Bitcoin: What's in Store for 2016

While the hype may have faded a bit, 2015 was still a busy year for Bitcoin. Venture capital investments topped $1 billion (roughly Rs. 6,700 crores) for the first time. People are finding it easier to invest in the digital currency, thanks to the debut of firms such as Bitcoin Investment Trust. Big financial companies-Nasdaq, American Express and Visa- invested in Bitcoin startups, "a game changer in terms of attitude towards the technology," said Gil Luria, an analyst at Wedbush Securities.

So what's in store for 2016? We'll probably see the first Bitcoin company valued at more than $1 billion, a self-imposed slowdown in new Bitcoin production (which will put some miners out of business) and more financial institutions embracing the currency and its technology. The main unknowns are the price, consumer adoption and-as always-the real identity of Bitcoin's creator, Satoshi Nakamoto.

"Should be a revealing year for Bitcoin," Tim Draper, a venture capitalist who's bought Bitcoins and invested in related startups, wrote in an email. "I expect some of the consumer applications to come to light. I expect the U.S. government to finally recognize Bitcoin as a currency. I expect to hear of the first Bitcoin unicorn (Coinbase maybe)."

Here are some of the developments seen for Bitcoin in 2016:

Bitcoin halving
New Bitcoins are generated all the time, when operators of number-crunching computers called miners solve complex equations and record every transaction. The number of Bitcoins that can be generated, however, is limited by design in the digital currency's underlying software.

Once every four years, the number of Bitcoins that miners can harvest every 10 minutes is cut in half. Summer 2016 marks four years since the last halving, with the cap set to drop to 12.5 Bitcoins every 10 minutes. That's bad news for some miners, especially those with older machines. "They are just going gangbusters and trying to mine as much as possible," said Bobby Lee, CEO of Chinese Bitcoin exchange and mining pool BTCC. With fewer new Bitcoins floating around, the price of the virtual currency could climb in value, he said.

Block size
Data in the Bitcoin network is stored in chunks called blocks. The problem is, some worry that as more people use and buy Bitcoin, the network will run into bottlenecks and dramatically slow down. Some propose changing the block size to solve the problem.

"One of the most important things I'd like to see happen is consensus from all the parties involved in Bitcoin on how we should move forward," said Charlie Lee, Bobby's brother as well as director of engineering at Coinbase and creator of Bitcoin rival Litecoin.

Financial industry
Barry Silbert, whose company runs Bitcoin Investment Trust, recently predicted that Wall Street will begin to trade Bitcoin, according to a participant at a private investor event. Traditional banks, which have long stayed away from Bitcoin startups, will begin to work with these companies, he said.

Financial firms will also continue to look at the blockchain, Bitcoin's underlying technology, to use in secure transactions. While they may not directly use Bitcoin, a blockchain could help verify any financial transaction, from a share trade to a bond coupon payment. R3, a startup, has gathered 30 banks including Citigroup and Bank of America to develop standards and a technology the financial institutions could use. It hopes to unveil initial results next year, said R3 spokesman Charley Cooper.

At the same time, more institutional investors may start trading Bitcoin. "As an ecosystem, we've only just begun to scratch the surface of institutional involvement," said Tyler Winklevoss, an investor in Bitcoin exchange Gemini.

Startup busts
With hundreds of Bitcoin companies vying for business, there won't be enough money to go around. More Bitcoin startups could merge or go out of business, Silbert predicted.

One cause for that will probably be the lower-than- anticipated pace of consumer Bitcoin adoption. Sharp swings in the digital money's value against the dollar and other currencies will continue to turn off users and make Bitcoin impractical for everyday purchases.

There have been recent reports, again, that the creator of Bitcoin has been unmasked, but there's no consensus yet that they're true. One of Draper's funds and his son are investors in Coinbase.

© 2015 Bloomberg L.P.