by Jamie Holmes
The price of bitcoin jumped sharply on October 22 in response to the conclusion of the biggest ever conference of miners in China, where the participants discussed scaling issues. In the first ever event that included all of the major miners in China, Huang Shiliang, a famous Bitcoin advocate, delivered an important talk which could be a pivotal moment for the future development of Bitcoin. While BTC-USD surged to a fresh high of $650 on American and European exchanges, there were notably higher volumes driving BTC-USD as high as $670 on Chinese exchanges.
A translated transcript appeared online, detailing what was said, in what could be an important sign for the future of Bitcoin. It seems that Bitcoin Unlimited supporters are reading a long-term plan to override the Bitcoin Core developers. With the miners organizing and standing together to make the case for scaling Bitcoin as to outgrow the 1MB block size, the market may be pricing in an eventual solution to the block size debate.
Outlook is Rosy for Bitcoin
The chart below shows the bullish breakout for BTC-CNY on the OKCoin exchange, which smashed through the ¥4,500 handle and posted the largest daily gain since June 2016. Next fractal resistance lies at ¥4,600 and a break of this level will see the market test the 2016 high at ¥5,185.77.
Also notice that yesterday’s bullish surge was supported by higher volume, indicating interest in bitcoin will increase over the coming weeks. October 22 saw the largest net daily bullish volume since August 3, when BTC-CNY began to recover from the Bitfinex hack and started its march back toward equilibrium, ¥4,000 as signalled by the Ichimoku cloud.
Currently, the price action is above the green Ichimoku cloud and the large rise in volume suggests that the upward trend since the Bitfinex hack is solidifying and getting ready to establish fresh yearly highs. Upward momentum will dominate in the week ahead as the Awesome Oscillator provides a bullish signal, known as the ‘Saucer’. Notice the curvature formed over the past three days, whereby the red bar was followed by progressively higher green bars, pointing to further gains for bitcoin.
Outgrowing the 1MB Block Size Limit
Shiliang outlined the problems the Bitcoin ecosystem faces with the limited 1MB block size. However, the Core developers favour a more conservative approach, made clear in the speech:
“In late August, representatives of the Chinese [Bitcoin] miners went to the United States with the [Bitcoin] Core developers to discuss the expansion of the block size. The results were terrible, whereby the developers refused to expand capacity…”
By overcoming the 1MB limit, Shiliang believes this will result in a more favorable environment for fee incomes and Bitcoin price, noting that since one block presently hold 3,500 transactions at most this is anchoring the demand and use of bitcoin. He notes that the number of transactions a block contains grew steadily since Bitcoin’s inception but over the past six months, this has stagnated. Since blocks are full, the network can no longer grow.
Lifting the Block Size is the Only Option
Miners are facing a three-pronged attack whereby the life cycle of mining is very short, whereby capital depreciates relatively quickly, higher operating costs, and stagnating block fees. Fees accounted for the proportion of miners income is still very small, an average of only 3 percent. The current situation is because the block is limited to 1MB. And since the number of transaction is limited, the total fee is unlikely to rise.
Increasing the transaction fees would hurt the growth and demand for bitcoin, leaving the bitcoin price as the factor miners need to engage. However, the price is determined by demand and supply. While the supply is fixed, demand is more of a significant factor in the price of bitcoin over the medium term. But since the block size is limited to 1MB this is limiting the use of Bitcoin, anchoring demand for the cryptocurrency to a low level.
Scaling bitcoin however would increase demand and hence the price, leading to better profitability for miners. Shiliang provides anecdotal evidence for the statement pointing to the fact that the price of bitcoin fell on the disappointing talks in late August but a price rise on the back of the announcement that ViaBTC supported Bitcoin Unlimited, as well as after a meeting between Chinese miners and Core developers in early 2016 that was perceived positively for the growth of the network.
Shiliang wrapped up the speech by urging miners to support the Bitcoin Unlimited protocol by mining with the ViaBTC pool, stating they only need to achieve 16 percent of the network's computing power and that should be enough to tip the rest of the ecosystem in their favor and swiftly reach the 80 percent figure to strengthen the “fragile” Bitcoin network. Toward the end of the Shiliang’s speech one comment stood out, displaying confidence that the scaling issue Bitcoin will soon be settled once and for all:
“So what we now have to do is to find 6 percent [to make up 16 percent]. The overall situation will soon be settled…”