Bitcoin's Coming Taproot Upgrade Will Allow Smart Contracts and Push the Cryptocurrency Higher

Mark Hake

Bitcoin (BTC-USD) is set to move significantly higher based on an upcoming upgrade in November. That upgrade, called Taproot, will essentially allow Bitcoin to join the ranks of cryptos that allow smart contracts.

Up until now, Ethereum (ETH-USD) had reigned king in this area. Now Bitcoin will take on another use for its holders, other than just a store of value.

BTC tokens stood at $61,201 on Oct. 30 mid-day, and have a market cap of $1.15 trillion, according to Coinmarketcap.com.

Much has been written about this upgrade. According to Cryptoslate, this is the first major upgrade in Bitcoin in the last 4 years since 2017 since it implemented Segwit.

Taproot Explained

Crytposlate reports that the hard fork is set to go into effect on Nov. 16. It will bring in 3 new BIPSs (Bitcoin Improvement Proposals).

Over 90% of miners have signaled support for these changes. The first is BIP 340 which will allow a Schnnoor protocol that allows multiple signatures in smart contracts

The second is BIP 341 that introduces Merkelized abstract syntax trees (MASTs) to make smart contracts on Bitcoin more secure.

Lastly, BIP-342 will introduce a new scripting language to Bitcoin. That script, called Tapscript, will allow soft "forks" or upgrades rather than hard forks, or sudden changes.

With Taproot, Decrypt reports, all parties in a transaction can cooperate to make these complex transactions look like standard, person-to-person transactions.

For hardcore programmers, you can learn more about these changes at Bitcoin's main programming site, Bitcoin Core.

Taproot's Expected Effect on Bitcoin

These changes will effectively make Bitcoin much more competitive with Ethereum. For example, by Nov. 16, all Bitcoin nodes will have upgraded with the Taproot protocols.

This will give developers of smart contracts, NFTs, and Defi (decentralized finance) apps a great deal of confidence that they can integrate their Dapps (decentralized apps) into the Bitcoin network. Given the high fees at Ethereum, and given Bitcoin's huge popularity, this will likely lead to a mushrooming number of Dapps using Bitcoin in smart contracts and related applications.

According to Decrypt, this upgrade will also lower transaction costs at Bitcoin, making it more competitive with Ethereum.

Effect on Bitcoin's Price

In turn, that will help push up Bitcoin's popularity as many will see its usefulness is much higher than before. No longer just a store of value, Bitcoin will gain more function as a transaction currency.

Expect to see Bitcoin take a second leg up through the end of the year as a result (see below). So far this year Bitcoin is up 108.5% as of Oct. 30.

This upgrade, once fully implemented has the ability to move the crypto significantly higher over the next year. Here is an example.

According to DefiLlama, Bitcoin already has $194 billion locked up in total value locked (TVL). This includes all wallets, deposits, smart contracts, etc. to date. This is greater than Ethereum's $165 billion TVL, but not by much, especially given how much larger Bitcoin's market cap is compared to Ethereum.

Bitcoin's $1.15 trillion market cap is 2.27 times Ethereum's $505.8 billion market cap. But Bitcoin's TVL is only 17.8% higher than Ethereum's (i.e., $194b/165b). Therefore, with Taproot implemented over the next year, expect to see Bitcoin's TVL explode.

Price Prediction

This alone could lead to another leg up for Bitcoin's market cap as developers include the Bitcoin platform in their Dapps. For example, If Bitcoin's TVL doubles then the existing 2.27 ratio between Bitcoin's market value and Ethereum's could rise at least 50% as well.

So, for example, if Ethereum's market cap rises by 100% over the next year or two to $1 trillion, Bitcoin's market cap could rise to at least 1.50 x 2.27, or 3.4x times Ethereum, or $3.4 trillion (i.e., 3.4 x $1 trillion at Ethereum).

That, in turn, represents 2.96 times Bitcoin's present market value of $1.15 trillion (i.e., $3.405 trillion/$1.15 tr). This means Bitcoin's price could rise almost 200% to $181,154.

If that takes 2.25 years to occur (by the end of 2023), then Bitcoin's ROI will be 62% annually on a compound basis for the next two years. That puts Bitcoin at a price of $99,145 by the end of 2022, and $181,154 by the end of 2023.

Keep in mind, this is just my forecast and is subject to a huge amount of variability. There is certainly no guarantee that this will happen at all. For example, even with the huge gain in TVL, it is possible that Bitcoin's market cap ratio over Ethereum may actually shorten, not widen as I predict.

**********************

This is not financial advice and you should not rely on my analysis to buy or sell any stock or crypto, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of Bitcoin and it is not meant to provide you with specific advice in your own situation. I do not presently own Bitcoin crypto or related securities, but I may buy some of these in the coming weeks.

Comments / 0

Published by

Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
1500 followers

More from Mark Hake

Comments / 0