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Best Currency In 2015

|Includes: Bitcoin Investment Trust (GBTC)

The best currency of 2015 was once again bitcoin. By now, this should not come as a surprise, since with the exception of 2014 bitcoin outperformed every other currency in 2011, 2012 and 2013.

Compared to US dollar, bitcoin returned 34.6% (from 320.6 to 431.5) while the return in Euros was 50.7% and measured in Renminbi the return was 44.25%. bitcoinaverage.com/

It is fair to say that after a 2014 spent recovering from the hype- and price bubble of 2013 (and the demise of the mtGox bitcoin exchange) 2015 has been a strong comeback year for Bitcoin. Total VC investment exceeded $1B for the first time and 401k compatible instruments such as the Bitcoin Investment Trust (ticker: GBTC) have started to appear. Meanwhile the media have been buzzing with stories of how "blockchain technology" will revolutionize everything. A prominent example was the in The Economist which made Bitcoin the main theme of the October 31st printed issue.

Real market adoption, however, is always hard to measure.

During 2015 the number of bitcoin ATMs increased from 341 to 531 (56% growth) while the number of bitcoin accepting physical locations increased 25% to around 7500. Blockchain.info's "my wallet" service doubled the number of accounts to 5.44 million from 2.72 million a year ago.

If we use the number of transactions as a proxy for adoption, things are also going very well.

On average there were around 80,000 transactions recorded into the Bitcoin blockchain (the public ledger which records all bitcoin transactions) every day at the beginning of 2015 and here at the end of 2015 that had more than doubled. Doubling of the daily use in one year might be a good reason to be bullish. Another major bullish factor is the fact that the monetary inflation rate of bitcoin will more than drop in half during 2016 because of the block reward halving around july 1st - just like it did in 2012.

However, for the first time since I understood Bitcoin in early 2011 I find myself unable to be bullish.

The reason is that bitcoin cannot grow in 2016 as it has in 2015 without hitting a limit. The "blocksize limit"

This figure shows the average size of the blocks in the Bitcoin block chain. Beginning 2015 around 300 kB/block we are now averaging around 650 kB/block so another doubling of bitcoin use in 2016 would lead to blocks around 1.3 MB in average size. However, years ago, an artificial limit was introduced into the code which limits the size of each block to 1 MB.

The limit was introduced as safeguard against spam attacks whereby someone could bloat the blockchain by making endless transactions and fill the harddrive of every bitcoin node with junk. Clearly, a 1 MB maximum size of every block makes an average block size of 700 kB close to critical - and naturally, 1.3 MB is impossible.

The blocksize limit is years old and was previously no cause for concern- but the new problem is that the team of people maintaining Bitcoin's code base refuse to increase this limit. Controversy of the "scaling"/blocksize debate has divided the Bitcoin community and to make matters worse, the two main discussion fora: www.reddit.com/r/bitcoin and www.bitcointalk.org as well as the former main bitcoin website, www.bitcoin.org, are all controlled by the same person, "Theymos", who has imposed very strict censorship over the blocksize issue and who bans any discussion of the issue. This has led to the creation of several alternative bitcoin implementations which can scale up with user adoption: Bitcoin XT and Bitcoin Unlimited and uncensored discussion fora: www.reddit.com/r/btc and www.reddit.com/r/bitcoinxt and a more balanced bitcoin website: www.bitcoin.com.

Unless the block size is increased substantially, I cannot be bullish on bitcoin simply because the the 1 MB limit only allows around 3 transactions/second on the block chain - which limits bitcoin to a grand total of 95 million transactions per year and in my opionion there is no way that such a network can have a market cap of over 6 billion dollars - and hence I must conclude, that a Bitcoin which cannot scale (much) beyond 1 MB/block is very, very overvalued at 430 dollars.

If, on the other hand, a solution to to the scaling problem is implemented (such as those proposed by bitcoin XT or bitcoin unlimited) I think 2016 can be very, very bullish for bitcoin.

I currently hold a substatial long position in bitcoin, but I have been dereasing my holdings and I expect to further decrease my holdings until a strategy for bigger blocks is adopted. Stay tuned - I will keep you posted on this issue which I hope will be resolved sooner rather than later.

Disclosure: I am/we are long BITCOIN.