These 4 issues are essential talking points about bitcoin and whether its bubble is about to burst.
Across these four issues there is only 10 months' worth of reliable information. What these 10 months show is the increasing competition in the global cryptocurrency market, the increase in money flowing into the markets and also the effect of regulation on the market towards the latter stages of those ten months.
To get the best understanding of the problem a long-term view needs to be taken when considering the value of bitcoin. To that end, even if bitcoin can be considered a bubble, the underlying technology is here to stay.
- Item 1 Why bitcoin is suffering compared to other cryptocurrencies
A long-term view is essential because reliable information about bitcoin is hard to access. For example, when CoinMarketCap began recording bitcoin data on 28 April 2013, bitcoin’s market cap was already around US$1.6 billion and held over 90% of the entire cryptocurrency market.At that time only LiteCoin was a serious competitor holding 4% of the market, compared to today’s 1.76%.
Although LiteCoin’s market dominance has dropped, its market cap has increased from US$73 million when CoinMarketCap’s records began, to today’s US$17.2 billion. The entire cryptocurrency market capitalisation reached around US$832 billion on 7 January 2018. That's roughly US$831.4 billion more than when CoinMarketCap began releasing data less than five years ago. The keyword to take from that is competition.
As far as reliable data goes, competition to bitcoin has been strongest only in the last 10 months. All cryptocurrencies outside the top 10 accounted for only 6.67% of total cryptocurrency market cap. That number reached nearly 25% on 28 January 2018.
It is commonly accepted that more than 50% of the 1,498 cryptocurrencies now listed on CoinMarketCap will be useless in the future. As yet, there is no evidence to suggest that bitcoin will go the way of the dodo.
- Item 2 Will bitcoin win the race to be a broadly-accepted currency?
Bitcoin is currently winning the race to be a broadly-accepted currency, but only just. This is because it is impossible to separate bitcoin transactions that have been used as money, from bitcoin transactions for the purposes of speculative trading.
This means that the amount of speculative trading in bitcoin is unknown and quite likely will never be accurately understood. To add to the difficulty it can only be guessed how much bitcoin in US dollars is being sent, or for what purpose. This makes it much more difficult to know whether bitcoin is even being used as a currency.
There is information that estimates how much bitcoin is being sent. While these numbers fluctuate wildly, the information only has any importance over the last 10 months. Aside from US$26.6 billion dollars of bitcoin being sent on 24 January 2016, until early 2017 it was rare that more than US$1 billion was sent on any given day, according to data from BitInfoCharts.
24 January 2017 was the last day under US$1 billion worth of bitcoin transactions took place. US$22 billion was sent on 29 January 2018 and on 18 December 2017, an all-time high of US$56.6 billion was sent on that day. But this data shows all bitcoin trade across all exchanges. This highlights the difficulty of finding consistent information.
Blockchain.info presents a totally different set of information from BitInfoCharts, showing only the value of transactions entered on the bitcoin blockchain.
Blockchain.info reports that daily transaction volume did not exceed US$1 billion for the first time until 4 August 2017. Blockchain’s information shows that since 13 October 2017 the estimated daily transaction value has not been below US$1 billion. This shows that it is difficult to know to what extent bitcoin is being used as money.
The only example of this is a 3,000-tonne freight shipment of wheat that has been settled in bitcoin. The transaction which was reportedly settled in December 2017 is understood to be the world’s first. Using pricing information from IndexMundi, the 3,000-tonne shipment would have cost around US$550,000.
If Blockchain.info data is correct the highest daily transaction volume in December 2017 was US$4.1 billion. This means that even if the information from Blockchain.info is reliable, that trade accounts for 0.013% of total bitcoin trade if the transaction was settled on that day. This is the biggest example of bitcoin being used as money.
Based on this knowledge bitcoin is winning the race to become the world’s first broadly accepted cryptocurrency. There is a possibility that there could be more of these types of transactions. However, it is impossible to know anything beyond that because the information simply does not exist.
- Item 3 Why bitcoin needs Lightning Network
Essentially, bitcoin needs the Lightning Network to keep transaction fees to a minimum. In a similar trend to market cap, price and daily transaction volume, average transaction fees only have a story over the last ten months. Aside from making it up to US$0.10 in late 2013, average transaction fees hardly went above US$0.05 until mid-2016.
It was only at the beginning of 2017 that scaling issues truly hit home for the bitcoin community. By 30 March 2017 average transaction fees were lucky to be found below US$0.50. That figure peaked before mid-June at over US$5.50; US$8.90 in September; US$19.19 in November; and hit an all-time high of US$55.16 on 22 December 2017.
It is important to understand why those fees rose so sharply. Technically speaking, bitcoin does not make the user anonymous. What it does offer is a very private pseudonym, or fake name. The way that pseudonym is made is by using cryptography, a very advanced mathematics which cloaks a user’s identity. Even though the user’s identity is cloaked, the programming behind bitcoin allows two users to transfer bitcoin without needing to identify each other. This is because the maths underpinning the bitcoin blockchain makes this almost certain.
With all that cryptographic and transaction information, the computing power necessary is huge. As demand for bitcoin transactions increase and supply of available computing power remains stable, transaction fees go up. What this means is that the more people who want to transact in bitcoin means the higher transaction fees will go. That is basically the biggest problem associated with scaling.
To solve this problem the Lightning Network has been developed. Technically speaking, Lightning Network is a scaling solution that allows transfer of bitcoin between nodes off blockchain. Basically, users can transfer bitcoin between one another as often or as little as they would like and the end total is then entered on the blockchain. The benefits of this are believed to reduce transaction fees drastically, some say below US$0.01.
A sharp drop in transaction fees can already be noticed. As we've previously reported, the Lightning Network is still in development but is rapidly growing on Mainnet. At the same time as this, average transaction fees have been cut to as low as US$7.14, as at the time of writing. At this stage, it is too early to say definitely that Lightning Network is causing this drop in fees.
- Is the bitcoin bubble about to burst?
No. The bitcoin bubble is not about to burst. The reason? More people are being attracted to bitcoin and the cryptocurrency domain in general. It has been touched on here at finder that less demand for cryptocurrency causes a drop in prices of cryptocurrency. While that is true, it is important to touch on how an increase in regulation restricts demand for cryptocurrency, or restricts access to the market.
Government regulation of bitcoin and the broader cryptocurrency markets has increased. Nowhere in the world has the impact of government regulation been stronger than in South Korea. Korean cryptocurrency exchanges account for roughly one third of global trading volume. That number is going to reduce sharply with new regulations that bring Korea more or less into line with most developed nations.
Essentially, before December 2017, there were no regulations for cryptocurrency trading in Korea. This means high rates of tax, no more anonymous trading accounts and foreigners being banned from opening trading accounts. To add to that, banks will freeze accounts linked with exchanges or traders that do not comply with incoming know-your-customer/anti-money laundering policies (KYC/AML). This reflects a significant barrier to trade in a country where nearly one third of the population is believed to own cryptocurrency.
Only government regulation could pop a bitcoin bubble. Governments in the United States, Australia, across Europe, Asia, Africa and the Middle East are all introducing cryptocurrency know-your-customer/anti-money-laundering regulations. Increased government regulation will slow the rate of people entering cryptocurrency markets. It is unclear if severe government regulation will remove enough demand for bitcoin that it would cause its price to bottom out.
In 2017 more money entered the cryptocurrency markets and the price of bitcoin went up. In the last 10 months, total cryptocurrency market capitalisation went from around US$25 billion and increased to over US$800 billion before year’s end. In the same time, bitcoin’s value increased nearly 20 times.
Past performance is no indicator of future market outcomes. Regardless, there is a clear connection between the price of bitcoin and money flow into and out of cryptocurrency markets.
If bitcoin is a bubble, the question becomes: what will stop money flowing into the market for bitcoin?