Bitcoin is currently trying to finding an equilibrium point — at least at the current volume levels — given all the recent disruptions to the ecosystem (including the recent MtGox collapse).Equilibrium would be defined for me as the point of stability in price where there is symetric volume and consistent growth on a daily basis between buyers and sellers (utopian, but right now there is asymmetric growth which is not being quantified — so traders are having a problem predicting where it would go).History shows that it needs to find a very stable price point for a few months before it can really retest any previous highs.External factors like Russia, Ukraine, China, etc will contribute to Bitcoin volatility and changes in the supply/demand curve globally.I spent some time at the CoinSummit conference in San Francisco last week and my panel discussion, “Bitcoin transactions — what are the barriers for merchant and consumer adoption?” was well received by the community.Its very clear that Bitcoin has amazing potential but the fact remains that we are still in the very early stages of it’s evolution — which many have likened to the Internet in 1993.

Mainstream consumer adoption is just not there yet.We’re waiting for the “Netscape moment” for Bitcoin.I also don’t believe Bitcoin is suitable as currency — I think it’s a commodity that can be traded for goods and services.bitcoin suratIt may become a currency in time, but it just isn’t one right now.litecoin testIt’s a scarce, digital commodity — and the trading that takes place on exchanges really reflects the market sentiment around the value of this digital commodity.In the not too distant future, entrepreneurs & technologists will use the actual Bitcoins themselves in new and interesting ways (think smart contracts, etc.)czech bitcoin hacked—how many will be ultimately needed is unknown, and that’s what creates the imbalance in price.ethereum april announcement

Right now it’s all speculation as to what that future value of a Bitcoin will equate to.This is what makes the Blockchain far more interesting than the actual Bitcoin — but I’ll leave that for a future post.I have some alternative views (i.e.litecoin pool mining chartnot stuff the mainstream press totally gets), as to why Bitcoin is trading below $500 right now, but I want to point out that I am a Bitcoin bull for the long term.ethereal spanish translationI even predicted at the Silicon Valley Bitcoin Conference in May 2013, it would reach over $1,000 in 2013 when it was trading at $100 to audible sniggers and laughs from a very Bitcoin friendly audience.That said, conversely, here are the key reasons why I think the Bitcoin price may not organically reach $1,000 again this year, without an external event shifting the supply/demand curve for Bitcoin.math of bitcoin mining

It is difficult to predict anything further out than a single quarter in the Bitcoin world, so instead of making bold predictions I would rather focus on highlighting some issues that are suppressing the Bitcoin right now.TechCrunch published a story yesterday about the recent IRS rulings around Bitcoin — which classifies it as an asset, not a currency (which effectively makes transactions using it taxable).ethereum loansTo be frank, anyone who thought that Bitcoin would not be subject to taxes in some form is living in a dream world.Anyone who made 5000%+ returns over the past year or so should not be complaining about paying capital gains tax — it could have been worse and been classified as income tax.bitcoin farming speedThat said, it will have an impact on the price of Bitcoin as some people holding them will need to sell some of their coins ahead of tax filing next month.The real impact is that the notion that Bitcoin is a “deflationary” currency vs the USD has effectively been dispelled.

Any deflationary gains have to be offset via capital gains taxes.This does not mean that it is not deflationary vs other currencies, but given the IRS has given strong guidance here — it’s effectively mooted in the USA.It will remain a store of value, but it clearly is not a currency in it’s current form.The upside of the IRS guidance is that given it’s not classified of a currency, you can buy and hold Bitcoin for years and never pay taxes until you realize the gain.Contrast that against the treatment of foreign currency holdings (and subsequent appreciation against the USD) and you’ll see it’s a fair outcome.The IRS guidance when coupled with unconfirmed rumours that China is “banning” Bitcoin has led the mainstream press to postulate that these are the reasons for the current weakness in the price.The way things are going, the digital currency Bitcoin will start to malfunction early next year.Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away.

So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator.Andresen held the role of “core maintainer” during most of Bitcoin’s improbable rise; he stepped down last year but still remains heavily involved with the currency (see “The Man Who Really Built Bitcoin”).Andresen’s gloomy prediction stems from the fact that Bitcoin can’t process more than seven transactions a second.That’s a tiny volume compared to the tens of thousands per second that payment systems like Visa can handle—and a limit he expects to start crippling Bitcoin early in 2016.It stems from the maximum size of the “blocks” that are added to the digital ledger of Bitcoin transactions, the blockchain, by people dubbed miners who run software that confirms Bitcoin transactions and creates new Bitcoin (see “What Bitcoin Is and Why It Matters”).Andresen’s proposed solution triggered an uproar among people who use or work with Bitcoin when he introduced it two weeks ago.

Rather than continuing to work with the developers who maintain Bitcoin’s code, Andresen released his solution in the form of an alternative version of the Bitcoin software called BitcoinXT and urged the community to switch over.If 75 percent of miners have adopted his fix after January 11, 2016, it will trigger a two-week grace period and then allow a “fork” of the blockchain with higher capacity.Critics consider that to be a reckless toying with Bitcoin’s future; Andresen, who now works on Bitcoin with the support of MIT’s Media Lab, says it is necessary to prevent the currency from strangling itself.He spoke with MIT Technology Review’s San Francisco bureau chief, Tom Simonite.How serious is the problem of Bitcoin’s limited transaction rate?It is urgent.Looking at the transaction volume on the Bitcoin network, we need to address it within the next four or five months.As we get closer and closer to the limit, bad things start to happen.Networks close to capacity get congested and unreliable.

If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin.Why take the provocative step of releasing an entirely new version of Bitcoin?It was a difficult decision.I’ve been lobbying pretty hard behind the scenes for the last eight months, but  was having trouble even getting developers to agree that there was a problem.I had to go public and actually release the code and let people essentially vote with their feet.Now that we’ve done that I think you see people finally coming around to the idea that this is a high priority problem.I’m not happy that it had to come to that, but I think in the long run it will be a good thing.Some major Bitcoin companies have endorsed your proposed way of increasing the block size, and some miners have even adopted BitcoinXT.Other companies and prominent Bitcoin developers have attacked your move, and suggested alternative solutions—not all backed by working code—that are rapidly gaining support.

What’s happening?It’s somewhat chaotic.There’s no well-defined process for coming to a decision about changes to Bitcoin and there’s no one correct answer for how to solve this problem.Things are pretty messy – but that’s by design.There’s no central committee.There’s no single person making these decisions for Bitcoin; it takes consensus among the people running the software.It’s a good thing that decisions like this are really hard to make happen.Do you think that consensus can be reached?It’s pretty clear that the maximum blocksize is going to increase.I don’t know exactly how or exactly when.I don’t think it’s clear yet that my proposal will generate enough consensus among miners and the other ecosystem players.What will happen if nothing is done?Transactions will get unreliable and it’ll get worse and worse over time.My fear is there’ll be no critical event that causes people to react—Bitcoin just kind of has a long slow death.I’m trying to set off alarm bells for ‘You know, guys, if we don’t do this, Bitcoin will be dead in four years.’ It’s not easy to sell that, especially when there’s so much controversy.If BitcoinXT activates, it will recognize existing Bitcoins.

But not new Bitcoins created by miners who don’t switch.Is that dangerous?It’s pretty hard to get left behind.Once the Bitcoin core software sees that 50 percent of mining power has upgraded and you haven’t, it’s going to warn you that you need to upgrade.It would be awfully difficult to be taken by surprise.The economic incentives to switch would be so strong—you want your Bitcoins to be the same Bitcoins that everyone else is using.How widely established is Bitcoin now anyway?It’s firmly established in a few niche areas and growing there.An early use case is people who pay international contractors in Bitcoin because it’s easier than figuring out how to transfer dollars into local currency.The major barrier to it going mainstream anywhere is there has to be some way of getting Bitcoin as part of your normal activity.Until part of your paycheck is regularly paid in Bitcoin, I’m not sure how it would really go mainstream.I can imagine places in the world where there are not functioning banking systems, or payroll systems, where it could go mainstream first, because you’re not trying to replace the way people are already doing something.I still say do not invest your life savings in Bitcoin.