In this week’s edition, we examine bitcoin’s rather astonishing price movements within the last 30 days, explore some of the reasoning behind the “burst of the crypto bubble,” and review recently-tested exploratory solutions to bitcoin’s problems that keep it from attaining its original goal of being a low-cost, universally-available digital currency.

Bitcoin Plummets; Price Correction Underway

The total market capitalization of all cryptocurrencies dropped below $500 billion for the first time in over a month since mid December, heightening fears that either the bitcoin bubble was about to burst or that an otherwise substantial correction was about to occur in the digital money universe. The total market cap hit a low of $417 billion on January 17th, largely correlated with bitcoin’s drop in price to around $9,500, the first time it had hit that level since early December. This fall represented a drop of about 50% in the price of BTC over the course of less than one month.

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Not only was bitcoin down this week, some 25%, all 10 top coins by market cap ended down for the week. This confirms the idea that the crypto market was over-valued, as big-player Wall Street money is now considering itself to have over-zealously played blockchain technology space; perhaps too much money was being thrown into projects in a rather blind fashion. Only a few weeks after the opening of bitcoin futures trading in different countries, nearly 40% of all money invested in such vehicles is riding bitcoin short. In effect, millions of dollars are currently betting against bitcoin’s continued rise.

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Fears of Regulation to Blame for Sell-Off

The price of BTC was hit hard last week, falling up to 25% on news that South Korea might pursue the banning of all cryptocurrencies. For the time being, South Korea has banned the opening of all anonymous cryptocurrency accounts and is now requiring domestic exchanges to share their user data with banks in the country. Even with reports that the government was backing down on these claims amidst a large public outcry, the price of BTC still has a long way to go before cracking its previous high of $19,783. Several other countries with high proportions of cryptocurrency users are also announcing that plans for regulation are in the works.

As the popularity of cryptocurrency as an alternative form of payment continues to increase, so does the need to provide regulatory guidelines on how to best handle it on a national level. Just last week, it was confirmed that the IRS now had a department dedicated to the processing of cryptocurrency-related transactions and tracing “the movement of money through the Bitcoin economy.” The tax oversight bureau also publicly announced plans to step up tax enforcement laws already in place, acknowledging that a large number of people had been quite successful with their investments over the last year.

Although the price of BTC remains up over 300% in the just the last 6 months, the fear created by South Korea’s sudden, sweeping declarations is compounded by last week’s string of plans for regulation from nations around the globe. Regulatory woes, heavy competition, a sense that the market was over-valued as well as issues regarding blockchain bloat and high transaction fees have kept bitcoin from snapping back on its quest to break the $20,000 mark, at least for now.

Evolution of the Lightning Network

For the last 3 to 4 years, several independent academic research and business teams have proposed various solutions on how to speed up transaction times within the Bitcoin Network, in an attempt to keep it more scaled and ready for an expanding user base. The first such solution to be deployed was that of SegWit, launched in August 2017 as the first half of the voted-upon New York Agreement as referred to by members of the Bitcoin Core team. The implementation of SegWit saw drastically reduced block sizes after the first four months of its integration with the Core client, and as more transactions can now be squeezed into each 10-minute block, it arguably has helped transaction fees from becoming even higher than they already are.

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The Lightning Network attempts to solve bitcoin’s long confirmation delays and rising transaction fees by allowing for “off-chain” transactions via a “network of micropayment channels,” according to the current draft of their research paper. Having been under theoretical development for a few years already, a small group of online merchants agreed to test using Lightning Network-developed software for the transmittance of bitcoin starting in December. The results were generally positive, and though a bit more tweaking and bug fixing may be required before the Lightning Network is ready for mainstream release, it is already being hailed as the solution to bitcoin’s scaling woes.

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If the Lightning Network did take off and become implemented in the majority of bitcoin transactions (it currently guides the transactions of over 100 nodes), it could certainly help put bitcoin back on the path to being the “universal digital currency” that it once hoped to be – a title for which many bitcoin competitors are currently contending. The success of an off-chain, micropayment system that was both cheap and fast would certainly make bitcoin more competitive and allow it to throw its hat back into the ring as a universally-accepted digital currency. Though bitcoin remains far and away the most widely accepted cryptocurrency, and the progress of the Lightning Network looks promising, some warn that it may not be able to solve all of bitcoin’s problems, and that the original blockchain model is now outdated compared to more recent developments in the highly-explored, burgeoning technology.

Also in the News

  • The co-founder of anti-virus software creators and cyber security experts Kaspersky Labs, Natalya Kaspersky, recently made the claim that bitcoin was the project of “American intelligence agencies” as a means for providing “quick funding” for intelligence operations globally. She also went on to make claims that bitcoin was “entirely privatized” and that exchange operators were the true controllers of the price of BTC.
  • The U.S., on the other hand, is now warning its citizens not to invest in Venezuela’s upcoming Petro coin. The move would be regarded as an “extension of credit” to the heavily-blockaded Venezuelan government, which seeks to employ blockchain technology as a solution to some of their economic woes. By investing in the petrodollar, U.S. citizens would unwittingly break pre-existing sanctions against Venezuela by indirectly aiding their government, an act that is forewarned as entirely illegal.
  • Indonesia, a country which has flat-out illegalized the domestic use of bitcoin, is looking into reports that the digital currency is being used in the tourist hotspot island of Bali. Indonesian law requires that all monetary transactions in the country be conducted using the government-backed rupiah, making usage of bitcoin flatly prohibited in any state-based transaction.
  • Mark Cuban is back in the news, providing his thoughts on the future of cryptocurrency in a recent Q and A session. The billionaire who once flatly rejected the notion of owning any crypto coins, then pivoted to call it an “experimental investment,” is now hailing its potential benefits when applied to the transformation of finance. Though he still cautions people to not invest more than they can afford to lose, the already-billionaire is now sitting on some mega-profits thanks to investments casually made in the first half of 2017. “Crypto bubble” or no, Cuban’s endorsement of blockchain technology is a ringing bell for those who are still undetermined and sitting on the sidelines.