Bloomberg: Bitcoin Outlook for 2016

Although the hype has faded, 2015 was still a busy year for Bitcoin. Venture capital participation reached $1 billion for the first time. With the emergence of companies like the Bitcoin Investment Trust, it became easier for people to invest in digital currencies. Large financial companies (Nasdaq, American Express, Visa) have invested in Bitcoin startups. "It's a complete change in attitude towards this technology," said Gil Luria, an analyst at Wedbush Securities.

     So what will 2016 bring? We may see the first bitcoin company worth more than $1 billion, a reduction in the creation of new coins (which could put some miners out of work), and more financial institutions embracing the currency and the technology. Still unknown are bitcoin prices, consumer adoption, and the mysterious, as always, identity of bitcoin creator Satoshi Nakamoto. All of this is possible as bitcoin prices approached a year-high of $438 on Friday.

“This is the year that Bitcoin truly comes to light,” venture capitalist Tim Draper, who has bought Bitcoin and invested in related companies, wrote in an email. “I look forward to seeing some consumer-facing applications emerge. I look forward to the U.S. government finally recognizing Bitcoin as a currency. I look forward to hearing from the first leading Bitcoin company (likely Coinbase).”

Here are some of the developments that Bitcoin will face in 2016:

Bitcoin Halving

     The digital currency's underlying software dictates that there is a limit to the total number of bitcoins that can ever be created. Miners with computers that have enormous computing power mine new bitcoins every moment, processing complex equations and recording every transaction. So every four years, the number of bitcoins miners can mine every 10 minutes is cut in half. By the summer of 2016, four years after the last halving, output will be cut to 12.5 bitcoins every 10 minutes. That's bad news for some miners, especially those using older equipment. "They're going to go crazy and mine as much as they can," said Bobby Lee, CEO of BTCC, a Chinese exchange and mining pool. As fewer new bitcoins are created, the value of the virtual currency will rise, he said.

Block size

     Data in the Bitcoin network is stored in what are called blocks. The problem is that some people worry that as more and more people use Bitcoin, the efficiency of the network will reach a bottleneck and slow down significantly. Some people have proposed increasing the size of blocks to solve this problem. "The focus I would like to see is that the Bitcoin industry reaches a consensus on how to develop," said Charlie Lee, Bobby's brother, Coinbase's technical director and Litecoin founder.

Financial Industry

Barry Silbert, who manages the financial services firm Bitcoin Investment Trust, recently predicted that Wall Street will start trading Bitcoin, according to participants in a private investment program, and that traditional banks, which have long shied away from Bitcoin startups, will begin working with them.

     Financial companies will also continue to focus on blockchain, the core technology of Bitcoin, to ensure transaction security. They may not use Bitcoin directly, but blockchain can help verify any form of financial transaction, from a share transaction to the use of a coupon. A startup called R3 has brought together 30 banks, including Citigroup and Bank of America, to develop standards and technology for financial institutions to use blockchain. R3 spokesman Charley Cooper said the company hopes to demonstrate its initial results next year.

Startup bankruptcy

     At the same time, more institutional investors may start to invest in Bitcoin trading. "As an ecosystem, we are just beginning to develop the interface for institutional participation," said Tyler Winklevoss, an investor in Bitcoin exchange Gemini.

Startups go bankrupt As hundreds or thousands of bitcoin companies enter the industry, there won’t be enough money to support them. More bitcoin companies will merge or go out of business, Silbert predicted.

     One reason for this may be the low consumer adoption of Bitcoin compared to the high enthusiasm of practitioners. The sharp price fluctuations of Bitcoin against the US dollar or other currencies will continue to prevent some users from joining and make Bitcoin's daily payments impractical.