Will Bitcoin Crash in 2018? High Transaction Costs Raise Fears of BTC Collapse

bitcoin-crash
Credit: iStock.com/traviswolfe

 Another Bitcoin Crash Coming in 2018?

Running a crash filter on the Bitcoin (BTC) price history returns at least two major Bitcoin crashes. Both times, Bitcoin transaction costs had peaked.

Right now, we’ve approached another critical juncture. Transaction costs are at an all-time high, and fears of a possible Bitcoin crash in 2018 are escalating.

So here we are, analyzing what is literally a million-dollar question: Will Bitcoin crash again in 2018?

You see, in the demand-supply framework, prices are controlled by only these two forces. To keep prices from falling, either demand must rise or supply must fall. But since supply, by default, is a constant in Bitcoin’s equation, the only variable we’re left to deal with is demand.

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Now, demand for Bitcoin—although rising—hinges on one critical factor: ease of use. If you take out that factor, demand will belly flop, and so will prices.

The ease of using a digital currency comes from low transaction costs and fast processing times, but Bitcoin is losing to its rival altcoins on both of these fronts.

Other popular altcoins—like Ethereum, Ripple, and Litecoin—are all much faster and cheaper to transact in than Bitcoin. Because of this, the naysayers are questioning Bitcoin’s ability to replace fiat currency as a widely used mode of payment.

Bear in mind, the enigmatic Bitcoin founder Satoshi Nakamoto dreamt of a financially independent world where Bitcoin could rule as the single universally accepted monetary unit—uncontrolled, unsurveilled, and uncensored by any authority.

Those who subscribed to this idea became the Bitcoin devotees. They’re the Bitcoin bugs who’ve stuck with this cryptocurrency on ideological grounds.

Just recently, I weighed the possibility of a Bitcoin crash in 2018. My thesis, which split Bitcoin buyers into two clubs—”devotees” and “sheep”—rested on the premise that a crash could occur only if the devotees bailed out on the cryptocurrency.

For the record, the sheep are buying this digital currency for no better reason than it’s trending. So, if the trend begins to fade, the sheep will head for the exits.

Case in point: the sheep could bring about a major price correction in Bitcoin prices in 2018. But, in my humble view, the devotees could save it from a crash; only if their reason to demand this digital currency remains intact.

The ugly truth, however, is that Bitcoin may be throwing cold water on their dreams. Bitcoin’s transaction costs are skyrocketing, and processing times are slowing down. At this point, fears of a crash in BTC prices seem well founded.

To help you better understand why transaction costs matter, allow me to get down to the brass tacks of how a Bitcoin transaction works.

How Bitcoin Transactions Work

Say “person A” has to make a payment in bitcoins to “person B.” On the front end, the bitcoins will appear to move from A’s wallet to B’s wallet after a few keystrokes. But, on the back end, this transaction must enter Bitcoin’s blockchain, its decentralized ledger that perpetually keeps track of all BTC transactions, anytime and anywhere.

To land on this blockchain, the transaction must be approved by the Bitcoin “miners.” The miners solve the blockchain code and enter the transaction on a block within the chain. For this task, they receive a transaction fee, which is determined based on the size and timing of the transaction.

In addition to this transaction fee, the miners also earn a block reward. These are the few bitcoins they unlock every time a transaction is completed.

So, to sum it up: Total Cost of Transaction = Transaction Fees + Block Rewards.

Surging Transaction Costs Raise Fears of Bitcoin Crash in 2018

The fees and rewards provide an incentive to the miners to keep their computers up and running. All the electricity and hardware costs they incur are paid for by these incentives. In turn, they provide back-end power to Bitcoin’s digital network.

But these incentives have skyrocketed in the past month. On the front end, the average user is getting frustrated.

Miners’ revenue, which was just under $19.0 million a month ago, has jumped more than twofold to hit a record $53.0 million.

Just imagine paying 40% of your transaction amount in fees. You think I’m exaggerating? See this tweet from an average Bitcoin user.

Freeman Tweet

Bitcoin transaction costs are currently at all-time highs. The average cost per transaction is hovering over $140.00. That’s almost double what it was during the Bitcoin crash of 2013, when the transaction cost was already nearly double what it was during the crash of 2010.

bitcoin transaction chart

So, if we go by history, every time Bitcoin transaction costs have doubled from the last highest data point, a crash has ensued.

Is a BTC Crash Inevitable?

So, what is the likelihood that a Bitcoin crash could again happen in 2018? By the looks of it, a crash does seem possible, but there’s a catch.

Remember “SegWit,” the proposal to increase Bitcoin’s block size—which ended up splitting Bitcoin? Yes, if the community finally agrees on it (the next iteration of SegWit2x), Bitcoin may have a chance to save itself from an eventual collapse.

In case you missed it, the community of Bitcoin devotees voted on the topic of increasing Bitcoin’s transaction capacity earlier this year. Had this proposal been adopted, it would have reduced transaction costs and processing times.

But the community disagreed with that proposal and ended up splitting (hard forking) the Bitcoin blockchain. In the aftermath of this hard fork, two new Bitcoin babies were born: Bitcoin Cash and Bitcoin Gold. Today, both of them market themselves as the better Bitcoin alternative.

The long and short of it is that Bitcoin must give its devotees a reason to stick around. Otherwise, a Bitcoin crash in 2018 may become inevitable.

Analyst Take:

Money, as we know it, is both a store of value and a medium of exchange. Although many people are transacting in bitcoins today, Bitcoin’s real demand is flowing from the investor community, which is purchasing it as a store of value.

Bitcoin’s utility as a medium of exchange is in question today, just as rising transaction costs put a limit on it. Unless the devotees find a way around this problem, it will remain a hurdle in Bitcoin’s way to mass adoption.

This loophole is allowing Bitcoin’s rivals to creep in and take over as the more viable media of exchange. So far, the devotees have shown faith in Bitcoin and have stuck around. But, if Bitcoin fails to fix its scalability issues, chances are that the devotees will hop over to the other side. In which case, a Bitcoin crash would become possible.

Until then, however, we’re only foreseeing a major correction in Bitcoin prices. The odds of a Bitcoin crash seem slim in 2018, but we’re not ruling them out.

Also Read:  Is Litecoin (LTC) Going to Crash?