Lightning, Halving and ToTheMoon

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24.06.2016

On June 6, bitcoin miners have produced block #415,000. It means that mining reward will halve in less than 5,000 blocks or 42 days.

Since the last reward halving in 2012, Bitcoin price has grown from $12 to $670 (at the time of writing), and peaked at around $1,100 in late 2013.

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During that time, venture investment in the industry exceeded $1 billion, hundreds of new companies, blockchain projects and cryptocurrencies have emerged. Most of the latter, however, are hardly interesting even for speculative purposes.

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While professional traders and spokespersons for cryptoexchanges have already expressed their expectations as to the halving’s impact on bitcoin price, the expectations may reach even greater grandeur when it comes to SegWit and Lightning Network.

Disclaimer: Halving is twofold decrease of reward for mining a new block. In the years 2012 – 2016, the mining reward comprises 25 BTC. After the halving, the amount will stand at 12.5 BTC. The final bitcoin of 21 million BTC overall is to be mined by the year 2140.

Apart from the exchange rate’s growth, increase of the number of transactions, and expanding investment in the industry, the exponential growth also involved bitcoin blockchain’s volume. Thus, the BTC transactions database’s overall volume was 4 GB in 2013, while in early 2016 it surpassed 70 GB.

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This is one of the main reasons behind the block size debate. However, a fine scalability solution dubbed Lightning Network was proposed shortly afterwards. It is quite probable that in the wake of the halving and over the course of the industry’s further development, the blockchain will cease the exponential growth thanks to LN.

“It’s impossible to switch to massive adoption of Lightning Network in a couple of months, but the expected growth of transaction cost will be a good incentive. So, I don’t expect any short-term effect from Lightning, but it’s one of bitcoin’s last resorts in terms of scalability and further survival. Another last resort for Bitcoin is transferring all transactions onto Ethereum blockchain using tokens with 100% bitcoin backing,” says Ethereum developer Daniel A. Nagy.

Lightning Network’s integration may not only solve the scalability problem and put a lid on the accursed blocksize debate, but also make bitcoin a full-fledged competitor of VISA. Additionally, LN will enable transferring values across several blockchains, which theoretically could become a game changer for decentralized trading and solve the problem of centralization in cryptoexchanges.

10 Transactions per Second at the price of an NPP

While a year ago the issues of hardfork and blocksize increase seemed irrelevant to most regular users, nowadays the situation has took a dramatic turn. Just recall the spam attacks on bitcoin network last September, when it took hours to effect a transaction.

Quite recently, when bitcoin price started surging upwards, the problem became even more burning. It took almost 48 hours to effect some transactions, which term resembles a traditional international money remittance. If you add volatility and possible change of bitcoin price in any direction during that time, it may run shivers down your spine.

According to blockchain developer Alexander Pankov, Lightning Network may end up this problem, and make bitcoin even more disruptive.

“Lightning network provides a complete solution to the scalability problem. While currently we see series of full blocks and a queue of thousands of transactions quite often, Lightning will cause the basic turnover to go there first, and then to grow hundred-fold. Bitcoin as a unit of Lightning will act as a working body, which will result in increase of demand when the number of transactions and users will grow. It’s hard to predict the price for autumn, but I’ll be very surprised if bitcoin’s market cap won’t surpass the sacred trillion once Lightning Network is implemented,” says Alexander Pankov.

There are additional reasons to introduce LN or a similar solution. In particular, Nagy shares the concerns of community members regarding possible reduction of bitcoin mining, which has already resulted in mining centralization. Most computational resources are currently controlled by a handful of companies and individuals. Thanks to one of the most famous miners, the heat around block size went down after a roundtable.

“Currently, bitcoin network processes around 10 transactions per second while consuming power similar to that of a nuclear power plant. This absurdity requires us to answer the question of who pays the bill. It’s evident that transaction fees can’t cover such power expenditure. Nobody would use bitcoin for such money. So, most expenses are incurred by buyers of freshly mined bitcoins,” Daniel A. Nagy says.

Thus, LN is indeed a serious trigger capable of influencing the industry’s further evolution and bitcoin price. Its implementation becomes gradually crucial every day.

Halving vs Price

As for reward halving impact on bitcoin price, the opinions in this regard are very diverse across the industry. Not everyone shares the confidence of some believing that it will result in cryptocurrency exchange rate’s further growth.

“In my opinion, discussing bitcoin price and, moreover, predicting it is futile. It’s like weather: you know that spring changes into winter, which changes into autumn, and then comes winter. That’s all. Only fraudsters would predict weather in September, when it’s currently June. As for halving, we knew it would happen back in 2010. Discussing exchange rate in this situation is just speculating,” Pankov says.

“I think we should look closely at difficulty and hash rate charts to assess the possible price after the halving. If miners start closing the stores, the cost may stop at the level below the doubled April price, i.e. below $800. Otherwise, if miners are patient enough not to sell bitcoins at lower prices and continue mining as before, the stable level will be somewhere between $800 and $1,000,” Nagy commented.

Konstantin Lomashuk, co-founder of cyber.fund, generally agreed with his expert colleagues:

“Halving is a perfect incentive for the network to evolve.

  1. It pushes the price upwards, as daily issuance rate drops. The market has most probably reacted in advance, so the price will keep on growing until the halving occurs. A few days prior to that moment, speculants will start closing their positions, and we’ll see a decrease. However, miners know about that as well, so they sell their stocks now. For two months’ time, there’ll be serious volatility related to possible bankruptcy of miners, as well as reduction of issuance rate.
  2. Bitcoin’s popularity is growing, there are more and more mentions and articles, so its investment allure and transaction rate grow as well. It’s unknown what is the cause, and what is the effect. One thing is certain, though: there are more users, so the network’s cost also increases.

If the demand after the halving turns out to be higher than expected by speculators and miners, we’ll see new peaks of bitcoin price in six month. My recommendation is to buy and hold.”

Globally speaking, halving is the event the market is waiting for to see bitcoin’s further growth. Halving will cause miners, especially those major, to cut their expenses and revise financial strategies. It’s quite reasonable to expect miners to engage in other business lines related to bitcoin. Some of them have already started diversifying their activities, as they realise that mining will become a steady and low-profit activity in the long run.

Halving in the price context implies mostly speculative expectations. Implementation of serious technical amendments or add-ins like LN, on the other hand, may energize bitcoin to continue growing.

The forthcoming challenges of successful LN implementation aren’t off the table as well. However, it’s a completely different matter.

Toly Kaplan

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