Bitcoin just hit a new all-time high. Now what?
Disclaimer: I am not a Bitcoin expert by any means. I have been an avid Bitcoin observer since late 2012. Below are some of my thoughts.
Yesterday Bitcoin broke its previous all-time high of ~$1,165 set in November 2o13 and is currently sitting pretty at ~$1,200. It has been a long and tumultuous 3+ years since the pioneer cryptocurrency last reached these levels. A lot has changed, a lot has improved, yet still, the community has much to solve as it ventures further forward into this crypto Wild West.
2017 v. 2013
The return to a $1,200 price is an incredible testament to the strength and resiliency of the Bitcoin network. Many people labeled the cryptocurrency experiment a massive failure and declared Bitcoin dead after the parabolic price run up in late 2013 and subsequent crash following the Mt. Gox heist that resulted in 850,000 bitcoins vanishing from the exchange. Yet, here we are, back hovering around $1,200 with r/Bitcoin posting its best “to the Moon!” gifs and longtime HODLers patting themselves on the back for weathering the ~1.5 year bear market and eventual retrace. How is this rally different than the 2013 rally? Is it another bubble waiting to pop? Let’s compare.
The Bitcoin ecosystem was raw in 2013. It was a dark market driven, hacker dominated, and mostly unknown experiment that was looking to supplant the global financial system. With few eyes watching Bitcoin and the people experimenting with it, early users entered a world riddled with shoddy security and con artists. The pinnacle of technical incompetence and outright fraud within the Bitcoin ecosystem was the Winter of 2013–2014. During this period, it is believed that Mt. Gox allowed a trading bot (Willy Bot) to push the price of Bitcoin up in parabolic fashion to the previous all-time highs we just surpassed yesterday. While Willy Bot was busy running up the price, Mt. Gox was simultaneously in the process of being robbed of $450 million worth of bitcoin. A truly incredible feat of human ineptitude that affected a great amount of early adopters and ushered in a lack of confidence from outside observers. The event is a dark cloud that looms over the community to this day.
It has become evident that the late 2013 price surge was most likely a manufactured rally with no underlying fundamentals. A lot has changed since that period, mainly, the fundamentals. Hold for some charts… (thanks blockchain.info and LocalBitcoins)
The charts above show the organic growth of Bitcoin over time. When we last saw ~$1,200 Bitcoin there were approximately 770,000 blockchain.info Bitcoin wallets downloaded. Today, more than 12.2 million wallets have been downloaded via blockchain.info, representing a ~1484% increase since late 2013. As more users utilize the network the amount of computing power needed to secure and add blocks to the network has increased significantly and the 1MB block size cap is being pushed to its limits (more about this later).
There is a perfect storm of speculation, dark market utility, and a need to protect wealth outside of traditional means driving these network fundamentals. We can see from the last three charts that person to person Bitcoin exchange has been growing steadily worldwide for the last 4 years, and, more interestingly, has grown rapidly in countries that have experienced economic or regulatory shocks in the last few months. I chose to highlight two countries in particular. The first is India, whose president decided in early November 2016 to ban large denominations of cash overnight, rendering some of the money in Indian citizens’ wallets completely worthless. Immediately after the ban, LocalBitcoins saw a spike in transaction volume in India as some Indian citizens attempted to preserve a portion of their wealth in Bitcoin. The second is China, whose central bank decided overnight that Chinese Bitcoin exchanges would be forced to delay user bitcoin withdrawals for 30 days upon request. Again, we can see from the last chart that some Chinese citizens decided to work around the centralized exchanges and transact person to person.
These are just a couple examples in a sea of many that show people attempting to preserve their wealth via Bitcoin because the political and/or financial situation in their countries has become too uncertain. These instances combined with pure speculation from traders and investors leads me to believe that the current $1,200 Bitcoin price is justified. However, with that being said, there are many problems to solve going forward. The biggest of which is the current scaling debate.
Scaling the protocol
As I mentioned above, there is currently a 1MB (megabyte) limit on the amount of data that can be contained in each Bitcoin block (a new Bitcoin block is created roughly every 10 minutes). The explosion of user growth and subsequent transaction volume that the network has experienced over the last 4 years has led to blocks filled to the brim with transaction data. We are reaching a point where there is simply not enough data storage in each block to cater to the demand of the users on the network. At the moment, it is not a fatal flaw, but if Bitcoin wants to continue to experience the network growth it has up to this point, the community needs to scale the network so that it can handle more transactions.
Currently, there are two popular competing proposals being debated as the best way to scale the network in the short-term, and they are drastically different.
One of the proposals is Bitcoin Unlimited, which would like to hard fork the Bitcoin network to immediately increase the block size, which would allow more transaction throughput on the network. This seems like a simple enough solution, but hard forks come with a lot of risks. The biggest of which is the potential for the Bitcoin network to split into two networks; one following the original rules and the other following the new rules set by Bitcoin Unlimited. Journalist Aaron van Wirdum has done some incredible reporting on the technical aspects of the Bitcoin Unlimited hard fork here and here, and has illuminated grand assumptions made by the Bitcoin Unlimited team, mainly revolving around the assumption of Emergent Consensus. I won’t pretend to be impartial on this matter. I think the push from the Bitcoin Unlimited team to hard fork the network is reckless, especially after the case study we all witnessed in July 2016 after Ethereum hard forked the network to return funds “stolen” during the DAO heist. If you hard fork once, what will stop you from doing it again in the future and what justification will be given then?
The other proposal to scale the network is known as Segregated Witness (SegWit) and it has been proposed by the Bitcoin Core team. SegWit is a proposed soft fork that would eliminate redundancies in the storage of transaction data and signature data within each block, freeing up space for more transaction volume and allowing the initiation of some 2nd layer scaling solutions. In this scenario there is no possibility for a network split, which (in my mind) means a considerably less amount of risk. However, for SegWit to activate, miners representing 95% or more of the total Bitcoin network hash rate must signal support for the proposed soft fork. This is a high threshold for adoption and currently only 25% of miners are signaling support for SegWit. Again, I will not pretend to be impartial, I believe that SegWit is the best scaling solution right now because it does not risk a split of the network and allows for 2nd layer applications to take on some of the scaling burden. However, as of writing, it looks like SegWit adoption among miners has stalled as the debate continues and miners weigh their options. I hope sanity prevails in the end and the community avoids a hard fork at an unnecessary juncture and decides to activate SegWit.
If/when the scaling debate is settled, I believe it will solidify Bitcoin as the store of value of the future. I get laughed at a lot for saying this in front of people in real life, but I truly think we will see a great rotation from global fiat currencies into more fair money systems like Bitcoin and the altcoins created in its wake. If Bitcoin can solve its scaling issues (which I think it will), it is not outside the realm of possibility that one day 1 bitcoin will be worth as much or more than $1million USD in today’s terms.