When will the tipping point arrive?

[Steve Sokolowski]

Given the threats to Bitcoin at present, a tipping point must occur for cryptocurrency. It simply isn't possible that the status quo of a stalemated community that oversees increasingly inefficient products is sustainable for the long term. One can question who will be in charge when it is over, which coin will be dominant, and whether Bitcoin will ever increase its blocksize, but the current stalemate will be definitively resolved in some way because a bitcoin price above $700 is based far too heavily on speculation about the currency's future for it to be sustainable.

I've already spent a lot of time discussing how the situation could end up, so I'm not interested in reviewing more about Segregated Witness or Bitcoin Unlimited or Ethereum. Rather than rehashing these issues, I would prefer to write about some of the indicators I'm watching to predict when this tipping point will occur. The timeframe for change is very important to businesses like ours that need to make plans for the future. The timing is perhaps more important than what actually happens, because we can deal with the result once there is certainty. What I'm noticing is that most of the indicators are accelerating and becoming increasingly volatile, a sign I take to mean that something is going to change dramatically soon.


1. Bitcoin transaction fees

Transaction fees on the Bitcoin network have been inching up for over a year, but there has been a dramatic increase in fees over the past two weeks. Our payout fees rose from 80 cents to over $1.35, nearly doubling our costs. These fees are now eating over $500/yr out of our profit.

Nobody can say that he or she knows at what level fees start to cause significant disruption to users. I know that I put changing our Coinbase payouts to ETH on our list of tasks after multiple algorithms are released when fees rose above $1. What that change does is to push fees off to Coinbase, because now our ETH gets sold there and they will have to pay for all the payouts on the BTC network.

There is a certain fee level at which Coinbase's business model will implode, because they will no longer be able to afford paying for the free transactions they offer. Right now, bitcoins on Coinbase are worth more than bitcoins stored in a traditional wallet, since I know that a high percentage of money will be lost sending traditional wallet bitcoins to anyone. Within months, I imagine that we will start to see a divergence between the value of coins stuck in certain types of wallets from each other. Those who believe fungibility is important for a currency will be severely disappointed. Additionally, the failure of a company like Coinbase would be devastating to the industry and would set the stage for Poloniex, which focuses on altcoins, to ascend to a dominant position in the United States.

The exponential increase in transaction fees recently cannot continue for much longer without a major change to use cases and business models. My opinion is that current business models are being forced onto other chains, while the people who would supposedly pay more, like ETFs, are not and may never be in Bitcoin, and that would leave nobody wanting to use the Bitcoin network.


2. Bitcoin price volatility

After years of relatively stable prices with a few periods of explosive appreciation, bitcoin prices are on a rollercoaster. Ostensibly, the current crash is supposed to be about China's restrictions on bitcoin trading, but it seems to me that was simply an initial trigger that exposed worries about a more existential issue. As price continues to crater, people (especially naive offchain traders) will for the first time begin to truly question whether Bitcoin has any future in its current state.

Some believe that a trend reversal has already occurred; others believe that there is still a possibility that we are still in a "cup and handle" formation that will signal a huge bubble in the coming months. Whichever happens, nobody thinks that price is going to remain at current levels for long - another sign that a tipping point is approaching.

I don't see a difference as to whether the current crash causes a dramatic decline or whether the next bubble does. Traders are going to ask why they are paying so much for something that has repeatedly failed to achieve the promise they've been waiting eight years for and has now twice failed to rise above the same all-time high.


3. Difficulty increases

After a period of explosive growth, Bitcoin difficulty remained relatively stagnant or even in decline for years. In the past few weeks, hashrate and difficulty have started to skyrocket again as manufacturers build new miners and mining farms come online.

Each time difficulty increases, a higher cost of mining is the result. The effect is that some miners turn off equipment because it is no longer profitable. There are two effects from this: first, the block time increases since fewer blocks are being mined for the next two weeks, delaying confirmation times. In the current fragile state of the network, a small reduction in capacity has a catastrophic effect on confirmation times and fees. A 5% increase in block times does not equal a 5% increase in fees; it may be 200% or more. This causes people to switch to other networks or to stop using cryptocurrency.

Second, miners are incentivized to take action to increase their profits. Miners are currently content to do nothing because they are making money. If the revenue stream dries up, they will probably be more likely to do anything they can to get back in the green, including things some they previously considered risky like implementing Unlimited blocks.

Difficulty is now increasing at a much faster rate in the past. It cannot continue to increase for much longer at this rate before the cost of mining exceeds price. As before, a tipping point is approaching and either a lot of miners need to go out of business to stop the increase in hashrate, or they will need to do something to increase price.


4. Forum censorship and public relations

While the debate has been contentious for a year, both sides of the blocksize controversy have become more vocal in recent weeks.

In the past few posts, I covered the issue of excessive forum moderation. The latest method of censorship seems to be using technicalities of "doxing" to get accounts banned from forums that prohibit it. While I'm sure this has always been going on, it's also a trend that has accelerated in recent weeks. Not only did our account get banned from reddit (despite having "doxed" users for 2 years prior), but other well-known figures like Gregory Maxwell (nullc) have also been banned on ridiculous interpretations of these rules. I even discovered a 60-post argument over whether it was a "dox" to say my name in another forum. There, people threatened to and actually banned each other and talked in code just to avoid the censorship.

The problem with these censorship wars is that if the other side doesn't respond, then one side is perceived as "right" because nobody else can refute their arguments. That's why I chose to respond. This is a feedback loop - where use of these tactics results in censorship, the victims respond and get the aggressors banned, and more and more people get involved until eventually either the rules change or people go elsewhere. This tipping point is approaching as well, especially on reddit where the censorship is most rampant and where it is easy to get people permanently banned for accidental violations.

Another interesting development recently is that of developers lashing out over Twitter. As Chris says, once Core developers resort to "the project won't be able to innovate without me," frustration is starting to set in. (Ironically, many people who disagree with the Core explicitly believe that the industry would be better off without their participation.) These sort of tweets are exactly what have been appearing over the past few days.


5. Larger block signaling

This is a short one, but the number of blocks signaled for a large block size has had a 2% uptick in the past week, after a smaller increase before that. Previously, support for larger blocks had seen months of stagnation.

While activation of Bitcoin Unlimited won't occur at current levels, seeing Unlimited support approach 30% or 35% would wake people up to the change, just as one pool's gaining 50.6% of LTC hashrate did recently. Though no immediate changes occurred due to the hashrate spike, it alerted people to something that was happening which people previously had ignored.


6. Altcoin volatility

Altcoins had a period of remarkable stability for a while, but now the volatility has returned, with coins like Monero appreciating and crashing repeatedly. Since Monero's usage is nowhere near a required value of 0.03 bitcoins as it was worth earlier this year, people are obviously looking for other options by throwing money into many coins and seeing which ones will stick. Whereas previous bubbles were often unapologetic "pump and dump" schemes, the money now seems to go into coins that are completely different from Bitcoin.

Given enough time, one of these days a coin is going to give Bitcoin's market capitalization a run. and when that happens, all bets are off. Ethereum is already positioned to do it. Though ETH is very different from bitcoin, there are few differences in terms of what the two coins can do. All the major exchanges trade in ETH, you can pay for items in ETH with payment processors like Coinbase, and even OpenBazaar is supporting altcoins.

While Monero is unlikely to cause a shakeup due to its low support by merchants and exchanges, what will happen when ETH starts its next bubble? Few seem to recognize that the "first mover" advantage touted for Bitcoin is almost entirely gone, now that ETH is so widely traded and accepted. If the value of ETH were to start to approach that of Bitcoin, it isn't clear why the new owners of ETH would see a need to convert back to Bitcoin when it is so widely supported and technically superior. If this tipping point were reached, it would occur literally overnight, perhaps initiated by a few rich traders, without any warning.


In conclusion, all of these indicators seem to imply that the cryptocurrency industry is reaching a tipping point, where a decision is finally going to be made about its future. The rapid change in these indicators are important because they cannot continue at their current rate without a fundamental shift to the state of the industry. It's not clear what the outcome will be when the tipping point arrives, but change often occurs exponentially, and we should not be surprised to find that events begin to move much more quickly in the near future.