After years of neglect, the financial news has started to report routinely on Bitcoin prices, and even mention some alternative cryptoassets. It’s about time. But the timing of broadcasts doesn’t always work out well.
For example, I listened to the financial podcasts all over my home assistant on Saturday morning, December 23, 2017, and everyone was talking about a historically gigantic crash of Bitcoin. For most of the week, the asset/currency floated in the range of $19,000. Then the darkness fell and Bitcoin briefly traded as low $10,000 before settling (if this word can ever apply) around $12,000. This all happened in 24 hours.
Always looking for something dramatic to report, the financial press got to work with its scripts and broadcasts. There were several problems. Even at its low, Bitcoin was still up 45% from thirty days earlier. It was only weeks ago that I was astonished to tweet about how the price had reached $7,000. My friends and I were placing bets on when it would reach $10,000. I doubted that it would happen by year’s end.
(Years ago, I made a very public prediction of when Bitcoin would hit $1,000, and happened to come close to calling it exactly. The date was November 29, 2013. I was a prophet...until it crashed a few days later to $576. This sent people into a panic, and I recall sweating that one out pretty hard. After that, a wise man told me: predict price or date but never both.)
Let’s look at the 30-day percentage return for the most highly capitalized crypto-assets of this writing.
Bitcoin (BTC): 46%
Bitcoin Cash (BCH): 55%
Ethereum (ETH): 46%
Ripples (XRP): 79%
Litecoin (LTC): 75%
Dash (DASH): 57%
Zcash (ZEC): 51%
This is what I’m looking at now, even as the news reporters are still talking about the crash. Meanwhile, most cryptoassets gained back more than half their losses from the day before. Some have fully recovered. If you had slept through a few days, it would seem like nothing at all happened.
Reporting on this sector is like describing your friend with an extreme bipolar personality disorder. By the time you report one mood, it’s changed. All news is old news.
How Little We Know
From the time Bitcoin was introduced, it faced ridicule, disgust, smears, and anger. This is understandable. Incredulity would naturally greet a technology that achieved something never before thought possible.
As more evidence poured in that this was, in fact, a fantastic and transformative invention, the loathing of it by the elites in finance became more visible and loud. That continues to this day.
From the time that Bitcoin earned a dollar exchange ratio of 2 to 1, people have said it was in a bubble and that a crash was coming. And indeed the crash came – before Bitcoin obtained new heights – and then came again and again. We look back and see one of the highest performing assets in history.
Rarely have so many been so wrong about so much. And yet none of us can fully shake the sense that we are supposed to already know now what we are waiting for the market itself to teach us.
And it’s true that I was an early skeptic. Becoming convinced that this technology could work and even change the world was a gradual process. I had to set aside my preconceptions, examine the evidence, take on a new theoretical challenge, gain familiarity with new fields, and adapt my thinking to the emergent reality.
The great lesson I learned was the absolute need for humility in assessing new technologies. They are emerging so fast and with such enormous power, in a way that is fundamentally disruptive of what came before, that they are defying old conventions. You think you know. Suddenly you discover you don’t know.
The Block Size
The same lesson applies to the epic debate about the blockchain block size. This debate over the Bitcoin protocol raged with a fury for three years. It has been frenzied and tremendously nasty, and has left a trail of Twitter wars that will live in infamy.
Again, at first, I paid very little attention, presuming that it was not unlike any debate among developers of an open-source technology. WordPress developers debate all day, every day, and somehow it all works out.
The problem concerned scaling Bitcoin as it grew more and more popular. With blocks limited to 1 megabyte, transactions times slowed more and more, and miner fees kept growing. This posed a problem for Bitcoin champions (like me) who had long cited speed and low fees as major advantages that Bitcoin had over nationalized monies.
People have told me to drop that old vision, that Bitcoin would not change the world (the “maximalist” position) but instead would provide a different and more reliable way to store wealth. That’s a very different case from the one I heard and promoted back in 2013.
Why did this block size limit exist? It was put in place by Satoshi Nakamoto in 2010, one year after Bitcoin began, and it was done as a security measure against spamming and attacks. Changing that limit would require consensus in the developer community and nodes. Later in the year, the first patch to Bitcoin was proposed that would increase the limit to 7 megabytes but there was very little interest.
As the debate intensified, the terms became more clear. It was about vision. What is the most desired purpose of Bitcoin, to be a store of value or a means of exchange? The store-of-value crowd insisted that Bitcoin was never intended to be a daily currency but rather a final settlement layer. The means-of-exchange crowd said that Bitcoin cries out not just for holding by legacy owners but for actual use as money.
A number of proposed fixes were floated that would achieve a compromise but none obtained the consensus necessary for adoption.
The community that celebrated this technology had long dreaded the idea of a hard fork in the chain. This accounts for why the debate was so passionate and angry for so long. But nothing would stop it: the hard fork happened on August 1, 2017. I recall the sense of waiting for something terrible. But the remarkable thing happened: not much. One Bitcoin became two, the new one called Bitcoin Cash because its larger block size enabled cheaper and faster transactions.
Every owner of Bitcoin who possessed private keys was suddenly in the possession of an equal number of Bitcoin cash. The price opened in the $300s. If that seems low to you today, stop there and consider what this means. When I first had skin in the game on this technology, the price was $14. People were screaming at me that this was absurd and preposterous. That this new and seemingly sketchy token of a hard fork could already call forth a price of $300 is itself a remarkable tribute. (Can someone please remember that the first posted price of Bitcoin was 1/16 of a penny?)
In the course of just a few months, the exchange ratio of this new kid on the block named BCH peaked at $4000. Speculation has grown that Bitcoin (more and more called Bitcoin Core) could eventually flip with Bitcoin Cash – though no one knows for sure. As the expense and time of confirmation have grown and extended, to the point that Bitcoin seems nearly impossible to use for daily transactions, everyone who seeks a real digital currency is looking around.
There seems to be no question that the market has already warmed to the idea of larger block sizes. We might look back at the choice of Bitcoin’s core developers to lock in the block size at 1MB as a terrible choice. Or perhaps new transactions layers on top of the Bitcoin blockchain will prove workable and this choice will end up as prudent and solid because it facilitates a more decentralized network of full nodes.
Ideally, everyone who comments on this sector would stop the Twitter wars, all based on knowing what we cannot really know, and instead go full Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”