The booming city of Bitcoin has gotten congested.
It’s choked with traffic. Costs are going up. And the residents are getting cranky.
Bitcoin was never designed for all this. There’s no way that, in 2009, Satoshi Nakomoto imagined his network would be handling 207,322 transactions per day, and would be worth $31bn.
Now all this traffic is playing havoc with the bitcoin network. Transactions are taking ages to complete. As a result, costs per transaction have gone up.
Lots of people imagine a big future for bitcoin. But until it fixes this congestion issue, the future is on hold.
Bitcoin is of course the oldest and best established cryptocurrency. That’s why it’s so busy. My colleague John Duncan has a different strategy for investing in cryptos though. He’s got a shortlist of the tiny “penny cryptos” most likely to take off, bitcoin style, in the near future.
Choked with traffic
Sticking with the city analogy:
The bitcoin network is a bit like an Old Town at the centre of European cities such as Prague or Lucca (pictured below). A maze of winding, narrow pathways with lots of choke points. Basically: it’s not the system you’d design from scratch for handling huge crowds.
The standard dollars-and-pounds financial system isn’t designed this way. It’s like a modern city; built to handle huge volumes of traffic quickly and efficiently.
So now the residents of Bitcoin City are trying to decide how to fix the problem. They want to make the network more efficient without losing the distinctive things that make bitcoin, bitcoin.
There’s a lively debate going on. It’s getting a bit tense…
The civil war
There are two groups. One group wants to make some changes to free up the amount of traffic the network can handle. This will make bitcoin more useful as a currency alternative. It’ll mean more people will use bitcoin to buy more things.
Sounds fair enough. Who could be against that?
The other group sees things differently.
They worry that the proposed solution to the congestion problem will give a small number of people control over the entire system. They say there’s no point in having a decentralised currency if it’s controlled by a small group. And as well as that, they worry a big change will make bitcoin more vulnerable to hackers.
The two camps have been going at it hammer and tongs over the last few months on forums, chatrooms and social media. And it’s all coming to a head soon.
The two groups both promising to make changes by the end of the summer. Right now, it’s tough to see how the two sides are going to come together. So by autumn, we’ll probably be looking at a “hard fork” – which basically means bitcoin will split in two.
The politics of cryptos
It’s a lot to take in, I know. I’m saying bitcoin is like a congested city… which is in the midst of a civil war… and the likely outcome is for it to split in two?
Ok fair enough, the city metaphor broke down eventually. But it’s not too far off the mark. Like bitcoin, cities are:
Decentralised systems people use to interact with one another…
With physical limits and choke points…
And ultimately, governed by politics.
That last point is really important to get your head around. Cryptocurrencies like bitcoin aren’t managed by computer code; they’re managed by people with their own ideas and their own interests.
This matters because crypto politics effect crypto prices. The ether split proved that (look up the DAO hack!) and the impending bitcoin split will prove it too.
I’ve skated over a lot of this in today’s issue. Tomorrow I’ll talk in a bit more detail how the politics of cryptocurrencies such as bitcoin work in practice. And I’ll explain what I think it means for bitcoin’s value going forward.
I’ve skated over a lot of this in today’s issue. Tomorrow I’ll talk in a bit more detail how the politics of cryptocurrencies like bitcoin works in practice. And I’ll explain what I think it means for bitcoin’s value going forward.