2017 was bitcoin’s year.
The cryptocurrency graduated from outsider status to becoming part of mainstream conversation as its volatile price trajectory, scandals, and promise crafted an exciting growth story. By the end of 2017, bitcoin futures had begun trading at prominent exchanges, such as CME and CBOE, and governments around the world were considering regulation for the cryptocurrency.
If bitcoin’s enthusiasts are to be believed, 2018 will be another stellar year. To make their point, they cite price predictions by experts and analysts. But it is difficult to take those predictions at face value.
This is because bitcoin is unlike other fiat currencies. In addition to the economics of supply and demand, technological innovations and government regulation also play a significant role in determining its price movements.
With those caveats in mind, here is a brief list of factors that might influence its price in the coming year.
Segregated Witness (SegWit) Adoption
High transaction fees regularly cropped up as a countervailing narrative to bitcoin’s growth story in 2017. The SegWit hard fork, which increased the size of blocks on bitcoin’s blockchain, was expected to speed up numbers of transactions and lower their fees.
But that hasn’t happened.
Out of the 156 companies that have signed up for activating SegWit since its inception, only 17 have implemented it so far. Per recent statistics, SegWit constitutes only 10% of all bitcoin transactions. Their reasons are a complex set: from the difficulty of implementing security and technology upgrades for the hard fork to the fact that SegWit is relatively untested within bitcoin’s ecosystem. In the meanwhile, the backlog of transactions and fees on bitcoin’s blockchain continue to climb.
But 2018 promises better tidings.
Bitcoin’s core development team is set to launch a new wallet interface featuring SegWit in May 2018. Cryptocurrency wallets offered by Coinbase, the largest U.S.-based exchange, will also be compliant with SegWit in 2018. Greater traction will reduce transaction fees and help attract more users to bitcoin’s platform.
Introduction of State Channels and Sidechains
SegWit is also expected to lead the way towards the Lightning network, which is being touted as a solution to bitcoin’s scaling problems. (See also: What Is Bitcoin Lightning Network?) The network envisages a number of state channels (or, separate payment channels) between two parties to enable conducting of transactions off bitcoin’s blockchain. A similar concept is sidechains, which offer less security and decentralization but can be used to take transactions off bitcoin’s chain. (See also: Is Bitcoin's Lightning Network A Game Changer?)
Nolan Bauerle, research director at CoinDesk, likens state channels to bitcoin plugins. “They (the channels) might suck out a lot of oxygen off other cryptocurrencies (that are competing to become the preferred medium of exchange) and empower bitcoin,” he says. The first set of transactions on Lightning network were tested in 2017. But the timeline for Bauerle’s prediction is still unclear. Some say it could be as less as six months or as much as two years.
A Pivot To Store Of Value
Bitcoin’s rising transaction fees made it unviable as a medium of exchange and mired it in an identity crisis in 2017. The cryptocurrency is behaving more like a store of value (similar to gold) and has attracted the attention of institutional and retail investors. As a result, technological innovations outlined above may end up having little to limited effect on bitcoin’s price in 2018.
Instead the cryptocurrency’s price movement in 2018 may be determined as a store of value. In this state, its price is influenced less by its utility in daily transactions and more by media mentions, government regulation, and institutional money. The last two categories will have an especially strong effect on bitcoin’s price.
Spencer Bogart, a partner at Blockchain Capital, has predicted a price target of $50,000 for bitcoin based on interest from institutional and retail investors. “The drawbridges for institutional investors have only just been lowered,” he told CNBC, adding that a “trickle-down” effect will attract retail investors to cryptocurrency markets. But don’t expect to see to diminishing of bitcoin’s volatility.
The prospect of more hard forks as well as more institutional money that aims to capitalize on bitcoin’s volatility (such as funds that double in value based on bitcoin’s price) will continue to make the cryptocurrency a bad idea for risk-averse investors. 2018 might also see the first IPO of a crypto-company, according to another CNBC piece.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.001 bitcoin.