This Week In Bitcoin — July 4, 2016
Stories on NPR and the NYT, The Second Halving, and Another Altcoin Goes Down
My favorite book on bitcoin is Digital Gold by Nathaniel Popper. It recounts fascinating episodes in bitcoin’s history and paints a colourful cast of seminal characters.
This week a reader forwarded me a Planet Money episode in which Popper tries to send David Kestenbaum $5 worth of bitcoin. The transaction fails to settle, providing a perfect reason to explore problems with bitcoin.
Modern bitcoin wallets are smart. They allow a sender to choose a transaction fee ranging from $0.40 to $0.05 resulting in a corresponding settlement time of 10 minutes to multiple hours:
Other wallets allow users to choose a custom fee. If a sufficient fee is not paid the transaction will not be processed. Did Popper pay a low or no fee in order to create a dramatic “bitcoin is in trouble” story? Popper won’t comment:
That being said, fees have increased this year as blocks near capacity. Core developers are maintaining maximum block size at 1MB for one main reason: decentralization. Large blocks take longer to spread or propagate across the network. Longer propagation times mean effective head starts for miners who solve more blocks. This creates a positive feedback loop in which successful miners find more success and bitcoin mining centralizes, making it more susceptible to attacks.
Popper published a companion piece in the New York Times called How China Took Center Stage in Bitcoin’s Civil War. It’s almost certain that a majority of bitcoin mining today occurs in China and Popper attributes this to a surplus of hydro power projects built for industrial projects that subsequently failed. Another plausible reason is restrictions placed on the sale of that energy to the Chinese grid. Interestingly, this places bitcoin mining in the same umbrella of regulatory arbitrage that’s made bitcoin popular with online casinos, sports betting, merchants of illegal drugs, and those providing advertising for sex workers.
The good news is that the rate at which mining chips are improving is slowing and expected to continue slowing. This will pave the way for a future in which mining chips are commodified and used as money-making machines wherever heat is desirable, such as in your home’s hot water heater. It sounds weird, but it’s totally sensible. A bitcoin miner in every home would be great for decentralization.
Anyway, even if bitcoin transaction fees went to $10 bitcoin would be fine. Its value as a transactional currency would decline, but its portability, storability, programability, and scarcity would continue to outshine gold, stocks, bonds, and real estate. This infographic from visualcapitalist.com highlights the relative petiteness of bitcoin’s market cap to that of other moneys and markets:
Dash Coin Exposed
Bitcoin’s dominance in the cryptocurrency space continues to recover from its all-time low of 74% in March. This week Bitcoin Uncensored interviewed YouTuber Amanda B. Johnson, who is famous for pumping Dash, the seventh-largest altcoin by market cap. Dash markets itself as a “privacy-centric digital currency with instant transactions.” The interview raises a plethora of red flags including Dash’s weird incentive scheme for nodes, the “accidental insta-mine” that taints the origin, and the failure to gain meaningful traction. Considering the brainpower devoted to bitcoin development, the technical claims made by the Dash team (or any altcoin team for that matter) seem too-good-to-be-true.
The Halvening
This Saturday, bitcoiners around the world will celebrate as bitcoin enters its third era. Three quarters of all bitcoin that will ever exist will have been created (that’s 15.75 million) and the block reward will halve to 12.5 BTC. Enjoy!
