Bitcoin Price Rally: Echoes Of Metcalfe, Parkinson And The Cloud

Bitcoin seemed to recover somewhat on Thursday, following reports that a solution may have been found that will avoid the need for a hard fork on August 1. The solution is SegWit2x, which is supposed to bridge the divide that is holding programmers and miners apart while simultaneously keeping the cryptocurrency market in suspense.

The issue stems from the way in which transactions are approved within a block, which is proving to be costly and time consuming. SegWit2x, a variant of the original SegWit or “segregated witness” protocol seeks to strip the approval process from the original transaction – treating it separately and thus lightening the processing load.

A second issue has to do with the network’s block size which is also proving to be a bottleneck to the system. SegWit2x seeks to eventually push the block size from 1MB to 2MB.

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In recent days, a sufficiently large percentage of blocks were mined using SegWit2x, giving rise to some optimism that a solution might be tangible. But many programmers and miners are not happy. They believe the solution has been brought about too quickly without adequate testing, which means Bitcoin’s challenges are far from over.

These are the growing pains of innovative technologies, and it’s nothing new to the computing world. Bill Gates was famous for once stating “640K [of RAM] ought to be enough for anybody.

It drives home a lesson for the absolute need for scalability on a logarithmic scale. Whereas in the brick-and-mortar world, a successful growing business might see a need to expand operations by opening a branch office or building a bigger warehouse, the networked world is different.

Metcalfe’s Law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). Nowhere could this be better demonstrated than with a popular virtual solution like blockchain or bitcoin in which usefulness and popularity grow overnight from hundreds to thousands to millions of users.

Blockchain technology has the potential to take over a large portion of the world’s commerce. Not simply commerce as it now stands but much more of it, and more finely grained. In the supply chain, for example, the many points of contact between a farmer on one side of the planet and a supermarket on the other have been blurred somewhat due to time and cost issues, leading to widespread delay, spoilage and fraud within the system. Blockchain makes it possible for many more intermediary steps to be factored in and immutably sealed, thus confirming that an organic avocado is indeed organic, or that the medication you are about to ingest has passed all the required certification steps.

Thus blockchain is not just “a better mousetrap,” but a far more intricately detailed one. And all of those extra new checkpoints will need processing power and oversight.

As a counterpoint to the practicality of Metcalfe’s Law, there is Parkinson’s Law – equally applicable to anything blockchain or even cloud related. Cecil Parkinson stated that “work expands to fill the time available,” and this has a corollary in stating that storage space or processing power also expands to fill demand (think of all those emails you have filed away). This is more of a passive and less proactive stance than Metcalfe, and points to inevitable inflationary activity: more blockchain or bitcoin transactions taking more time, costing more in transactions fees, and contributing less to the overall advancement of commerce.

Back to the bitcoin price rally. It’s a good and hopeful indication of better times ahead in the next two weeks, but it is no guarantee. Bitcoin’s price rebound tends to drag the other cryptocurrencies with it, just as it does when it plummets, since many market observers lump them all together in one basket of commodities.

Obviously, anything that actually prevents the fork from happening at all, and encourages trading houses not to suspend business for that day, would be a good thing in terms of buoying the stability of the currency as well as the entire sector.

But the growing pains must be taken seriously. The creators of bitcoin, ethereum and other protocols are very smart people. They can foresee much of this scalability requirement. But they are also human (mostly), which means they are prone to argument, factionalization and general tribalism that has plagued humankind forever, and which has already given birth to Ethereum Classic and Litecoin.

It is this degree of infighting that has mainstream investors and companies worried. Rumors of trolling between ethereum and bitcoin camps are disturbing. They do not paint a cohesive picture of a brave new digital economy. A world economy without borders, seeking to embrace a commerce technology without a center, needs to see a continuum of progress. Cliques and splits have the potential to simply demote the entire cryptocurrency concept to that of freshly minted banknotes in a new post-revolution banana republic.

In the cloud business, the same rumors abound. Cloud was created as an innovative new method for storage and transfer of data and mission-critical applications. Free of the trappings and risks of on-premise IT, cloud was to be a perfect new technology. But then, some wanted their own private clouds. Others wanted a hybridization of public and private clouds. Then came worries about cloud sprawl and the loss of control and security that comes from too much too soon without appropriate governance.

The bitcoin price rally is a good thing, but it is unlikely to be a permanent thing. We are in the midst of a serious correction period. Traditional market analysts would call this bearish territory. August 1 still looms large. This is not yet over.