US-based bitcoin exchange Coinsetter assesses that the ongoing block size issue can eventually have ripple effects on bitcoin’s trading and prices.
While nothing earth shattering, its analysis is a reminder of the interconnectedness between the Bitcoin economies of payments, mining/validation and exchange. In most debates on the topic, Bitcoin’s core technology is the focus, the effects on exchangeability seldom raised.
In its analysis, Coinsetter suggests that leaving the block size limit as is (1 MB) may adversely affect Bitcoin’s value as a quick, international transactional system, if its adoption continues to increase as anticipated. With more transactions, the available capacity of blocks is reduced, and transactions will have to wait more than the current average of 10 minutes. This was experienced during the latest ‘stress test’.
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The reduced value may then translate into reduced prices. In addition, longer confirmation times may hamper trading activity. Market participants may face delays in trading their capital, including arbitrageurs for whom timing is important. This may result in a less efficient market.
On the other hand, an increased block size can adversely affect miners, particularly the smaller variety or those based in locations with underdeveloped internet infrastructure. For them, processing larger amounts of data will be too difficult, thereby compromising the goal of Bitcoin’s globalization.
Miners facing increasing costs may no longer find it profitable to operate, and may resort to buying bitcoin instead of mining it. Perhaps counterintuitively, a reduced mining network can actually lead to increased demand and prices.