The update scheduled for November 16 highlighted the skepticism of some investors about the Bitcoin network’s ability to adapt and expand.
The last time the Bitcoin network underwent a major upgrade was in July 2017, the price of Bitcoin jumped almost 50% until August 23, when the changes were adopted.
Now, as the original blockchain network prepares for its next major upgrade in November, known as Taproot, few investors are expecting a price reaction anywhere close to this scale. The price of BTC has already doubled this year and reached a new all-time high of around $67,000 last week. While further advances are possible, Taproot itself likely won’t be the catalyst.
“The Taproot update will have minimal impact on the price of Bitcoin ,” said Edward Moya, senior market analyst at online currency broker Oanda.
The Taproot update, which will go into effect on November 16, aims to strengthen the privacy protection of some transactions on the network through an innovation known as “Schnorr signatures.” The update will also enable the use of lighter-weight “smart contracts” – essentially programs stored on the blockchain that are triggered when certain conditions are met. Smart contracts have been a key feature of the rival Ethereum network, enabling the rapid growth of decentralized finance (DeFi) applications that aim to automate many of the functions of banks and trading firms.
“This is a revolutionary moment for Bitcoin ,” said Don Guo, CEO of Broctagon Fintech Group.
However, the episode highlights a key difference in Bitcoin’s approach to network improvements compared to rival blockchains, where updates and tweaks are much more common. Ethereum, the No. 2 blockchain that is fresh off the London hard fork in August and is now moving forward with the Ethereum 2.0 overhaul expected next year, has seen the price of Ether, its native cryptocurrency, rise fivefold this year.
Is Taproot good for Bitcoin?
Bitcoin supporters say the slow approach simply shows how methodical and cautious its developers are – wary of doing anything that could harm the revolutionary blockchain network, which has failed to live up to most expectations since its inception 12 years ago.
But some investors have become more skeptical about the Bitcoin network’s ability to adapt and expand, fearing that its first-mover advantage could fade. Given the fast pace of development of the blockchain industry, four years without a major update could be a death sentence.
“Some might argue that Bitcoin’s lack of updates shows its technical superiority over Ethereum.”, said Denis Vinokurov, head of research at Synergia Capital.
He said the Taproot implementation will likely have a limited impact on the price of the cryptocurrency because the update has been expected for years.
“The risk is that the market will perceive this as something that is already available somewhere else ,” Vinokurov said.
Adam Back, Blockstream CEO and protocol researcher, told CoinDesk in an interview that despite the infrequency of updates, hordes of developers are constantly working to improve the network in the background. Developers have been preparing for a Taproot update since 2018, a year after the Segregated Witness, or “SegWit” update.
“It’s a false story that people are making up that Bitcoin isn’t growing very fast,” Back said. “People mistake long, rigorous quality checks for no change. There is a stream of changes, and it’s big, but it has a slow release schedule because it requires testing.”
According to Beck, “People are getting impatient because it’s been a year since they heard about it in the press.”
“Competing coins are in many ways futuristic marketing for what might happen in five years ,” he said.
Just four years ago…
If history was any guide, the renewal could have led to great things.
The 2017 update that introduced SegWit improved Bitcoin’s scalability by “unbundling” certain data into individual transactions, effectively reducing their size. This move allowed more transactions to be processed without increasing the size of individual data blocks.
Another key feature of the 2017 update was the inclusion of the Lightning Network, a secondary layer built on top of the Bitcoin base layer that enables near-instant, free, and more private Bitcoin transactions. The development of the Lightning Network since 2017 has positioned it to become a pillar of El Salvador’s bid to make Bitcoin legal tender alongside the US dollar.
SegWit was approved on July 23. A month later, when the update went live, the price of Bitcoin increased by 50%, reaching a then-astounding $4,247 on August 23, 2017.
But with Bitcoin now trading above $60,000, some investors think the cryptocurrency’s rally could be looking, well, unfulfilled.
“There may be a limit to how much more you can really get out of bitcoin ,” said Daniel Coury, chief operating officer of Cypherpunk Holdings Inc., a digital asset investment firm. (Koury is a former CoinDesk reporter.)
“If you’re an institutional investor, it looks like you’ve already missed the boat.”, Koury said. That’s why investors are turning to Ethereum and a host of competing blockchains, known as “Eth killers,” according to Koury.
What will Taproot include?
Anton Chaschin, managing partner of Bitfrost.io, a blockchain middleware platform, said that the introduction of smart contracts could indeed increase the interest of institutional investors, given the potential for creating new products and applications.
On the other hand, new privacy improvements may require greater attention from governments interested in preventing tax evasion, money laundering and any illegal activity.
“While they may be attractive for private transactions, it may also raise regulatory suspicions ,” Chaschin said. “There’s already a lot of talk about regulations, and this may be the last straw that forces regulators to act more aggressively.”
Cryptocurrency investors are concerned about China’s crackdown on Bitcoin miners in September. Concerns about grid energy consumption and potential environmental harm remain paramount for many traditional investors.
It may be difficult for investors to become much more optimistic about Bitcoin than they already are, as the price has now fully recovered all lost ground from its June low around $28,600. The long-awaited rollout of new US exchange-traded funds (ETFs) focused on Bitcoin futures began last week, with the ProShares Bitcoin Strategy ETF surpassing $1 billion in assets in just two days. Valkyrie Bitcoin ETF Strategy launched Friday. The VanEck ETF launches Tuesday.
But according to analytics firm IntoTheBlock, the Taproot update could demonstrate that Bitcoin is a technology that can be adapted and upgraded without any impact on its reliability or uptime, while maintaining its investment thesis as a store of value.
“We expect investors to react positively to these updates and the price will continue to rise in the long term ,” said Juan Pellicer, an analyst at IntoTheBlock.
Broctagon’s Guo said: “After successful technical implementation accompanied by growing adoption, there is no reason why the price should not increase . “
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