March 2017 came in like a lion for Bitcoin as, for the first time ever, one Bitcoin sold for more than one ounce of gold. As I write this, the Bitcoin currently in circulation, if sold at current prices, would bring in more than $20 billion US (that’s nearly 12 times the market capitalization of its closest competitor cryptocurrency, Ethereum). As it enters its ninth year, the future looks very bright for an idea that many have spent the previous eight years scoffing at and predicting the imminent demise of.
But this time they may be right. Bitcoin is in crisis, and the crisis could kill it.
A few days ago, I spent a small amount of Bitcoin (in the range of $5 US in value). The transaction took nearly 30 hours to confirm. This was because I elected to pay only the minimal “miner fee” (about 25 cents, or about 5% of the amount I wanted to spend — 1% would be a better target in my opinion).
To survive and thrive over the long term, a cryptocurrency is going to have to be used as a medium of exchange by regular people buying regular things at regular stores. This means that transactions have to be confirmed quickly and that the fees involved have to be attractive versus PayPal and credit cards.
Recently, transactions on the Bitcoin blockchain have slowed waaaaaaaay down for people who are unwilling to pay fairly high “miner fees.” The (as non-technical as possible) explanation of that term:
Bitcoin is created (“mined”) by people (“miners”) who run computer software that keeps track of Bitcoin transactions (“updates the blockchain ledger”). The miners are rewarded with a bit of the newly created Bitcoin and with miner fees.
As more and more people use Bitcoin, more and more computer power is required to update the blockchain ledger. Transactions with the minimum fees included go to the back of the line and are taking longer and longer to process.
If this isn’t fixed, Bitcoin will become nothing more than a store of value for people who move it around in quantities big enough to justify large fees and long waits. If that happens, the value of Bitcoin will plummet back toward a famous early transaction in which someone paid 10,000 Bitcoins for two pizzas. No customer or shopkeeper is going to pay a dollar in fees and wait 30 hours for confirmation to buy or sell a can of cola.
Two proposals for improving the system, “Bitcoin Unlimited” and “Segregated Witness,” are under consideration by the Bitcoin developer and miner communities. I’m not the guy to ask about the technical virtues of each proposal, but my sense is that Roger Ver, the main evangelist for Bitcoin Unlimited, has a better understanding of what needs to happen and why. That is, he sees that small, fast, low-fee transactions are the future of cryptocurrency.
If Bitcoin developers and miners don’t get that fact through their heads, and soon, cryptocurrency as such won’t die — but Bitcoin will cease to be people’s cryptocurrency of choice.