Alex’s 2015 Bitcoin Update

2016 Predictions — Private “Blockchains”— The Great Debate — Coffee Money Anyone?

2015 was my first year of working on bitcoin full-time. It was a lot of fun. Here are some highlights:

I ran for parliament on a bitcoin-centric platform (I lost)

My YouTube videos got 70,000 views

I wrote some creative essays

I brokered the sale of ~$50,000 CAD worth of bitcoin to friends and family (they won)

Below is an overview of three major issues facing bitcoin today

.

…but first: Prediction 2016!

.

My top three reasons to be bullish this year:

Growing Interest: There is a renewed interest in bitcoin and a growing interest in “blockchain.” Shrinking Supply: The rate at which new bitcoins are created will halve this summer to 12.5 bitcoin per ten minutes. Common Sense: I haven’t heard a good argument against a neutral and decentralized money. Whether you are an egalitarian, a libertarian, a utilitarian, or a pacifist, bitcoin is a force for good.

I predict the price will hit $1000 CAD in 2016. If the block size limit debate (explained below) is resolved (even temporarily) we could see $3000.

Media interest in 2015 shifted from “bitcoin” to “blockchain.” Many valuable, yet non-monetary apps are being developed, both on bitcoin’s blockchain, and on other similar ledgers. The blockchain hype probably culminated with two feature stories in the October 31 Economist. The cover story’s most-recommended comment is my own:

“It amazes me how people can get excited about the blockchain, and make statements like, “Bitcoin itself may never be more than a curiosity.” To me it’s kind of like saying the car is curious, but the internal combustion engine is amazing.

A land registry that can’t be tampered would be good. A money that is decentralized, neutral, programmable, censorship-resistant, and deflationary …. this is a truly great invention.”

Private “Blockchains”

Legacy financial institutions have stopped ignoring bitcoin. Visa Europe said, “2015 has turned Blockchain into something the industry has to live with. Blockchain and Bitcoin, now more real than ever. It is no longer a choice anymore.”

A consortium of dozens of banks, including TD, BMO, Royal, and Scotiabank, have partnered with a firm called R3 to explore how they might use blockchain technology to serve customers faster and ultimately retain their power. Skepticism from the bitcoin community has not been concealed. Many predict private blockchains will grow as well as the failed walled-garden intranets of the 90’s.

The security of bitcoin’s blockchain (and by extension the trust in and value of bitcoin) rests on two pillars: 1. A proof-of-work algorithm that makes processing new transactions costly and reverting old transactions even more costly and 2. An openness-from-the-beginning that spawned a decentralized network that grows harder to attack every day.

Private blockchains cannot (by their very nature) be public, so if they are possible, they will have a necessarily have a radically different and untested-by-time security design vs. bitcoin’s blockchain. Some have suggested using a ledger controlled by proof-of-stake, but such a design would require users to trust stakeholders. The beauty of bitcoin’s blockchain is that it can be trusted without trusting someone. This idea is fleshed out in this talk by Peter Todd, one of the brilliant Canadians in bitcoin.

For a defence of private blockchains read this article by another brilliant young Canadian and the founder of Ethereum: Vitalik Buterin.

The Great Debate

The Great Debate of 2015 was about whether to raise the block size limit and if so how. (The bitcoin code has a 1 MB size limit on each block of transactions. Effectively, this limits bitcoin to 7 transactions per second. Currently, the average block is about 0.6 MB and rising.) Obviously, if bitcoin is to become a commonly-used money then the code needs to be changed.

The thing is, whenever a change is made to complex system, negative unintended consequences are inevitable. On the other hand, if no change is made, the economics of bitcoin will change and this will also bring negative unintended consequences.

Work is being done to change or fork the current bitcoin code — but finding consensus has been elusive and at times ugly. Other developers are working to workaround the problem buy building software on top of the existing bitcoin code.

No one wants ugliness in the bitcoin community (except for legacy financial institutions) but it is part and parcel of open-source projects. Personally, I will gladly take ugliness and openness over closed-door meetings and pronouncements.

I believe bitcoin’s block size limit will be increased soon, and I’m near-certain it will be increased before any competitors grow to even half of bitcoin’s size. In the meantime, transacting with bitcoin might become more expensive. Businesses relying on cheap bitcoin transactions might go bust.

But the work done by miners building and securing the bitcoin blockchain continues to grow exponentially. It’s clear that the growing energy consumption of the blockchain is not a flash in the pan, but the continuation of a cosmic trend, driven by the laws of thermodynamics.

Coffee Money Anyone?

In December I went to my first bitcoin conference: Blockchain Agenda San Diego. I met a lot of great people in the community as well as some of the important CEO’s. I also sat down for a long chat with a couple of established money managers from Vancouver, who wanted to know what bitcoin-related companies I’m excited about.

Purse, Fold, and Gyft (and AirBitz, a wallet that has integrated Fold) are companies that are inserting tentacles into the gift card world of Amazon, Starbucks, and Target. There were 46 million people who received Starbucks gift cards in 2014. That’s a lot of debt — payable in coffee! Fold uses the liquidity of bitcoin to redistribute that debt, and help insure it’s paid.

Fold takes a cut as a middle man, but its business is not super-scalable, nor does Fold have a monopoly. Someone could create a peer-to-peer version of Fold any day now.

However, this development is great for bitcoin — it gives 100’s of millions of people an easy-to-understand reason to buy some bitcoin: save 10-20% at Starbucks and Amazon. This itself should be enough to give the price of bitcoin a big boost, seeding a new hype cycle, new merchant adoption, new venture capital, and a new set of apps, all of which make bitcoin more valuable.

I’m looking forward to many more exciting bitcoin developments in 2016. The tea leaves of the long-term log-chart paint a pretty picture. Happy Holidays and All The Best In 2016.