Reports of Bitcoin’s Death Have Been Greatly Exaggerated
Bitcoin did it again. After a long and painful Crypto Winter in 2018, Bitcoin has staged a staggering return in the first half of 2019. It’s unclear what caused it at this stage, but all signs indicate that the winds have turned, and that market sentiment has dramatically shifted from “blockchain, not crypto” a year ago, to a much more positive sentiment vis-à-vis public, permissionless blockchains in general, and Bitcoin in particular.
The unexpected and sudden rally that started in April 2019 coincided with trade war tensions between the US and China and the New York Attorney General going after Bitfinex and Tether for questionable business practices, namely that Bitfinex allegedly used Tether’s reserves to conceal $850 million in losses. The latter example is particularly interesting. If the there is a risk that USDT tokens, the tokens issued by Tether, might not be 100% backed by the corresponding amount of US Dollars and this caused a flight to Bitcoin, that would constitute a reversal from past behaviors when traders would do the exact opposite and would sell their bitcoins for USDT in anticipation for volatility in the crypto market. The fact that Bitcoin does not have to be backed by any fiat currency nor central authority is slowly being recognized as a strength, not as a weakness, as proponents of the fiat currency system would want people to believe.
At $9,000, the price of Bitcoin is currently higher than it has been 96% of the time over the past 10 years and its market capitalization is north of $160 billion, quite an achievement for an asset not backed by any government, corporation and whose founder identity is unknown.
2018 was the year of the great Bitcoin value transfer
While the price of Bitcoin went from an all-time high of close to $20,000 in December 2017 down to $3,200 in December 2018, something very important happened during that period: many bitcoins changed hands. This is what most people forget in bear markets: volumes do not drop to zero, there is still a lot of trading activity.
Warren Buffet once famously said that “the stock market is a device for transferring money from the impatient to the patient”. The same could be said about the Bitcoin market: value was transferred from short-term traders, retail investors who were in it to make a quick buck and miners, to hodlers. Recent data analysis shows that large Bitcoin hodlers, a.k.a. whales, started accumulating again in the second half of 2018, at the bottom of the bear market.
The stock market is a device for transferring money from the impatient to the patient, Warren Buffet
I had argued in a previous article that the 2018 bear market was at least partially caused by the miners, who had to sell their bitcoins at all cost to cover their operating expenses, while volumes and prices were depressed, further depressing the Bitcoin price. On May 21, Brian Kelly said on CNBC that he had talked to several miners that had indicated that they had already sold enough bitcoins to cover their costs for the next 12 months, which means the likelihood of a repeat of what happened at the end 2018 is unlikely.
As I had already written previously, unlike other commodity producers, miners do not have the ability to curtail production when demand is low, nor to increase it when it’s high. No matter what, 12.5 bitcoins are mined every 10 minutes on average, at least until the next halving in May 2020 when the mining reward will drop to 6.25 bitcoins every 10 minutes. This feature exacerbates price moves as it prevents miners from producing more when demand is high, or less when demand is low. If miners are indeed already set for 2019, a scenario similar to the one that unfolded in the second half of 2018 is unlikely.
Bitcoin has matured since 2017
The year 2017 was the year of irrational exuberance in the crypto market. Bitcoin went up 20x while pretty much project with a whitepaper could raise millions in crypto through ICOs. Since then, most altcoins have lost 90%+ of their value and Bitcoin has regained market share. Bitcoin has survived being forked, many times, and out of all the many Bitcoin forks, only Bitcoin Cash seems to have retained some value, even though very few transactions are actually happening on the Bitcoin Cash blockchain. While many detractors were claiming that Bitcoin was worthless because anyone could create a clone, the market gave them a clear message that it’s definitely not the case.
In the meantime, the SegWit softfork of August 2017 has achieved the desired outcome: SegWit transactions now account for more than 40% of daily Bitcoin transactions and even though on-chain transactions are close their all-time high, the memory pool, where all the pending transactions are being stored before being added to blocks, is nowhere close to where it was in December 2017, when the number of transactions, and transaction fees, were at their all-time high.
Payment solutions built on top of the Bitcoin blockchain, such as the Blockstream’s Liquid Network or the Lightning Network, are emerging. These layer 2 solutions will allow the number of Bitcoin payments that can be processed to grow exponentially. What many proponents of faster altcoins missed was the fact that for an asset to be considered a currency, it first needs to become a store of value, then it may become a means of payment, not the other way around. Chasing the latest, fastest cryptocurrency is pointless because there will always be another supposedly better cryptocurrency being launched to compete with the incumbents.
Bitcoin is slow and rigid, good!
Bitcoin is slow, it’s rigid, it does not get updated very often and it’s very hard to reach consensus when a proposed upgrade is put forward, exactly how it should be. Any currency needs some level of stability. While price stability has not been achieved yet, Bitcoin is still in its infancy, technical stability is being demonstrated every day the Bitcoin blockchain keeps processing hundreds of thousands of transactions.
Once gold had proven its worth as a store of value over centuries, banks started issuing notes redeemable in gold and countries issued currencies convertible in gold, which facilitated payments in gold. Bitcoin is in the process of establishing its own track-record: it’s been around for more than 10 years and not once has the network been compromised.
Expect unexpected applications for the Bitcoin blockchain
When Microsoft announced at Consensus in May 2019 that it would build identity solutions on top of the Bitcoin blockchain, it was first a surprise, then it made total sense. The Bitcoin blockchain is the most secure blockchain out there, thanks to the sheer computing power dedicated to mining Bitcoin, which makes it the ideal candidate to build a secure, decentralized identity platform on a public blockchain.
While Bitcoin, the cryptocurrency, may become a full-fledged reserve asset like gold, the Bitcoin blockchain itself is likely to become a settlement layer, where only a fraction of all Bitcoin transactions would be processed. This is how the modern banking system scaled, by taking many transactions “off-chain” through cash and credit cards, and this is how the Bitcoin blockchain will scale too.
The killer feature of the Bitcoin blockchain is its security. The Microsoft identity solution is just one example of what is to come. After 10 years we have just barely scratched the surface of what the Bitcoin blockchain can do.
