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Connectivity

Why Bitcoin’s $1,000 Value Doesn’t Matter

The cryptocurrency has reached a three-year high, but it’s no cause for celebration.

You’ve probably read that the New Year brought glad tidings for Bitcoin. On January 2, the cryptocurrency hit a three-year high, with its value reaching as much as $1,033. But it doesn’t matter. In fact, it only serves to highlight some of the shortcomings of the currency.

Blockchain advocates may breathlessly point out that the increase in value means that the collective worth of the currency totals as much as $16 billion. That sounds like a lot. It’s not. As the Financial Times points out (paywall):

For context, the Central Intelligence Agency put the planet’s stock of broad money—notes, coins, and various forms of bank account—at $82tn as of the end of 2014. On the CIA figures, the value of bitcoins hashed into existence is similar to the broad money total for Uzbekistani soms. With apologies to Tashkent, the value of soms and bitcoins, and the number of people for whom they are relevant pieces of information in the world of modern finance, both round to zero.

In other words, even valued at over $1,000, Bitcoin isn’t making too much of an impression in the grand scheme of things. In fact, its rising price even hints at some of its troubles.

The Register notes that the recent rise of Bitcoin may be attributed to the removal of high-value bank notes in India and Venezuela, but perhaps more significantly to the steady devaluation of the Chinese yuan. As the New York Times reported last year, a small band of Chinese companies have effectively gained control of the currency. As domestic currency value has fallen, so demand for the digital currency has risen, driving up its value.

But such centralization is unwelcome for many users of the currency outside of China. The structure of Bitcoin means that if a single user mines the majority of the currency, then it is able to rewrite the blockchain if it sees fit and even veto changes to the underlying technology. 

And change is what it probably needs. If the currency is to grow—which, as the Financial Times argues, it clearly needs to—it will need a technical redesign. Currently, Bitcoin can only tolerate up to 7 transactions per second, which is tiny compared to the many thousands that, say, Visa can handle. Researchers believe that its capacity could be stretched to 27 transactions per second without a complete overhaul, but that's still small.

The Chinese companies mining Bitcoin could, in theory, join forces to take advantage of the majority loophole. Given the country in which the most prolific miners operate, the news could raise fears about state control. None of which is helped particularly by the passing of an arbitrary $1,000 threshold.

(Read more: BBC, The Register, Financial Times (paywall), The New York Times, “Technical Roadblock Might Shatter Bitcoin Dreams,” “Bitcoin Transactions Get Stranded as Cryptocurrency Maxes Out”)

This article was updated on January 4 to correct the current transaction rate of Bitcoin and clarify the majority rights of the currency.

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