The Taproot will make BTC go parabolic in Q4,2021. It is the most significant upgrade since 2017 that will dramatically increase buying interest, sending bitcoin into orbit. This upgrade is a huge deal because not only it addresses some core challenges in bitcoin’s network, but it also strives towards achieving maximum decentralization and maximum privacy.
The first positive sign is Taproot lays the foundations for bigger developments since SegWit (2017 upgrade). We know bitcoin is the closest among all cryptocurrencies to achieve maximum decentralization, and this network upgrade will only take it to the next level. In this article, we are going to look at some important aspects of Taproot, its impact on BTC price action, and some major on-chain metrics we observed over the past week.
Largest Possible Anonymity Set
Gregory Maxwell, the one who introduced the concept of Taproot, believes bitcoin will achieve the largest possible anonymity set when the upgrade is activated in November. We all know the complexity of smart contract transactions differs greatly from ordinary blockchain transactions, but they will become indistinguishable with this particular upgrade.
The number of technologies complementing bitcoin’s privacy is amazing. Bitcoin Script, multi-sig transactions, and lightning channels look to add more privacy to the network. With Taproot, it is only going to get more advanced in privacy and security. Privacy advocates and some revolutionary cypherpunks also believe that the network upgrade taking place in November will attract greater institutional adoption.
Impact on Bitcoin Blockchain
The bitcoin blockchain will be subjected to significant changes with the taproot upgrade. Apart from privacy and security, the functionality of the bitcoin blockchain is going to enhance. By adopting a new digital signature called Schorr Signatures, we are going to see the network run more efficiently and at a lower cost for users.
With the current ‘Elliptic Curve Digital Signature Algorithm,’ we are using more data on the blockchain and more time to verify the owner. For example, if there are two parties in a contract, the blockchain has to spend twice the time to verify and twice the data to store the identity of the owner. This is only creating more friction with higher transaction costs. With the Taproot upgrade, Schorr signatures will be in action, making smart contract transactions unreadable and untraceable.
This combination of public keys made possible by Schorr signatures will not only make second-layer applications become more private but will also facilitate lowering transaction costs.
Where are we now?
Any significant change to a global network like bitcoin will need rigorous testing. According to recent reports, the upgrade will not be activated until November this year. Also, we would require 90% of the miners’ signal approval for the upgrade to be locked in.
If the miners fail to reach the threshold after sending their “signal bit,” they will have to do it again in the next two weeks. As we already reached this target on June 12, we have nearly two months left. Assuming everything goes according to the plan, we will see Taproot go live in November.
How is on-chain data looking?
With Taproot only a couple of months away, we have to see the stage for bitcoin set up perfectly, so when the upgrade kicks in, it will act as a catalyst. The current on-chain data is looking good, but we see a great divergence from real-time activity.
With over 2 Billion dollars in profits, we see aSOPR rally significantly, bouncing higher and resetting to one. This aggregate move in the market is indicating a capitulation bottom. We can view the last few weeks in two ways- bull market distribution or disbelief. In both cases, we see the market absorb the spent supply. To get out of this capitulation event, we will have to see massive accumulation, which would happen with a series of disbelief rallies.
The spending behavior is usually assessed with Realized Cap HODL waves, but to understand the flow of supply, we need to check with exchange data. The graph below shows significant outflow volume, which is similar to the peaks in November 2020.
Another interesting dynamic to pay attention to is exchange outflows. When the major sell-off took place, we saw large deposits of around 30k BTC in exchanges like Coinbase. Now, all of the inflows are converted into net exchange outflows, balancing the exchange reserves.
On-chain data also shows smallholders having less than 10 BTC now own an all-time high of 13.8% of the total supply. This is an interesting trend to watch moving forward, as it supports mass distribution and accumulation across different types of holders.
In conclusion, the on-chain activity is historically low, and the price action of bitcoin is showing positive traits. We can see the on-chain shifting to higher levels soon, as we are now sitting at the 2018-2019 capitulation bottom. With that being said, the upgrade will only make a bullish case for bitcoin, and if we continue with the current pace and network growth, we should hit $100k by the end of the year.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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