Thoughts on the current state of Bitcoin and Cryptocurrency

Posted on by lhl

I’ve been meaning to summarize my thoughts on the state of Bitcoin/cryptocurrencies for a while, as I’ve been following the topic pretty closely for the past few years (read my Adventures in Bitcoin writeup from 2013), but it’s been somewhat daunting, since there’s so much reference material that needs to be tracked down. This post is a work in progress, but I’ll probably publish things just to get some thoughts out in a relatively timely manner.

First, some disclosures, for the past few years I’ve been long on Bitcoin, but over the past couple months I’ve liquidated all but 1 BTC (old times sake). I currently have positions in Ethereum, Monero, and Dash. If Bitcoin manages to overcome its current issues I will buy back in (but sadly, I don’t think that’ll be likely).

Note: crypto-currencies have always been quite speculative, but I’d extra recommend people to be careful buying in currently as alt-currencies have high correlation/dependencies on bitcoin (the most common way to trade alts is via bitcoin conversion) and things may get bumpy.

Currently, bitcoin price has actually been unusually stable (the most stable 30-day volatility in its history, in fact), and in many other ways (institutional investment, financial infrastructure, end-user client software, day-to-day usefulness) it’s stronger than it’s ever been (and far ahead of any alt-currency competition), however IMO, it’s also in the most precarious/riskiest state since I’ve started seriously tracking it.

Bitcoin will be having its second halving in less than 100 days. This has only happened once before, which ended up being almost a non-event. Prices didn’t move, hash rate remained relatively stable and extra transactions filled the gap. Brian Armstrong (CEO of Coinbase) does a pretty good job of describing why this halving might be different. With full blocks and a cost doubling that may force many miners to drop out, capacity pressures may cause major disruption in transaction processing.

(Aside: Bitcoin Classic (summary) adoption has stalled and is unlikely to ever reach the 75% mining network support it needs; there is also a 28 day grace period, so there is a very tiny window at this point for a switch to happen before the halving even if that supermajority number was reached)

The halving risks are merely a sympton of some more serious issues (or existential crises, depending on your POV) that Bitcoin has been facing for the past year or so:

  • Full blocks leading to transaction processing/capacity limits of the Bitcoin network
  • Development of a “fee market” which has increased tranaction costs, lowered reliability and ease-of-use
  • Inability to generate consensus/evolve the protocol to fix the capacity/scaling issues
  • Exposing multiple bottlenecks/centralizations in a supposedly decentralized system:
    • a tightly knit developer cabal employed almost entirely by a single company
    • the ability for a handful of Chinese mining pool operators to decide network consensus
    • and the central management and censorship of the primary user forums and websites that the community uses for information dissemination, deliberation, and discussion

What began as a disagreement on the technical merits of on/off-chain scaling, has now kicked off (or perhaps merely unearthed) an existential crisis focused on the control of the protocol and the nature of political consensus that doesn’t seem to have clear answers.

(WIP)

On community censorship:

Forks

Interesting Reads

Small vs Big Blocks; Scaling