By popular request, here follows an edited transcript of Bitstocks CryptoTime Episode 21, What BSV’s Technical Metrics & Utility Boom Reveal.
(Disclaimer: The following is based on personal opinion and should not be considered any form of financial advice.)
Bitcoin Core (BTC) has been the dominant cryptocurrency until now. But, what if we told you a shift is at hand? In an episode of CryptoTime, Bitstocks Relationship Manager, Antonio Shillingford and Bitstocks Investment Associate, Stephen Ierotheou applied the principle of using hashing power to determine the fair value of cryptocurrency assets. The two compared Bitcoin Cash (BCH), Bitcoin Core (BTC) and Bitcoin SV (BSV) using this metric, and come to an exciting and promising conclusion...
Stephen and Antonio then delve into an even more dramatic metric: the effect that the May 2020 Bitcoin block reward halving will have on mining profitability. With BSV’s capacity growth and application development boom, the project is on track to remaining profitable for miners while keeping individual transactions cheap and instant.
Hashing power has been at the forefront of our minds for quite a while. What’s particularly fascinating about this metric, is the premise of using hashing power to determine the fair value of cryptocurrency assets.
Before we jump into the data, let’s clarify what hashing power is: it’s a measure of the computing power that Bitcoin miners donate to the network to help process transactions and secure it.
When we look at hashing power, BTC holds the lion’s share with 96.8%, while BCH has 2.1% and BSV holds the remaining 1.1%. Where it gets interesting is when you use BTC and BCH as a base layer to compare to BSV, i.e. using ratios of hashing power against asset values. These calculations reveal that BSV is between 15% and 17% undervalued.
In terms of market capitalisation, BTC also holds the dominant position, with 68.7% of the market cap. Though it’s fluctuated between lows around 33% and highs of 91% over the last five years, BTC’s current position is actually the highest they have been for the past two years.
Considering BTC’s dominance until now, many assume it will remain so in future. We don’t agree. Given particular trends and upcoming events, we expect to see a potentially dramatic shift occurring over the next year.
For the moment, BTC’s marketing presence dominates the space, which aids it in winning significant hashing power. But when you look at financial trading models and indicators, BTC has little more than brand awareness to secure its position.
Let’s take the premise of mean reversion that says that market moves always revert to the mean. Now if you tailor it for trade dominance, you’ll look at BTC’s current position in a different light. Although BTC’s dominance is at its highest point at the moment, there’s a high likelihood it will revert back to the mean.
The factor of network density is the most likely trigger that will put the shift in motion. If we look at the BSV project, its focus on providing the best possible infrastructure to allow for major app development gives it the best chance to win major adoption and use. When you look at Bitcoin’s economic model, you’ll understand why a high transaction velocity is not a nice-to-have, but a requirement for sustaining the network.
At the end of the day, it’s transaction volumes that indicate true value, because it relates to real-world usage instead of speculation. It doesn’t matter how many utilities you build onto a project or an application; If no one’s using it, it doesn’t hold value.
Getting back to the BSV project, we’ve just had a two-gigabyte upgrade to provide enterprise-level software developers with the assurance that BSV will be able to handle enterprise-level transaction volumes.
It goes back to the whole issue of density. If you think of the different blockchains’ blocks as different containers, you could say that both BTC and BSV’s blocks are containers filled with air. The major difference is that the BSV container allows air particles to bounce off of each other which puts them in an excitable mode to allow you to fit a much great number of particles in the same space.
Many have criticised BSV’s ambitious scaling plan, claiming there’s no need for such capacity right now. But if we think of a world in five, ten or twenty years, the operation of a vast majority of appliances will be automated with the use of blockchain. For something like a light bulb, switching it on could end up being an actual blockchain transaction. To compete, blockchains will have to scale to not hundreds of thousands of transactions per second, but millions or even billions. The BitcoinSV project’s roadmap represents this vision, making it the only public blockchain that can achieve these goals.
If you look at blockchain as a business application for a moment, you’ll see that its peer-to-peer monetary function is only the beginning of its utility. And when you start talking about using blockchain as a foundation for building a company on top of, the available block size is incredibly important. Why would you build on an infrastructure that won’t be able to cope with peak transaction periods, like Christmas time is for retail companies?
Think back to Christmas 2017 when the BTC network drew to a near standstill, with some transactions not taking minutes to clear, but in extreme cases, days! Imagine you were running a business that relied on BTC transaction throughput and it’s your most profitable time of year. Companies don’t want to have to worry about these kinds of scenarios. They want a reliable foundation that frees them from having to check it every two seconds to prepare for the worst.
Let’s talk a bit more about Bitcoin’s potential to serve as a foundational layer, or as an information infrastructure for business applications. There’s this massive misconception that Bitcoin is this new form of money and that’s about it. The way we (at Bitstocks) see it, Bitcoin is a protocol that can be used as infrastructure for building companies on top of. In our minds, this is where the real value of blockchain lies.
Jumping back to the matter of network density and how blockchains are structured... One of the main issues with BTC is the narrative they’ve been promoting that every single person can be a node. This is something that Craig Wright has been talking about a lot recently:
“A node in Bitcoin is a miner. There can be no exceptions.”
If you look at global enterprises, companies like Facebook and Google, they all make use of massive data centres so they can process high transaction volumes. If you let every single person run their own node even if they’re not mining, your network is inundated with operators who aren’t making any contribution to network capacity or security. What’s even worse is the current BTC situation where you have all of these small capacity Raspberry PI’s involved - and they only end up slowing down the network.
You can picture the situation like a string of cups that are connected to allow flow between them through a huge hole in the bottom of each of the cups. In this picture, a Rasberry PI is the one cup in the middle of the string that only has a tiny hole in its bottom. It doesn’t matter how fast the water flow between the other cups, the moment it hits the cup with the tiny opening the flow slows down to a trickle. And that’s what’s happening to the Bitcoin network at the moment,and why it’s so important for miners to be investing into infrastructure that can deliver the hashing power to process high volumes of transactions without delay.
Miners have one of the most important jobs within this space, and the block rewards compensate them for their work. Although Bitcoin’s economic model subsidises growth of the network through a set mining reward, block reward halving events are supposed to encourage utility development. A higher volume of transactions and transaction fees can ensure miners a stable income, even when the set block reward dwindles as is happening around May 2020 - about 40,965 blocks from here.
Without an increase in transaction fee derived mining rewards, the BTC price will have to double, or miners will be out of pocket. Given BTC’s tiny little Lego blocks that only allows a small number of transactions to be processed, it will be impossible to compensate for the loss through transaction volumes. Instead, miners will have to push up the block reward by pushing up the minimum fee that they’re willing to accept per transactions. Transactions submitted with lower fees will be outcompeted and stand little chance of being processed. At the end of the day, the traditional Fiat system that’s already in place will allow much cheaper transactions anyway.
Either way, the Bitcoin block reward halving will take a huge chunk out of the mining incentive, and a lot of miners will likely give up on BTC mining. As miners drop away, so will the network’s hashing power.
BSV’s scaling model, on the other hand, has taken these token economics to heart, which is why the aim is to process an infinite number of transactions in each block. With a high transaction velocity, the total block reward (transaction fees plus the set block reward) adds up to a lucrative sum while individual transactions will remain cheap. Even as the set block reward keeps getting halved, eventually going down to a negligible sum, the growth in transaction fees will compensate for the loss.
What’s going to be particularly interesting is to see how miners use these economics to create new business models. Miners could position themselves to serve as ‘service providers’. You could have an exchange, for example, that has a contractual agreement with a miner to support zero-conf transactions. Imagine how it would improve the efficiency of the space if I’m an exchange that has a deal with a miner to accept every incoming transaction? I could allow instantaneous trading and settlement.
Though 2020 block reward halving is bound to cause massive upset for a great number of miners and operators, the outcome will be a more effective and efficient ecosystem. While we foresee a significant shift in dominance occurring, as a company our focus is still on building true value on a stable foundation - which is why BSV is the only option for our BitcoinSV Banking Ecosystem, called Gravity.