Digital Transactions Authoritative, insightful and timely information for payments professionals
Bitcoin’s heady rise this year has pleased investors and drawn the attention of derivatives exchanges and other institutional players, but it may also have obscured a development going on behind the scenes to solve one of the digital currency’s biggest drawbacks: its weakness as a payment method.
Bitcoin, which started out 2017 at a price just shy of $1,000, finished the day Thursday dancing above $18,000, according to Cooinmarketcap.com, a site that tracks cryptocurrencies. That represented a climb of $3,300, or 23%, in a 24-hour period. After a retreat, the currency was trading around $16,100 by midmorning Friday. That price places the total value of all Bitcoin in circulation at $275.5 billion.
Investor interest has been stoked not only by the currency’s meteoric rise but also by the implied endorsement coming from big-league futures exchanges. Chicago-based CME Group Inc. will start trading Bitcoin futures Dec. 18, with its crosstown rival, Cboe Global Markets Inc., following suit later on. Both exchanges received a green light for the contracts last week from the Commodity Futures Trading Commission.
But another event took place this week that promises to clear up two key Bitcoin problems: network congestion and fast-rising transaction fees. Developers working on a project called the Lightning Network announced Wednesday that they had conducted a pair of successful live transactions using specifications they’ve been working on for more than a year. While much work needs to be done, the transactions reportedly worked as expected across software prepared by different developers, according to Coindesk, a cryptocurrency news site.
For the past couple of years, the Bitcoin network has been plagued by slow transaction times and rising fees for users. Both problems are brought on by volume growth on an underlying blockchain limited by 1-megabyte blocks. While some solutions attack the problem by increasing block capacity, Lightning proposes a bypass. It manages the transaction’s details via off-chain channels, broadcasting to the blockchain only when the transaction is culminated.
If Lightning is widely adopted, it could solve Bitcoin’s scaling problem, allowing for much faster growth and more reasonable transaction costs. Earlier this week, an online-game distributor called Valve Corp. stopped accepting Bitcoin because fees, which are paid by the person spending the currency, had in some cases risen to $20 per transaction. Fees are controlled by so-called miners, the organizations that create new Bitcoin by working out complex mathematical problems. As volume rises, miners can charge more to give a transaction a higher priority on the blockchain.
Bitcoin has already become a hot commodity for investors. Next up could be a solution that finally unlocks its potential as a payment instrument.
