Future of Bitcoins

There are several interesting observations to be made about bitcoins.

Reduction in the Number of Miners

As the bitcoin reward diminishes over the next few years and the difficulty level is raised, it is expected that miners will start to drop out of the network. This means that the difficulty level will eventually go down unless the increase in per-miner compute capacity increases.

Value of a Bitcoin

There is a limit to the number of bitcoins that will be generated, currently estimated at 21 million bitcoins. At $1,000 per bitcoin, this is a total value of USD 21 billion dollars. This amount is trivial compared to the total currency value of most nations. If bitcoins really take off, there will be millions of participants worldwide. Twenty-one billion dollars is not nearly enough to handle the level of transactions that this group will generate. Therefore, many predict that the value of bitcoins will increase by a large factor. Of course, if bitcoins don’t make it into the mainstream, they may ultimately be worth nothing.

Transaction Rate

Currently, the bitcoin transaction rate is limited to one block every ten minutes. At an average of 400 transactions per block, this is a rate of 40 transactions per minute. This pales in comparison to the thousands of transactions per second that Visa and other payment processors handle. It is not clear how bitcoins is going to modify its algorithms to handle a transaction rate that is orders of magnitude greater than the current limit.

Higher transaction rates can be handled, for instance, by increasing the block generation rate. To be able to handle ten thousand transactions per second, the block generation rate would have to be increased from one block every ten minutes to 25 blocks per second.