The Future of Bitcoin
Posted by BANKUS on June 19th 2017
Reports of Bitcoin’s death have been numerous and “greatly exaggerated” for much of its lifespan. But there remain reasons for skepticism – not least its well-known volatility, as evidenced by the 2017 surge in price and this week’s 20 percent plunge from an all-time high of around $3000. Clearly, such price volatility undermines Bitcoin’s pretensions to be a stable store of value and medium of exchange. Its general ongoing surge also encourages hoarding not spending. So, ignoring this week’s plunge, Bitcoin is presently a commodity to buy, rather than a currency for general adoption.
"Though Bitcoin’s value has more than doubled since the beginning of the year, its altcoin rivals have recently wrested a sizeable chunk of the market for themsleves."
Back in February, Bitcoin’s share of the market was 85 percent, according to data from CoinMarketCap.com. This week that share has fallen to below the 40 percent mark, while Ethereum’s share of the market in the same period has risen from 5 percent to more than 30 percent. This drift to rival coins has been encouraged by Bitcoin’s inflated transaction time and transaction costs – partly due to its recent exponential growth – further chipping away at its capabilities as a medium of exchange. Some transactions have taken days instead of minutes, and the average transaction cost recently hit $4.50. Another reason for Bitcoin’s issues is the scaling debate, which has split the community over the past two years. What seems on the surface a technical debate around the accommodation of growing transaction volume, many also regard as a struggle for control of the protocol. On one side are the Bitcoin Core developers, who are seeking to keep the block size smaller for as long as possible, to support small-time miners and keep Bitcoin decentralized. On the other side are the China-based mining pools and hardware providers, who want to increase block size to reduce transaction times. Further complicating the divide are genuine cultural differences between the two camps.
To increase the block size and activate what’s known as Segregated Witness (SegWit), a new way of verifying transactions. An encouraging development, but similar agreements have fallen through before. SegWit is the protocol upgrade proposed by the Bitcoin Core development team, but it has its opponents. On August 1st, a segment of the Bitcoin community will conduct a user activated soft fork (UASF). These users and miners will only accept Bitcoin blocks that signal support for SegWit. If a majority of miners (by hash power) does not signal support for SegWit through Bitcoin’s blockchain, a coin-split may occur. Despite surging popularity for Bitcoins and cryptocurrencies in general, neither the general public nor regulators are truly yet on board. Last month saw a series of ransomware cyber-attacks hit the news, with Bitcoin being the currency of choice used by the extortionists. Bitcoin still retains an association with crime and the “dark web”, the seemingly necessary corollary to its libertarian allure.
"In May, a pact was signed by 58 companies, across 22 countries – representing 83 percent of Bitcoin hashing power."
Bitcoin’s value has been hit following serious security breaches at Tokyo based Mt. Gox in 2014 – then the largest Bitcoin exchange – and in August 2016 when hackers stole $65 million from Hong Kong-based Bitfinex. And this week Bitinfex, along with another major Bitcoin exchange, reported cyberattacks, though the attacks did not this time affect clients’ funds. In 2015, New York began issuing controversial licenses to cryptocurrency companies, but to date very few have been issued due to the high cost of applying. And in March, Bitcoin plunged after the U.S. Securities and Exchange Commission rejected a proposal for a publicly traded fund based on the digital currency. With respect to China, a May report from Wall Street analyst firm Sanford C. Bernstein concluded that blockchain could benefit Chinese banks but was unlikely to start a financial revolution with consumers “due to conservative regulatory attitudes toward financial innovations [and] the constraint of confidentiality”. The analysts concluded, “We believe blockchain application is more likely to be evolutionary rather than revolutionary in developing countries like China”.
"Bitcoin’s path has never run smooth but so far it has blazed a shining trail for a growing band of imitators and inspired innovators."
Thoughtful commentators will continue to ponder all the upcoming hurdles and fundamental issues. And, no doubt, before long, Bitcoin will once again be given its last rites. For now though, Bitcoin is very much alive.