Bitcoin, a roughly 10-year old pioneer and top crypto-currency by market valuation had its first chapter dominated by a long-term steady price rise primarily underpinned by staunch believers and high-risk takers in the face of dismissive sentiments from the mainstream world.
Designed with a finite supply that theoretically curbs inflation (making it a deflationary asset), Bitcoin attracted a lot of speculation and subsequently, a lot of scams, with its halving events (programmed periodic supply cuts) being smothered in hype, which is where we find ourselves once again with its third halving set for the 12th of May, 2020.
Partly determined by an assortment of metrics such as the number of accounts on exchanges holding money and placing buy orders, number of new wallet(s) (addresses) being opened and the number of Bitcoin-related searches on search engines, the interest in, and demand for Bitcoin is one factor that stakeholders will have to get better at gauging.
As the juxtaposition of Bitcoin’s price performance with that of traditional equity indices and currencies becomes louder, a lot more attention will have to be paid to how governments interface with the crypto-currency through new legislation and other prevailing policies executed by their agencies. As of now, the governments of multiple countries have signaled an acknowledgement of Bitcoin’s value.
With seizures and systematic auctioning of Bitcoin linked to criminal activity, congressional hearings and litigation involving entrepreneurial entities in the general crypto space, and the green-lighting of incorporated crypto-exchange operations from New York to Uganda, there’s no doubt that Bitcoin has steadily muscled its way into the pockets of many.
Attention will have to be paid to the numerous overt and indirect tools of influence by governments on Bitcoin such as anti-money laundering law enforcement through KYC (Know Your Customer) and transaction information sharing requirements for crypto exchanges, equity flow controls through regulatory filing and registration bureaucracy, and taxation.
All these will contribute to the larger picture that is the use of crypto-currencies and Blockchain technology to build state leverage in modern-day economic warfare scenarios such as evasion of sanctions and participation in, or utilization of alternative markets and supply chains etc.
A compact look into various countries’ regulatory attempts can be found in this summary.
Sustainability of miner operations
Mining farms deal in the creation of new Bitcoins and validation of transactions on the Bitcoin Blockchain (the network on which Bitcoin’s ledger is distributed), activities which are fundamental in the Bitcoin ecosystem.
The ability to predict how much focus mining farms put on rapid scaling, the implications that halving, electricity costs and the logistics of acquisition of latest machines have on operational efficiency, and the subsequent selling strategies that mining farms adopt to remain profitable will help massively in predicting Bitcoin supply, especially in the short-term.
A more in-depth conversation on this subject, with some notable industry names can be found here.
Historically, the applicability of Bitcoin and other crypto-currencies has been constrained by certain attributes of the block-chains on which they are founded such as the constant requirement of consensus on the state of the distributed ledger amongst computers on the network to validate transactions.
This in turn hinders the realization of super high transaction speeds which are requisite for real world applications such as the use of crypto-currencies for payments in day-to-day trade.
Efforts to boost efficiency in such areas have seen a bumpy evolution, with most solutions requiring concessions on decentralization and network security, which many Bitcoin purists consider a betrayal of the very core ideals that birthed this technology (major scaling examples are available in this mini-journal).
Tracking the number of new software missions and the developers that enter the Bitcoin space, along with their real-time progress in securing funding and deploying it to create layer 2 solutions like the Lightning network that address payment applicability is key.
A close eye will have to be kept on other endeavors such as Atomic Loans’ move to create Bitcoin-backed lending instruments that strengthen the crypto-currencies footing in the decentralized finance space, and Blockstack’s Proof of Transfer, a new consensus mechanism that would use Bitcoin’s Blockchain in transaction logging, hash storage and rewarding of participants on a Blockchain.
The recent introduction of Bitcoin options and futures contracts is a major development that has enabled cautious enthusiasts to interact with the crypto-currency’s price action without necessarily owning large sums of it.
The availing of up to 100xleverage to traders, amongst other incentives, has substantially contributed to the volatility witnessed in the market as drastic trading decisions are often made in a bid to meet the account requirements set by those offering these contracts, while also mitigating losses during periods of large price movements. Here is a more detailed breakdown of how crypto-derivatives are affecting the price and safe-haven potential of Bitcoin.
All-in-all, stakeholders will have to get better at identifying relevant metrics in any of the pressure points stated above, the correlations between them and the extent to which they prove causation, and the various situational nuances that could make some of this data misleading.
These may include possible misrepresentation amongst mining farms to conceal their strategy from competitors, mixing activities by owners of larger crypto holdings that could lead to a skewed interpretation of custody statistics like number of wallet addresses, and other forms of data manipulation by crypto exchanges.
Remember to always remain realistic about how much you can know and how true it can be, let the new chapter begin.
Aijuka Duncan Ngabirano is a Ugandan writer based in Kampala, with a keen interest in crypto.