Tl;dr: Without a blocksize increase Bitcoin transactions will have to become very expensive to keep the network secure. Unless users are willing to pay hundreds of USD per transactions Bitcoin will never become more valuable than 10,000 USD.

What Makes Bitcoin Secure, And How Transaction Fees Keep It Secure

Bitcoin is secure (or insecure) for multiple reasons. Your signatures are protected with the the Elliptic Curve DSA via the curve secp256k1 as well as the hash function SHA-256, which is infamously applied twice. Other functions find their use in the protocol as well.

Also, Bitcoin is secure because despite the horrible reputation of information security, it is possible to manufacture and run computers that aren’t trivial to exploit. Asymmetric encryption depends on the ability to keep a private key (essentially just a large number) secret.

The great genius of Satoshi Nakamoto however lies in the introduction of Proof-of-work as a mechanism to secure an entire network of rational actors, many of which hiding in anonymity and placing zero trust in each other.

Each block contains probabilistic proof that its miner wasted ten minutes on it. Probabilistic because a miner might find a solution to a mathematical puzzle earlier or later than ten minutes, but as each block is also the announcement of a new puzzle, over time the average time between blocks remains around ten minutes, and no more than one miner become the definite “winner” of this block.

Finding the solution in time allows the miner to include a special transaction in the block in which they reward themselves with currently 25 bitcoin, created out of thin air. This block reward acts as an incentive to contribute to the network, and has in the past been enough to convince miners to connect their machines, and keep them connected.

Block Rewards Decrease While The Hashing Power Goes Up

The block reward is quantified in Bitcoin. Initially set at 50, it halves every 210,000 blocks, which is roughly every four years. The next “halving” is expected to occur around July 2016 according to bitcoinblockhalf.com. From then on, for another 210,000 blocks a miner will receive 12.5 bitcoin for each block found.

The security of the Bitcoin network can be measured in the number of hashes it can perform per second or the difficulty of the puzzle. This difficulty is currently set at 163 billion at around block 400,000 and gets adjusted every 2016 blocks, or every two weeks.

The current hashing power of the Bitcoin network lies at 1.07 Exahash/s, or 1.07 x 10¹⁸ hashes per second. Two years ago it was a mere 28 Petahash/s, or 28 x 10¹⁵. In other words, it increased almost forty-fold in just twelve months, due to improvements in chip performance, but also price.

A Solid Measure Of Bitcoin’s Security Is The Income Of Miners

A more accurate measure for the security of Bitcoin’s Proof-of-work (also applies to any altcoin that uses Proof-of-work) is the value of the energy destroyed in a given time frame.

As Bitcoin miners are generally rational actors in the economic sense, they will keep connecting machines to the network as long as this is profitable for them at the margin. With electricity being priced in fiat currency, and Bitcoin being exchanged for this fiat currency at an exchange rate discovered on a free market, a miner will add new machines if the value of the Bitcoin mined in an average 10-minute time interval is larger than the cost of operating this machine for 10 minutes. In short, 10 minutes of electricity.

At the time of writing, we can calculate the security of the Bitcoin network at about 10,500 USD per ten minutes. That would be the marginal cost of attempting a 51% attack on the network, which allows the attacker to censor transactions or bring the entire network to a halt. On top of the marginal cost comes a fixed cost of producing or buying enough chips and miners with at least the computing power of the existing network. A rough estimate puts this cost at 160 million USD, given over 226,000 Antminer S7 would be needed, each costing about 720 USD. In reality you wouldn’t be able to buy this hashing power from any single producer, you would have to engineer and produce it yourself, adding an unspecified research and development cost to your project.

The 25 bitcoin however are not the only source of income to the miner. A miner also collects transaction fees from the transactions they include in a block, currently about 0.5 bitcoin. This puts the security at around 10,720 USD per block.