A bitcoin civil war is threatening to tear the digital currency in two. Here’s what you need to know
By Avinash Shenoy, UK
Jun 11: Bitcoin is in crisis. And what is very concerning is that majority of the wider population who may be invested in this asset/coin are blissfully unaware of what is going on! The set date of August 1, 2017 by the Bitcoin community, for some significant changes could dramatically affect the Bitcoin politics, dynamics and price and if all does not go smoothly, allow the other 710 Altcoins start a battle for market dominance.
There is undoubtedly a war in progress within the Bitcoin community concerning its future and this needs to be fully appreciated and recognised by an investor, both for the benefits and dis-benefits such a climate provides. The main players within the Bitcoin Ecosystem- the miners, the developers, users, etc are all deadlocked in a way to move forward to decide on how to solve what is known as the ‘Scaling’ of the network and if differences cannot be sorted out a the chances of what is known as a ‘Hard Fork’ occurring exponentially rises, which basically splits Bitcoin into two. This is not a good thing.
Those that are familiar with the Ethereum Hardfork that happened in the near past remember the effects it had- two incompatible networks and currencies namely Ethereum (ETH) being one and Ethereum Classic (ETC) on the other were formed. The price of ETH crashed and took a very long time to recover due to the competing chains and arguably the increase in supply of tokens initially.
In order for us to understand how and why this problem has arisen we need to understand a bit about Bitcoin and the technology that supports it.
Bitcoin works based upon a ledger system known as a ‘Blockchain’. A Blockchain is distributed ledger in the sense that it is basically a network of computers distribute all over the world that verify transactions. As every transaction is also recorded it can be traced back to its origin unlike traditional ‘fiat’ currencies (INR, £, $ etc). This is one of the major attractions of Bitcoin over traditional currency systems and equally as every transaction needs to be verified it has been its Achilles heel! The distributed network in recent times simply cannot cope with the sheer amount of transactions we have been seeing due to the global adoption of this Asset Class Cryptocurrency, which is nowseeing a large backlog. Its popularity is literally strangling the network.
Another way to consider this is Bitcoin transactions are processed in so-called ‘blocks’ that use cryptography to establish and set the transactions. But these are set at one megabyte size limit on blocks that is built into the system and is becoming an issueas the currency grows and transactions are increasing exponentially. Quite recently even small transactions are taking hours to be confirmed and this is simply not acceptable for real world use.
Going forward the real question is not whether or not Bitcoin should process more transactions in a given period of time. It is pretty much a given that everyone wants this. The question is how to achieve that.
In order to solve the issue of processing more transactions in a given period of time, two schools of thought have emerged:
1) Bitcoin Core (BTC): This camp wants to use what is known as a ‘soft fork’ which will optimise the code in a manner that will make transactions smaller and through other means and actually increase Bitcoin Transaction Volume.
The Soft Fork as a solution proposed by this camp is called “Segregated Witness” or Segwit when shortened. However it must be noted that they want to keep the 1MB Block size.
2) Bitcoin Unlimited (BU): This camp would like bigger Blocks. They propose to increase the block size to initially 2MB and then to whatever size is needed so that transactions are processed and verified faster through the network. The only caveat with this approach is if you change the block size to anything over 1MB then you are initiating a ‘Hard Fork’.
To sum things up:
The world of Cryptocurrency is nothing if not complicated and certain aspects so intertwined that they are hard to untangle. Therefore speculating on the outcome of this fluid and dynamic issue at this juncture would be premature if not naïve. However one can take lessons and examples from history to form a heuristic.
One such lesson was the previously mentioned Hard Fork of Ethereum which resulted in two competing networks and currencies. This is a very likely scenario and we may see Bitcoin fork and then both currencies (BTC and BU)continue to coexist alongside each other, competing for users and supremacy.
Further credibility is given to this theory because major Cryptocurrency exchanges (e.g. Poloniex, Bittrex, Kraken etc) have already announced that they will list Bitcoin Unlimited (BU) as an Altcoin, alongside Bitcoin Core (BTC) should such an eventuality play out.
What does this mean for the value of Bitcoin and your holdings of Bitcoin as we approach the deadline of Aug the 1st and beyond for SegWit and a possible Hardfork?
Essentially there are two scenarios that could play out:
1) Bitcoin has recently has had a superb rally due to factors in South Korea and the increasing adoption in Japan and has almost touched $3000/BTC this week. If the fork issue can be resolved by the developers, users and miners in a timely manner then the market will regain confidence and we could see a very bullish market.
2) If a scenario where a User Activated Soft Fork (USAF) is pursued with a view to activating SegWit (if there is not enough support), then we could see war like behaviour, where the miners who want to protect their incoming fees for mining BTC, implement a Hard Fork then two networks and two currencies will be formed.
If the Bitcoin forks and splits into two coins, then the price of each of these coins will most likely fall and be worth a lot less than what they currently are. From an economics perspective realise that you’ve just doubled the supply of Bitcoins everyone has, therefore the price has to fall.
Another phenomenon that will most likely play out is that people will start selling the coins that they don’t support, which will in turn drive the price down.
In reality no one can say with absolute certainty what the price will be after a fork for either currency,however there seems to be an overall agreement in the Bitcoin community that the price will drop substantially at least at the beginning.
But what about the Altcoins (eg: Ethereum, DASH, Monero, Litecoin etc)?
There seems to be mixed feelings in the community about this area.
The main reasons for this is because the Altcoins are pegged against Bitcoin in most exchanges when conducting trades. So if you want to sell or buy Bitcoin, you do it with an Altcoin. So the question here is whether an Altcoin is truly independent enough to pour your savings into or will it be dragged down with a Bitcoin crash?
Then the other school of thought is that coins such as Monero, Ethereum and DASH have come into their own. For example the former two are used in Dark web marketplaces alongside Bitcoin as currency. Then there is Ethereum Classic (ETC) which has risen dramatically from $2.17 to around $17.36 in a couple of months, primarily due to backing from an organisation called ‘Ethereum Classic Investment Trust’ which issues shares pegged to the cryptocurrency (https://grayscale.co/ethereum-classic-investment-trust/).
Therefore a drop in price and a war like situation may create a void in which these Altcoins could have an opportunity to fill the leadership void and if there is ever increasing belligerence in the Bitcoin Universe, solidify and hold that leadership position.
Essentially there are three scenarios that you could pursue knowing what you know:
Do nothing: This is always an excellent risk management strategy if you believe the miners will not activate a Hard Fork and that things will be sorted out using the Segwit option. Let the market take care of itself and hope all is well when you come through on the other side.
Convert Bitcoins to Altcoins: This risk management strategy will allow you stay out of the whole Scaling and Fork drama by transferring value to a more reliable and less volatile Altcoin such as Ethereum, Monero, DASH or Litecoin. If your marketplace allows it you could convert your Bitcoin to a Fiat Currency (INR, £, $, etc.), eg Kraken.com.
Sell all of the Bitcoins: If you cannot risk losing any of your Bitcoins it would be best to sell all of them immediately and not take any part in this unfolding drama. Once it is over there will be opportunity to buy them again. But bear in mind thatit is anyone’s guess as to whenwe will come through to the other sideand what BTC or BTU will be priced at when that happens.
The information provided within this article really allows one to achieve one thing: to be prepared and to take appropriate actions to ensure one is not exposed to any downside risk and in a position to take advantage of any upside benefits should it present itself.
Going forward it is important to keep an ear to the ground, visit sites such as reddit r/bitcoin, reddit r/btc and reddit r/cryptocurrency to see what the wider, global public, are saying. They are surprisingly the best live source of information we can use to understand what is happening in the marketplace. However, be cognizant that there are individuals trying to promote their own self-interest within these forums also, so ensure you triangulate anything of interest with other credible sources of information to ensure you have information you can reliably act upon.
Finally, it is important to understand your position with regards to your current Bitcoin holdings, your risk appetite and make a judgement call on which option you would like to be in according to your risk profile.
About the Author: Avinash Shenoy, based in the UK, has worked as management consultant with GE, ASDA-WALMART and the NHS. He holds an MBA with distinctions, with a number of other qualifications ranging from economics to engineering (distinctions). His primary interest is in writing on the topic of Cryptocurrency (Bitcoin, Ethereum, DASH, Monero, Litecoin etc) and 'Fintech', and he has been in this field, both as an investor and as a personal researcher, since 2012.