The debate that saw the Bitcoin community branch off into two groups appears to have reached some kind of compromise. The debate did have prolonged effects on the prices, functionality and the sentiment surrounding the digital currency. Over two years the debate had affected the prices in phases and packed a hopefully final punch in March that took the prices to below $1000 after a couple of months. The prices have now stabilized after the news of the hard fork was confirmed for an increase in blocksize. Let’s dive deep into whether a blocksize increase is the need of the hour and what the studies have revealed:
The time lag in processing the transactions:
A study by UCL Centre for Blockchain Technologies reveals that around 43% of the transactions are still not included in the Blockchain even after 1 hour from the first time they appeared on the network. Even more concerning is the fact that 20% of Bitcoin transactions are still not included on the blockchain even after 30 days. Over three months of the study revealed that in 12,000 unique nodes connected to the network, the confirmation time is inefficient for large value transactions. This exposes the inefficiency that has culminated in Bitcoin networks and why the blocksize debate has come into the picture as so critical to solve.
Reasons for lagging and inefficient transaction processing
The real problem for the non-inclusion of some transactions is due to the fact that there are no mechanisms that ensure that all transactions are actually processed. The miners are free to choose what transactions are to be included in their block. Satoshi did include a mechanism called ‘First Seen’ but it’s not enforceable at a protocol layer. The first seen method is a typical first in, first out method abiding which transactions can actually be processed instantly. However, instead of ‘first seen’, miners are opting for transactions that give them better incentives.
Having no/fixed incentives for transactions might be a solution as miners would stick to ‘first seen’ transactions while processing once they see incentives aren’t based on the amount being transacted. However, Pappalardo said that:
“What we suggest is that miners have no incentives to include all transactions and therefore some are missed and after a while it becomes increasingly unlikely that a miner will willingly include old transactions. Without any incentive for proper processing and timely recording of transactions, it is unlikely the system will spontaneously invest efforts to become more efficient.”
While blocksize increase seems inevitable, the inclusion of mechanisms to make sure all the transactions are processed in time would be essential to keep the Bitcoin network honest and efficient.
‘Safe Haven’, ‘Digital Gold’, ’Backup Asset’ are all the adjectives used to describe Bitcoin in 2016. The reason behind these is fairly simple and intuitive. In the face of Geo-Political crises, which led to economic turmoil across the globe, Bitcoin came to the rescue for many investors. Traditionally Gold has been the safe haven for such kind of market turmoil. The primary reasons for it are the scarcity of Gold and its non-correlation with other assets. With the cryptocurrency’s limited supply and ease in transactions, it has literally gained the name and status of ‘Digital Gold’.
Interestingly in ‘2015’ Bitcoin was the best performing asset class that outperformed traditional index funds and complex portfolios. The trend has continued in 2016 and Bitcoin still remains unbeaten when it comes to returns. Infact it has been performing better than Gold, making investors wonder if it can actually replace Gold in their portfolios. Let’s look into the aspects which make Bitcoin better than Gold:
Ease of Transaction:
Major investments in Gold do not actually result in handling of the commodity. Investors generally move the funds invested to reap their profits after a period of time. When it comes to bitcoin, it’s an investment that you can actually transfer, spend and utilize in day to day life thanks to the growing adoption of the currency. The ease with which funds can be moved in and out of the currency has always attracted big time investors for short term hedging. This one advantage Bitcoin has over Gold, Gold cannot be used in day to day life for various transactions directly.
Greater Extent of Non-Correlation:
Non-Correlation with other asset classes is a very important parameter which makes an asset a hedge balancing portfolio diversifier. As scarce and untouchable Gold is, it takes a dive along with other metals when the oil markets are collapsing. Fundamentally that is expected of any commodity as oil prices have a direct bearing on the transportation cost. The cost of a commodity also factors this cost and hence the commodity becomes cheaper when oil prices drop. Bitcoin being a digitally programmed asset, has no direct correlation with any of the physical commodities as the fundamental markets driving the price are totally different. This makes it an ideal hedging component in traditional basket of commodities.
Performance till date:
This year, Bitcoin has beaten Gold by a big margin and is still enjoying a healthy uptrend. While Gold gained 8.73% and outperformed S&P 500 and Twenty-year US Treasury Bonds, it still couldn’t match Bitcoins 100% overshoot.
|SPDR Gold Shares (NYSE:GLD)
|Bitcoin Investment Trust Shares (OTCQX:GBTC)
|iShares 20+ Year Treasury Bond
With a known 21 million limited supply, perceivably it is being considered further scarcer than Gold and will surely see a significant rise in value in the years to come.