A few thoughts - Tuesday, March 10, 2015

[Steve Sokolowski]

A few thoughts for today:

21 is not using bitcoins

In /r/bitcoinmarkets, you can see the exuberance over the latest news that a $116m investment was made in 21 Inc., a blockchain company. I call it a "blockchain company" rather than a bitcoin company because they talk about the "Internet of Things" and similar services that focus on the blockchain technology and not necessarily bitcoin. Unlike most speculators, the way I read this article is that 21's technology, whatever it is, is not focused on bitcoin but on using blockchains for some other purpose.

I don't see this news as significant for bitcoin because there's nothing in the company's plans that states that they will actually be using bitcoins for anything they are doing. The release specifically states that the reason bitcoins have not been adopted is because people don't see a need for another currency. It looks like they are attempting to use blockchains for what they see as more important uses than currency, which actually makes it seem as if bitcoins are the past rather than the future.


Announcements are cheap

Whatever the case, announcements and articles are plenty and products are few. Most of the bitcoin forums are flooded with articles by people stating that bitcoin is an incredible investment and it is like the stock market in 2008, but all of these articles are written by people who have invested huge money in bitcoin or bitcoin companies. Employees of Pantera and Andressen Horowitz frequently contribute to news sites about this; yet, I don't see any pieces written by traditional financial advisers. I'll give some credence to this sort of investing advice when I see neutral parties providing it.

Likewise, despite all of this positive press, the products that have rocked the news over the past few years are nowhere to be found. OpenBazaar, bitcoin's killer app, published yet another series of updates and new deadlines (but no usable product). Coinbase received a huge sum of money, but the number of merchants actually accepting bitcoin is increasing slowly if at all.


The fundamentals have not changed

A few weeks ago, I stated that the market was in for a few months of decline. I continue to support this statement. After this latest series of announcements die down, people will come back to reality and realize that nothing has really changed. Venture capital investment does not equate to more people buying and spending bitcoins. There are quite a few similarities to the situation occurring now and what happened last June: it's been the right amount of time and there are signs of progress, but the fundamentals issues holding things back like user adoption have not changed.

The greatest issue I see at the moment is that the 1MB transaction limit is woefully insufficient for anything close to the sort of grand plans that are being discussed for these companies. I've criticized the bitcoin developers before for working on unimportant things (like the removal of trivial configuration settings). Additionally, Gavin Andresen's proposal to increase the size of blocks to 20MB and then increase at a slow rate is not quick enough to support the exponential growth that is necessary for the network to survive. The rate of block size increase needs to be faster because people are not going to adopt bitcoin at 30% or 50% per year; they will do so all at once, at which time there will be no option but to perform another dangerous fork or risk a NAT-like solution of alternate chains being adopted.

But even a 20MB block limit would be a good start if the developers would prioritize this feature over some of the other less important things that are being worked on. I don't think that there will be any bubble until this critical issue is resolved. If there is one, then it will crash once the network gets overloaded with transactions.