In a span of less than two months, Bitcoin’s price has appreciated by a staggering 100% percent. We did a similar post on Bitcoin when it touched $5000 barely 3 months ago! At this juncture, with the price beyond eleven thousand dollars a Bitcoin (you’d be a millionaire by now if you’d gotten in early), it’s time to pause and analyse what’s spurred this extraordinary rise and what it portends for the future of Bitcoin.
At the time of writing, Bitcoin’s market cap is nearing the $200 billion mark, with an imposing valuation at $186 billion. So, what’s the secret ingredient that’s pushed Bitcoin to world fame and has captured the fancy of investors worldwide?
The answer is simple. Fiat money is riddled with problems arising from centralised control and growing security concerns. Mismanagement by a central bank or a cartel of banks could erode all the value of your holdings and wipe it all out before you can react. All your hard earned savings lose value and you’re left with no recourse or remedy. Bitcoin presents itself as a solution to these problems — no central control, secure transactions and algorithmic control of every process eliminating human intervention or decision making. As a novel experiment, Bitcoin has proved itself and has caught the fancy of the masses. Now that Bitcoin is on a steady footing, what does the future hold?
The future of Bitcoin
Now that Bitcoin has passed its trial by fire, emerging unscathed from the SegWit 2X scare, investors are buoyed and Bitcoin is back to breaking all-time highs over and over again in an unbroken rise. Though the momentum is quite heartening as proponents predict a sustained rally to even more dizzying heights, some questions remain to be answered. Every asset that appreciates has to have an underlying basis, a reason or a cause for the appreciation, for a sustained rise in value. Otherwise, it ends up a bubble, and the fall from glory is inevitable.
Bitcoin, though some brand it a bubble, has an underlying value in that it’s a decentralised, secure record of transactions that are immune to manipulation. The massive user base and following Bitcoin has, compared with other cryptocurrencies, makes it the most valuable crypto asset.
As a currency, the more people adopt Bitcoin and the more businesses accept Bitcoin, the greater its appeal. Prices spiked sharply after Square, a payment app based in the USA trialed Bitcoin as a mode of payment and enabled Bitcoin transfers between buyers and sellers. Also, Bitcoin enthusiasts are eagerly awaiting the launch of futures trading in Bitcoin, promised by Chicago Mercantile Exchange (CME) by the end of the year, which is expected to bring in a lot of mainstream money from financial markets into the Bitcoin ecosystem.
Transaction fees and Scalability
The greatest impediment to Bitcoin’s rise as a better alternative to fiat money right now is its transaction costs. Largely in check until quite recently, transaction fees have risen sharply, especially when miners withdraw hashing power from the network, with rates now easily hovering around $5 — $10. This is a big no-no for small-time investors, especially from developing economies, even if Bitcoin’s price is expected to only keep rising.
A high transaction cost slows Bitcoin’s prospects at becoming a global currency. If Bitcoin has to scale, which means more people using the Blockchain, Bitcoin’s transaction network, the transaction fees would only rise. But, to scale without any rise in transaction fees presents a difficult problem.
Developers are actively attending to this problem with the proposal of numerous novel ideas, one of which has garnered near-unanimous backing and is called the Lightning Network. This functionality enables Bitcoin users to swap their Bitcoins off the main transaction network at very low fees, making Bitcoin very attractive to everyone. Further, the lightning network also promises to enable inter-cryptocurrency exchanges, called atomic swaps, between cryptocurrencies that incorporate this technology, adding significantly to its allure. Prices can be expected to run amok if and when Bitcoin pulls off this feat.
The greatest long-term threat as has been and as it seems will always be, lies in state hostility. When China clamped down on cryptocurrency use earlier this year, prices plunged by nearly 20% before recovering on the back of renewed global demand. Even without an outright ban, lack of state endorsement and ambiguity could make people reluctant to trade goods and services for Bitcoin.
Though no one can bring down Bitcoin without shutting down every node containing the blockchain, which seems almost an impossible thing to do, state hostility can impact Bitcoin prices significantly and dampen user sentiment, thus stymying adoption. Some Bitcoin holders and developers are of the view that once Bitcoin becomes mainstream, Wall Street will serve as an effective lobby for the legitimation of Bitcoin by states. But the future is still uncertain as the new contender challenges state hegemony and control over money.
Finally, commodity experts and fund managers are seeing the flight of capital from physical commodity assets like Gold to Bitcoin. This is attributed to Bitcoin’s growing status as E-gold in popular perception and discourse. Even conservative estimates predict a manifold rise in Bitcoin value if as little as 5% of commodity investments shift to Bitcoin.
In the end, it boils down to a confrontation between centralised power and the will of the people, the outcome of which will rest on the importance people attach to the principles on which Bitcoin is founded — true freedom from totalitarian control and manipulation. Though no one knows what lies at the end of the tunnel, signs, and developments are very encouraging and if anything to go by, are reassuring that Bitcoin’s on the right track. One thing’s for sure though — it’s an exhilarating ride and an exciting attempt at a better monetary system.