, and uninsured.

For banks, the value of holding, managing, sending and receiving money is high, but apart from convenience, the trust banks provide today is just irreplaceable. Even if you get hacked, which you probably will — it will have no direct implications on you financially. The bank will activate its insurance policy and return the money to the original holder.

To solve the problem in the blockchain world, two problems need to be addresses.

1. A way to deal with information loss
2. A way to authenticate and authorize a physical person, and tie it into the ability of transacting in the virtual world

Banks don’t need to deal with these issues hermetically, since they are centralized. They can just modify their database to reflect any reality they wish. But cryptocurrencies are not the same. They are permanent, global, and irreversible.

For the Bitcoin blockchain, there is no way today to implement 1 and 2 using a technological solution. Ethereum does have wide support for writing logic on top of the blockchain and might accommodate those needs by using smart contracts. But if 1 and 2 are possible to protect easily then this will pave the way into mainstream adoption of Bitcoin and other crypto-assets, as insurance companies will start insuring people’s holdings.

Or better yet — if the solution will be inherently safe and will accommodate 1 and 2 then insurance companies won’t even be needed, as everyone would just store their assets using that magical solution without a need for insurance.