Yes, 2018, the 10th anniversary of Bitcoin, was the best ever year for the original cryptocurrency.
Your eyes do not deceive you, that is what I wrote. Confused ?
Bitcoin recently turned 10 years old, on October 31 2018.The digital currently that everyone has heard of but very few actually use has survived to this milestone, with many ups and down along the way. Generally, this was a good milestone. While many had predicted that Bitcoin was a fad over the years, the milestone itself showed that it was here to stay. Equally as important, Bitcoin had survived 10 years without being hacked or destroyed technically - the premise of the original blockchain was intact after a decade.
All except for one little problem….
You still generally can’t use your Bitcoin as a currency.
This debate normally evokes many heated discussions. Firstly, many will point out that, even at 10 years old, the crypto currency space is still in its infancy , and mass adoption is around the corner.
Some will claim that the main purpose of Bitcoin is now a Store of Value, a purpose which more and more people are embracing especially those living in countries with economic uncertainty. The value of Bitcoin, we’re told, will only keep rising and rising from here, and why would you want to spend something that will be worth significantly more in the coming months or years ?
There is then the argument that Bitcoin was simply the pioneer, the first mover the defined that space, but destined to be just that, and in actual fact one of the supposed “alt -coins” will actually rise up to become the first world currency, and this event is also imminent.
Lastly, there are the technical considerations, one being that Bitcoin on its own has a slow transaction speed when compared to Mastercard or VISA. This will not be sufficient for a global currency, let alone a digital one.
So where does the above leave us ?
If you analyse the above, it seems like the biggest blockers to Bitcoin being a successful currency are the concerns around scalability and general usability. Nothing concerns the actual price of Bitcoin , unless you then want to talk about Bitcoin as a store of value , which I’ll cover later.
So, if we could make progress in the ease of use of Bitcoin, the transaction speed, and just the overall availability and experience, we would be making further progress towards Bitcoin being a huge success as an alternative currency ?
Well, this is exactly what is happened in 2018.
Due to the highly secure nature of the original Bitcoin blockchain, the number of transactions per second that could be performed was not very high. For the last few years, many bright minds have been forwarding theories on how to improve this situation. The first of these was Segwit.
Segwit stands for “Segregated Witness”. To explain the concept simply - the maximum “block” size in the Bitcoin blockchain is 1MB, and it is argued that this should not be increased for security reasons. This, however, does limit the number of transactions on the network to about 7 per second. Segwit was proposed by developer Pieter Wiulle in 2015 to fix a bug, and it removed the signature of the transaction ( the “witness” ) to outside the block. This had a bonus affect of making the transaction size smaller, which meant that more transactions could fit into a block, meaning more transactions per second. The term SegWit hence stands for “Segregated Witness”, ie. the transaction signature or witness being segregated to outside the block.
Now this was done in a way to maintain compatibility, but the wallets had to be upgraded to SegWit to enable Segwit transactions. In early 2018, the number of SegWit transactions on the Bitcoin network was in the low single digits, but at the time of writing in late 2018, roughly 50% of transactions on the Bitcoin MainNet were SegWit transactions.
Thus 2018 was an important year for the successful rollout of SegWit.
This is the big one for both transaction speed scaling and general accessibility of Bitcoin. The original Bitcoin blockchain implemented security due to the cryptographic fingerprint of each block , and the consensus protocol used, the process by which nodes agree on the validity of each block. The problem is that doing all this work takes, well……work ! This process was never the fastest and the theoretical transaction rate for the Bitcoin blockchain was between 3-7 transactions per second.
While this was acceptable in the early test days of Bitcoin, this will never work for a platform that wants to become a global currency. Compare this with the VISA network , which averages around 1667 transactions per second, and could go higher theoretically.
One of the proposals which rapidly gained favour was an “off-chain” scaling solution, enabled by the above-mentioned SegWit upgrade.
What the above-mentioned SegWit enabled was the ability to implement off-chain scaling, ie. improve the overall transaction speed of the network by running smaller transactions off the network and then doing a commit to the network at intervals. An individual making a purchase with Bitcoin would pay an amount to a node, and the speed of these transactions could be very high. Only at certain intervals, when the node wants to reconcile, or be closed entirely, will an actual transaction be completed on the main Bitcoin blockchain.
The implementation of these nodes is called the Lightning Network. Many startup companies were formed and started deploying Lightning Nodes in early 2018. While there were only a few nodes in January, this has now grown at an exponential rate. Now actual Bitcoins will have to be transferred on the main blockchain to these nodes, for parties to transact with, and at the time of writing an estimated 500 BTC have been moved into Lightning Nodes. The growth in the network capacity from the start of 2018 to now, as illustrated below, is very encouraging.
In a year where the actual price value of Bitcoin has dropped followed by negative headlines, the growth in these nodes is the real story, and if anything, a very encouraging sign that a massive ecosystem is thriving around Bitcoin.
Thus 2018 was an important year for the successful rollout of the Lightning Network.
Apart from transaction speed, the other concern around Bitcoins success as a currency was around accessibility. Wallets were perceived by some as difficult to use, and certainly not friendly to the man in the street. To obtain Bitcoin you had to sign up at one of the exchanges - could they be trusted? It really seems, even today, that Bitcoin is the domain of the computer nerd or the day trader.
One of the possibilities opened up by these lightning channels is that vendors who want to transact in Bitcoin could now build offerings around the Lightning Network , with many merchants busy developing solutions around it. A report in September 2018 stated that over 4000 merchants had gained access to Lightning channels to facilitate payment. If this keeps going, it will have a massive impact on the general availability and feasibility of Bitcoin as a global currency.
What we’re now also seeing are some of the bigger companies get serious about this space. One example was the following leaked report, speculating that tech giant Samsung may be investigating integrating a hardware (cold) wallet into future smartphones. This would be a massive boost to crypto currency adoption and accessibility.
While Samsung have denied the reports at the time of writing, I’m predicting that this will indeed happen - whether with them or another manufacturer. It is just too much of an obvious step. Phones with hardware wallets are just the beginning , and in 2018 we started to see signs of whats to come.
Thus 2018 was an important year for improving the accessibility of Bitcoin.
Thats a big hardware name potentially embracing the world of Bitcoin. What we’d like to see though are big retailers and institutions jumping in on the other side as well. For that, we need to talk about ….
For years, people have been saying that for Bitcoin to be successful, it needs to be regulated and secure, with the big names in banking involved. This thought, however, brings fear and anger in equal parts to the Bitcoin traditionalists, who will argue that the point of Bitcoin in the first place is independence from traditional institutions.
The thing is, though, that it was only a matter of time before we saw some big names do something in this space. Enter Bakkt.
The curiously named Bakkt ( some say that it refers to “Backed”, referencing the significant corporate backing that the project is receiving ) is an ambitious project that aims to become the worlds first open, seamless global ecosystem where consumers and businesses can buy, sell, store and spend digital assets simply and safely. Quite a mouthful, but this has the potential to be the breakthrough that takes Cryptocurrency mainstream. It more than an exchange though, Bakkt will facilitate trading in crypto and payments for merchants. Announced in August 2018, Bakkt was created by the people behind the NYSE, and the two big names that were part of it at launch were Microsoft and Starbucks. Thats right, this project will scale globally running on the Microsoft Azure platform, and with Starbucks involved it seems like the ultimate aim will be to allow people to easily pay for their coffee and breakfast using crypto. Which is the holy grail.
Bakkt was supposed to launch in December 2018, but has been pushed back to Jan 24, 2019. According to the CEO of Bakkt, Kelly Loeffler, the interest in the platform has surged and Starbucks isn’t the only retailer onboard, although no other names have been released at the time of writing. Still, if you see the potential of this project, you will know that this is something that has been eagerly awaited for years, and simply by launching, could cement that cryptocurrencies are here to stay.
And 2018 was the year when Bakkt was announced, making it a landmark year again for both Bitcoin and all cryptocurrencies.
There have been other smaller developments in 2018 in addition to the above, including a real reduction in Bitcoin transaction fees. Now, the tone of this article thus far has been somewhat positive. Surely, you counter, that this is at odds with the general sentiment out there at the moment ? Many are predicting ( again ) the end of Bitcoin and are smugly posting on LinkedIN and Twitter about how it was a bubble and a scam.
Well firstly, to counter your counter, if we want Bitcoin to be a successful digital currency, then quite simply, you would need to have in place security, accessibility, scale and mainstream support. All of the above speak to exactly that, and the breakthrough in getting to the above all happened in 2018.
Secondly, once the above is in place, especially mainstream support, Bitcoin could have a value of $100 per Bitcoin and be a successful digital currency. Why must it be worth a million dollars to be a successful currency? That makes no sense.
Now, if we pose the question as to whether Bitcoin is a store of value, a new asset class, then you would want to look at the valuation of the asset. A steep drop in price, as seen in 2018, does indicate a problem. I won’t speculate as to the reasons for the 2018 crash, except to say that if critics are calling it a bubble, it was the latest in a long line of bubbles, and the overall trend indicates a parabolic growth curve. What I will say though, is that when you factor in all the developments listed above, there is a lot of work going on in the background for something that is supposed to be dead according to armchair experts. And if the expected outcomes of the above are realised and we do see progress in actually being able to use our cryptocurrencies as currencies, then the demand, as well as the built in deflationary mechanisms (like the guaranteed finite supply) may well end up causing the value of the asset to rise……. Something to ponder in spite of the doom and gloom.
Bitcoin in 2018 - the price may have gone down (perhaps temporarily), but the value certainly seems to have gone up.
Thavash is a Data and AI Solution Specialist (SSP) at Microsoft. He looks after the Data and A.I business for the Financial Services industry in South Africa. Thavash studied Electronic Engineering at the Durban University of Technology, majoring in Computer Systems Engineering and also completed a Bachelor of Commerce majoring in Informatics and Quantitative Analysis from the University of South Africa.