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The Future of Bitcoin

June 14, 2017 6:41 pm Published by

Bitcoin has had a stellar 2017 so far, to say the least.

On the back of a streak of new all-time highs in the past six months alone, the price of bitcoin has set yet another record when it surpassed $3,000 for the first time ever at around 5:00 P.M. (UTC) on June 11, 2017, according to CoinDesk’s Bitcoin Price Index. And with growing numbers of investors and mainstream media outlets alike adopting increasingly bullish views regarding Bitcoin, one might be inclined to argue that the only way left for Bitcoin to go is up.

One analyst even forecasted the price of bitcoin to surpass $100,000 in 10 years.

So then, with Bitcoin slated for a more than 3,000% increase in price over the next decade, I thought that this might be a good time to take a peek into my crystal ball and see what Bitcoin could look like in the near future.

But first, let’s take a look at the current debate swirling around Bitcoin’s intended use case, and the even swirlier debate surrounding the best method to scale Bitcoin to meet those use cases.

Bitcoin: Digital Gold or Digital Cash?

For the better part of two years now, the Bitcoin community has been embroiled in an increasingly divisive debate about how best to scale the Bitcoin network. Generally speaking, one-half of the Bitcoin community wants to follow Satoshi Nakamoto’s 2008 white paper to the letter — i.e., that Bitcoin should remain an “electronic cash system,” with every transaction continuing to be conducted on the Bitcoin blockchain without the need for additional layers on top of the Bitcoin blockchain.

On the other hand, the other half of the Bitcoin community believes that the best way forward for Bitcoin is to move most transactions off-chain — i.e., most transactions, especially the smaller ones, would be conducted on a second layer and then consolidated into one larger transaction that would be subsequently settled on the main Bitcoin blockchain.

This debate was precipitated and later intensified, by the explosive growth that Bitcoin has experienced within those two years. During Bitcoin’s earlier years, on-chain transactions were essentially free; there was plenty of room within Bitcoin’s 1 MB blocks for new transactions to be added by miners as quickly as possible that transaction fees were considered optional.

However, as adoption increased and Bitcoin’s user base grew, Bitcoin’s transaction capacity was soon outstripped by the increasing numbers of on-chain transactions.

Since miners are incentivized to include transactions with higher transaction fees — miners are rewarded with those transactions fees when they add a block to the Bitcoin blockchain, in addition to the current block reward of 12.5 BTC per block — a fee market developed where users were essentially bidding to have their transactions confirmed by miners in the next block.

And as demand continually outstripped supply, average transaction fees rose; a typical bitcoin transaction, at the time of writing, now costs approximately 0.0008 BTC — or almost $2.50 — for it to be confirmed in the next block.

In a nutshell, those who believe that Bitcoin should be first and foremost a fast and low-cost medium of exchange have been pushing for a removal of the current 1 MB block size limit. This, they argue, would bring Bitcoin back to Satoshi Nakamoto’s original vision — it is worth noting that the 1 MB limit was not a part of Satoshi’s white paper, but was added later to address the then-growing problem of spam transactions.

On the other hand, those who believe that Bitcoin’s future lies in its potential as a safe haven store of value have been pushing for an efficiency improvement called Segregated Witness, or segwit for short. This proposal aims to fix some bugs in Bitcoin’s implementation that are currently preventing second-layer sidechains — e.g., the Lightning Network — from being safely deployed on the Bitcoin network. Segwit also enables more transactions to fit into a given block by reorganising the way transactions are encoded into a block.

However, none of the proposals gained the consensus needed for them to be deployed on the Bitcoin network, with both parties increasingly politicising their counterparts’ proposals. The result? Bitcoin’s technical progress has ground to a stalemate, while its transaction capacity continues to burst at its seams.

My Two Cents: Bitcoin Is Neither at the Moment

Interestingly, Bitcoin’s overall price and adoption rate have not been reflective of the network’s behind-the-scenes troubles. On the contrary, despite the increasingly politicized verbal battles, ballooning transaction fees, and more frequent delays in transaction confirmations, the price of bitcoin has risen by more than $1,000 within the last 30 days alone , not to mention hitting historic new all-time highs seemingly every other week and subsequently drawing the attention of institutional investors and mainstream media outlets alike.

This is in addition to Bitcoin’s fondness for extreme price volatility — e.g., in the past year, the price of bitcoin has surged from around $580 to break the $3,000 mark, but not before experiencing drops in excess of $100 an hour and even several hundred dollars a day.

Case in point: after breaking the $3,000 mark on late June 11, the price of Bitcoin dropped by more than $300 the next morning “in a span of minutes”.

I would, therefore, argue that bitcoin is neither a viable medium of exchange nor a viable store of value at the moment, but rather more of a speculative asset than anything else.

Bitcoin’s price volatility alone makes it highly unsuitable for use as a medium of exchange, no matter how stubbornly one holds on to Satoshi’s original vision for Bitcoin. A currency needs to be stable enough that the cost of everyday living does not swing wildly according to unpredictable speculator sentiment. For example, I can’t have my monthly expenses fluctuate by as much as 700% from month to month — the volatility of bitcoin against the US Dollar on bitcoin exchanges is estimated to be up to seven times the volatility of traditional forex trading — purely based on how much a bitcoin is worth.

Similarly, bitcoin doesn’t exactly inspire much confidence as a store of value when my savings in bitcoins could be worth $3,000 one moment and $300 less within the next hour. This is not even taking into account yet of what could happen should the Bitcoin community split the network into two competing Bitcoins because of their current seemingly irreconcilable differences.

Instead, bitcoin’s astronomical growth in price and its trademark volatility suggests that bitcoin’s worth is still currently being primarily driven by speculators betting on future consumer demand.

After all, even gold — arguably the world’s most reliable store of value with more than 4,000 years of history of being such — is still struggling to breach the $1,300 mark, even in the wake of increasing global political and financial uncertainty.

What’s Next for Bitcoin?

Until and unless bitcoin attains and retains stability in both its technical and financial realms — i.e., reaches consensus regarding scaling and having its financial power shifted from speculators to consumers who actually use bitcoins for everyday transactions — bitcoin will remain nothing more than a speculative asset.

Till then, expect higher highs and sharper drops in bitcoin prices to be the norm.

And as always, never invest more in bitcoins than what you can afford to lose.


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