Before investing or even speculating on the future price of Bitcoin, we need to accept a few facts:
- You need to know about the underlying Blockchain of Bitcoin, and the technological drivers and vulnerabilities of Bitcoin’s Blockchain.
- You need to know that “Bitcoin” and “bitcoin” are not the same terms. “Bitcoin” refers to the broader BTC Blockchain environment and “bitcoin” refers to the digital currency itself (otherwise referred to as BTC).
Without the aforementioned knowledge, you are simply a kid in a candy store, loaded with cash and high hopes of randomly becoming a millionaire off of buzz alone.
Without Bitcoin knowledge, you are simply a kid in a candy store, loaded with cash and high hopes of randomly becoming a millionaire off of buzz alone
So what drives the price of Bitcoin? Why is it so freaking expensive and how did it increase exponentially over the past decade? What are the limits of this technology’s heights?
Here are the 4 core price drivers of BTC currently:
1. Segregated Witness (2MB) Agreements
Bitcoin has a scaling problem. More specifically Bitcoin’s Blockchain has a scaling problem. Approximately 10 million people own BTC, give or take based on the mainstream usage of Coinbase. This means we are NOWHERE NEAR mainstream global adoption, even in developing countries. In fact, it means there’s only an estimated 0.83% of people living in developed countries have direct exposure (ownership) of the digital currency.
This volume of ownership alone has been causing increasing scalability issues with Bitcoin.
“The growing user base is naturally accompanied by a constantly increasing number of daily transactions, which are now counted by the hundreds of thousands . The unfortunate reality is that the Bitcoin network, in its current state, is unable to process all those transactions fast enough.” — CoinTelegraph
The problem lies in a specific parameter called the “block size limit.” The current limit of 1MB, set by Bitcoin’s founder Satoshi Nakamoto, is insufficient for the ever-growing transaction intensity. The data of each transaction adds up when there are hundreds of transactions taking place every minute.
“The current size limit of one megabyte per block can realistically support three to seven Bitcoin transactions per second. The problem here is that for the network of the current proportions that is already not enough. And it’s only getting worse as the user base keeps growing.” — CoinTelegraph
So how is this problem being solved? There are two competing methodologies with very loyal camps:
- Bitcoin Unlimited aims to remove the block size limit altogether, thereby allowing the miners to reach a consensus on their own.
- SegWit offers a moderate increase of the block size to up to 4 megabytes moving some non-critical data out of the blocks.
Either implementation needs over a 90% majority to be implemented as a Bitcoin Improvement Proposal (BIP). If there isn’t a compromise, BTC could hard fork — which would be at a great detriment to the currency — meaning the price could tank.
2. Rootstock Sidechain
A startup called Rootstock wants to bring Smart Contracts to Bitcoin, essentially mimicking the current capabilities of Ethereum Blockchain. In addition, the team wants to introduce a Lightning Network that allows the network to settle and top up payment channels while consuming very little blockchain space.
This would be HUGE for Bitcoin, as it was generalize its Blockchain technology from just being used for financial applications in a more accessible manner AND it could aid the transaction scalability issues of the network — at least for some time.
3. ETF Registration Expectations
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. The SEC has been denying BTC ETF proposals for a while now, and such prohibitions prevent the mainstream investment adoption of the currency, but aren’t necessarily stopping BTC’s increase in value.
This is a hurdle of mainstream adoption that the Bitcoin community has failed to overcome time and time again — particularly with efforts being led by the Winklevoss Twins.
4. Adoption & Buzz
Of course, adoption and media buzz have always increased Bitcoin’s price over time. With increased adoption, both systematically and in terms of the Bitcoin community’s growth, will come a highly probable increase of the currency’s value.
Robert Greenfield is a Certified Bitcoin Professional, Cisco Software Engineer, and Blockchain specialist with work experience @Goldman Sachs, American Express, and Teach For America. Follow him on Twitter @RobTG4