The fact that Bitcoin is undervalued is probably not news to many people involved in the cryptocurrency ecosystem. Bitcoin’s recent price increase, through the $500 resistance point, rallied over the weekend and is now crossing $700 (£493, €621).
The most immediate price driver is the halving of the number of Bitcoins being mined. Currently some 3,600 coins are mined every day, which will drop to 1,800 in July. This change is integral to the design of Bitcoin and its limited supply.
This also means that the miners that verify blocks of transactions will see their fees drop from 25 Bitcoin per block to 12.5 per block. Bitcoin has been stable for some time and the halving of supply therefore entails an increase in demand hence the price pop. Importantly, this preserves economic viability for the mining community, although there have been some casualties.
During a recent chat at Consensus 2016, Samson Mow, chief technical officer of Chinese Bitcoin mining giant BTCC, spoke about the state of play and predicted the price pop we are now seeing.
Mow told IBTimes UK: “I think the halving will see prices going up. Because right now every day there’s 3,600 coins being mined, and the fact that the price holds stable means that people are buying those coins.
“If no one is buying those coins then it’s going to be flooding the market. But because the price is holding stable and increasing over time it means there is more demand than there is supply. And the supply is going to get cut in half.”
There are certainly other factors pushing the price of Bitcoin. Despite its well-publicised divisions and deliberations, Bitcoin is working to a tight schedule and has a busy roadmap ahead. There’s work being done on hard fork code to increase blocksize, plus the implementation of segregated witness (SegWit), the separation of transaction and signature data will happen soon, and then there’s the Lightning Network.
Right now it’s unclear what combination or order of hard fork and SegWit will take place. Mow confirmed the core Bitcoin developers who attended the last meeting in Hong Kong fully intend to honour their agreement to produce hard fork code, probably by the July deadline. “If we all decide we are going to run this code, it could be SegWit hard-fork, or hard fork with SegWit code in it, or hard fork then SegWit,” he said.
The combination of SegWit and a hard fork turned out to be a difficult thing to hash out in Hong Kong, noted Mow. “When you combine SegWit and a hard fork you get bigger blocks, so you have to find a way to kind of average the size down. Maybe set the hard fork but increase the blocksize through the hard fork but don’t use all that space right away. So limit it in the code. Because if you do it that way you increase the cap but you limit it; you can always increase it later with a soft fork.”
Mow said another meeting, this time in New York, will happen before a hard fork implementation takes place. The next stage will be Lightning, the payment channel which could put Bitcoin transactions on a par with Visa. Mow stated that he is not an expert on Lightning but gave an explanation of how he imagines it will work.
“Let’s say BTCC spins up a Lightning node, and you send a transaction to us, and we are connected to all the other Lightning nodes, then we can kind of relay it though for you. But we will eventually have to settle on the blockchain. I think UI-wise it will be a separate transaction, like you will send something with a Lightning address. So now you have a bitcoin address; then you have a Lightning address.”
Mow said the size of transactions doesn’t really matter but it will make sense to use it for smaller transactions like micropayments. For instance, you wouldn’t want to pay one cent in fees for a transaction that’s one cent in size.
“But whoever is running a Lightning node, if I’m understanding right, we will settle on chain, like after a day or a couple of days or a week. We will actually put the transactions through on the blockchain.”
“I don’t think this is going to be an incremental increase. Lightning will allow us to exceed the Visa network which is why everyone is so excited about it.”
In terms of the timing of Lightning, Mow said maybe this year, maybe next year – but soon. “They said this year they will release something. A lot of people are doing private implementations, like their own implementations of Lightning but it’s still experimental at this stage.”
Once these imminent changes to the Bitcoin protocol improve its functionality, a year’s worth of frantic blockchain hype is likely to rebound on the cryptocurrency. Another factor with relevance to Bitcoin price is the growing popularity of blockchain crowdfunds and token sales.
While banks and financial institutions are deciding on what flavour of private blockchain best suits them, the people who will actually build out the next generation of the internet are busy raising coins to fund that project (witness Ethereum, The DAO, WAVE, Digix, Augur etc). However this plays out – and Ethereum inventor Vitalik Buterin recently told IBTimes we may see a token bubble – it will probably also buoy the price of Bitcoin, the de facto currency of internet innovation.
On the subject of Ethereum, Mow said: “It’s good to have multiple cryptocurrencies. There are some people who say the rise of Ethereum indicates that Bitcoin is failing to scale but I don’t think so. They are just different things. If anything, it means cryptocurrency as a whole is better off.”
Unsurprisingly, he is less generous about private blockchains. “They are going to realise eventually that private blockchains are really just a database. It’s not an efficient database and it’s not going to solve their problems.
“People should understand that you cannot rely on a private database for your security. Banks have a problem; they are always worried about some fraud or someone doing the wrong entry. But just because you put a node in every branch running a blockchain does not mean that it’s safe, because that just means that you have attack vector for some malicious actor to do something to your network.
“For instance someone that gets access to the bank – they work there or whatever – can start rewriting the blockchain because it is only being secured with negligible hashing power. In fact it’s even less safe than a centralised database, because you are trying to decentralise that database in a really unsafe manner.”