BITCOIN’S ACCELERATING MOMENTUM

Bitcoin’s momentum is accelerating and cannot be ignored. Many commentators focus on the price of bitcoin, its volatility, the amount invested by VCs in Bitcoin companies and their valuations - but these provide a largely superficial view, giving little insight to Bitcoin’s true dynamics. Instead, other indicators illustrate better the dramatic momentum underway.

The peak daily Bitcoin transaction rate so far is 241 thousand transactions, achieved in September 2015. Bitcoin transactions volumes rose from an average of 87 thousand transactions per day in December 2014 to 197 thousand per day in December 2015, an annual increase of 125%, a rate that is accelerating. Usage of Bitcoin may be low compared to mature payment systems, but it is growing strongly.

The hash rate, the rate at which miners make calculations over the Bitcoin network to create new blocks and confirm transactions, averaged 684m giga hashes per second (gh/s) in December 2015, up from 287m gh/s in December 2014, an annual increase of 138%. In contrast, in early 2014, the rate was typically around only 9m gh/s. The processing power of the Bitcoin network is massive and growing fast - there is clearly an arms race going on, with the miners competing for block rewards and transaction fees.

It is easy to understand why – in 2015, miners’ aggregate revenue was $375m. In December 2015 alone it was $54m, up from $39m in December 2014, a 40% increase. Mining is big business, and a growth industry based on genuine revenues.

DEFINING EVENTS FOR BITCOIN IN 2016

There are two significant events in 2016 that will define Bitcoin’s success for the next few years. Firstly, the theoretical limit of around 300,000 transactions per day will be hit, most likely sporadically in April, and then regularly by June (the Bitcoin protocol regulates block creation at the rate of approximately 144 new blocks per day, and each block can hold only a finite number of transactions).

Secondly, sometime around the end of July 2016, the block reward miners receive for creating new blocks, halves from 25 bitcoins to 12.5 bitcoins per block (this is hard-wired into the Bitcoin protocol, with the halving of block rewards repeated every four years).  Currently, block rewards form the vast majority of miners’ revenue (transaction fees were less than 1% of their total revenue in 2015), so this could be potentially devastating for miners, unless the price rises - which it may well do given the supply of new bitcoins is halving.

It is difficult to predict what will happen when these two events occurs. Perhaps miners will migrate to a fork such as XT with a bigger blocksize to accommodate more transactions, perhaps transaction fees will increase dramatically in order to get a transaction confirmed – no one knows.

 However, extrapolating current trends into the first half of 2016 suggests:

• 235 – 340 thousand transactions per day by July 2016
• A hashrate of 1bn gh/s by July 2016
• Total miner’s revenue for the first half of 2016 of $350m - $405m
• An average bitcoin price for the first half of 2016 of $475 - $555 (with the price reaching possibly $660 by the end of June)

Whether it is valid to extrapolate Bitcoin trends with these two defining events approaching, and what happens after they occur is anyone’s guess. However, Bitcoin has shown consistently it is a resilient network which gets stronger the bigger it gets and the longer it endures – if it powers past these events without faltering, 2016 could be the year when Bitcoin’s momentum proves to be unstoppable.

Historic Bitcoin data in this blog can be downloaded and verified at https://blockchain.info/charts