Bitcoin's illiquidity is going to be a huge problem when the bubble bursts


  • Bitcoin is becoming more and more illiquid as time goes
    by.
  • As more people buy bitcoin, the network becomes
    increasingly congested, and transaction times get
    longer.
  • Transaction fees are going higher, too.
  • This will be a real problem if the price crashes and
    everyone tries to get out at the same time.

This chart shows a seven-day average of the total number of
minutes it takes to conduct a bitcoin transaction, since May
2016. Like the price of bitcoin itself, transaction time has been
rising as the months go by. At the time of writing, it took
four-and-a-half hours to confirm a bitcoin trade, on average:

Blockchain
Luxembourg SARL

If you are holding bitcoin, and you’re worried that the price is
a bubble — it cleared $17,000 last week — then bitcoin
transaction times should really start to scare you. The price of
bitcoin is shifting up and down by hundreds or thousands of
dollars each day. No one knows what the price will be one hour
from now, except that we know it will be very, very
different. 

The transaction time is built into the system. Each
transaction must be confirmed by six bitcoin miners
, and that
takes time. There is a finite number of miners, and the more
transactions they have to confirm, the longer it takes as their
network bandwidth gets filled. Worse, they charge for
transactions and prioritise transactions based on price. Those
who pay more get processed first. 

bitcoin priceMarkets
Insider

Imagine how bad this is going to get on the day some negative
news hits the wires and the really significant holders of bitcoin
decide, “I’ve had enough of this. I’ve made my money. I am
bailing.” The majority of bitcoins are held by a tiny percentage
of the market.
40% are held by 1,000 people
. Those few major holders can
crash the market whenever they want. 

As anyone who remembers the market crashes of 2000 and 2008
knows, these things happen fast. Billions get wiped off the
market in minutes. People who need to cash out now, but who are
an hour or so behind the news, can lose their shirts.

It is brutal.

And blockchain just isn’t equipped to deal with it.

Part of the increase in transaction time has, no doubt, been
caused by the recent arrival of new, less knowledgeable investors
who are coming into the market only because they have seen the
headlines about the price of bitcoin going up, up, up. 

That gives us an idea of just how congested it will be on the way
down.

It will also be expensive. By some counts,
transaction fees are doubling every three months
. Ars
Technica reported that
fees reached $26 per trade recently
.

Those fees will compound the losses of people trying to sell in a
crash.

By comparison, stockbrokers and banks transact trades in less
than a second, usually for less than $10. 

To give you an idea of how comically difficult it is to get out
of bitcoin, click on this
chain of tweets from a Google engineer whose screenname is
@TedOnPrivacy
. “I had to send pictures of my driving license
and passport to some random website, which for all I know could
be about as trustworthy as MtGox,” he writes. “I had enough time
to eat lunch while waiting for the transaction to confirm,
though, so this was nice, I had roasted avocado with an egg.”

It took him days. “Is it really money if you can’t use it nor
convert it to anything else?” he lamented.

Get the latest Bitcoin price here.>>

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