What moves the price of bitcoin? What moves the price of other crypto-currencies, like Ethereum?
Ask six different crypto “experts,” get six different answers.
Here is my answer:Technological innovation.
For bitcoin and other coins to become more valuable, in the long run, they must become more useful.
Crypto-currencies, when all is said and done, are programs. Programs are supposed to the “do things” that make people’s lives easier.
Therefore, developers need to build new features or make existing features work better.
End of story.
Were there any technological enhancements in 2018 to bitcoin and any other coin that made them more useful?
No, not really. And that’s a big reason why 2018 was so disappointing.
But here are two stories that promise to make 2019 a better year.
Bitcoin and the Lightning Network
The big knock against bitcoin is transaction speed. Transactions are only processed when a miner “mines” a block which occurs once every 10 minutes.
That’s the MINIMUM time to complete a transaction. Because there can only a maximum of 4000 transactions per block, that means the bitcoin network can only process 6.5 transaction per second.Compare that with VISA network which is capable of handling 24,000 transactions per second.
To repeat: low transactions speed (only 6.5 per second) and latency (10 minutes to validate) is the big knock against bitcoin.
Enter the Lightning Network.
It’s not part of the bitcoin core infrastructure, but rather another layer built on top.
The Lightning Network enables users to create payment channels between any two parties on that extra layer. These channels can exist for as long as required.
Because they’re set up between two people, transactions will be almost instant, and the fees will be extremely low or even non-existent.
The Lightning Network is powered by “nodes,” or servers responsible for creating channels between different users, in return for transactions fees.
This website is useful for monitoring the growth of the Lightning network
As you can see, there only 2500 nodes (servers) with less than 20,000 channels.
The network has just started to grow. For an average person to pay for a cup of coffee with bitcoin, there is still lots of work to be done.
But it’s happening.
Ethereum and Constantinople
In the last quarter of 2017 and first quarter of 2018, there was unbelievable hype about Ethereum and at one point, one Ether was worth as much as $1400.
Today it’s worth less than a tenth of that ($125).
What happened? Nothing happened. That was the problem.
In December 2017, it became painfully apparent that there were HUGE scalability issues with Ethereum, as developers tried to implement some of its features.
Around Christmas, a distributed application (DAPP) called crypto-kitties was such as huge success that it literally crippled the network for days.
Ethereum had to be fixed, immediately. But it was not.
Network upgrades were pushed back, first the spring, then the end of summer, finally November, and the FINALLY the first significant upgrade of Ethereum in more than a year, is happening this Wednesday (January 16th)
What does Constantinople fix? Well the list of upgrades and bug fixes is here.
The list not really understandable by non-programmers (that would be you and I). However, one phrase is repeated over and over throughout the technical brief:
“This EIP makes it cheaper (less gas is needed) to do certain things on chain.”
To translate: The chain is the record-keeping section of Ethereum, much like the blockchain is for bitcoin.
But Ethereum is different than bitcoin in that you can do more complex operations within the code base, like run actual programs.
But to do that, you need to spend “gas” to use the resources of the Ethereum system.
How do you get “gas”? You buy with it Ethereum, and Ethereum costs real money.
The problem with Ethereum right now is that as well as not being able to scale enough to meet demand, it’s expensive to run applications on the network.
This upgrade should fix some of those issues, at least.
Long-term, the only way for bitcoin (and other crypto-coins like Ethereum) to increase in value is by adding functionality.
Think of the smartphone revolution. Who wanted a smartphone when network speeds were 2G? What happened when 3G hit the market? And then finally, 4G.
In 2018 developers stopped working, probably because they were showered with money with no strings attached.
Easy money makes people lazy, and a hungry dog hunts best.
In 2019, the easy money is gone and people are getting hungry.