Bitcoin Fork Explained

On Tuesday a cluster of disgruntled Bitcoin activists, digital miners and entrepreneurs managed to forge a new version of the world’s most famous cryptocurrency, and Bitcoin Cash was born. It didn’t take wry commentators long to name the incident ‘Bitexit’, rather inevitably, though it could become just as epochal as Brexit promises to be.

What must Satoshi Nakamoto, the name of the secretive coder (or coders) who invented Bitcoin, which began operating as the first decentralised cryptocurrency in January 2009, think of the split – a technical manoeuvre known as a “hard fork”? After all, it appears to be the opening salvo in the Bitcoin civil war.

Bitcoin’s introduction spawned a proliferation of cryptocurrencies – indeed, there are now over 900 available on the internet, including Ethereum, Ripple and Litecoin – but the original remains both the most well known and valuable worldwide.

Cryptocurrencies are big business, as the first benchmark report on the topic, produced by a team from Cambridge University’s Cambridge Centre for Alternative Finance (CCAF), confirmed earlier this year. The study, which gathered data from almost 150 cryptocurrency companies and individuals and spanned 38 countries, showed that as of April the combined market value was $27 billion. And in June, following a spike in the price of Bitcoin, cryptocurrencies saw their combined market capitalisation hit $100bn for the first time.

Furthermore, the study found that almost six million people were actively using cryptocurrencies (mostly Bitcoin), which was three times the previous estimates. Given that Bitcoin is not yet a decade old, the collective buoyancy of cryptocurrencies “represents a level of value creation on the order of Silicon Valley success stories like AirBnB,” CCAF’s Global Cyptocurrency Benchmarking Study suggested, with good reason.

But why did Tuesday’s “hard fork” happen? Bitcoin’s critics have been grumbling for a couple of years that by resisting change and refusing to update the underlying code it has been unable to deal effectively with the recent surge of popularity that has led to its price leap from around $993 per unit at the start of 2017 to its current figure of $2,700.

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Speed – or rather a lack thereof – is the crucial issue here. In simple terms, Bitcoin transactions are finalised when a ‘block’ is added to the blockchain database that underpins the cryptocurrency. As it stands, the blocks are restricted to 1MB per 10 minutes, or seven transactions per second. Consider that Visa can manage 2,000 transactions per second. In short, at peak trading times Bitcoin deals can take hours to complete, thereby not allowing the currency to flourish. Bitcoin Cash seeks to alleviate this problem.

It’s too early to say whether or not the new cryptocurrency on the, ahem, block will survive in the long term, though its creation has, well, split opinion. “Forking is valuable behavior. Like mutations in DNA, it allows for faster evolution,” wrote Fred Ehrsam, co-founder of Coinbase, on Twitter.

“Bitcoin Cash has not solved scaling,” countered Ryan Taylor, CEO of Dash Core, an organisation that deals with the development of Dash, a rival cryptocurrency. “It has merely kicked the can down the road with slightly larger blocks, but still lacks a credible technology to scale to massively larger numbers of users.”

Standing on more neutral ground, Derin Cag, Founder and CEO of Richtopia, told me: “There are pros and cons to the fork. The pros are the media coverage, which is making Bitcoin more mainstream. The second pro is the development of the technology in terms of blocksize, enabling Bitcoin and/or Bitcoin Cash to scale.

“The cons are the extreme divisions in the crypto community and the split of the technology into two. It is an internal debate, which lasted for two years and went from diplomacy to full-on physical war in August 2017 with the fork.”

Cag added: “Many people including BitMain, a Chinese mining hardware company valued at nearly $1bn, and Bitcoin influencers such as Roger Ver, have shown support for Bitcoin Cash. Personally, I will remain neutral and hold on to an equal amount of Bitcoin and Bitcoin Cash to see how this all pans out. Beyond Bitcoin, the blockchain ecosystem is still healthy with the growth of Ethereum and numerous other startups.”

After a week of existence the value of Bitcoin Cash rose to over $361 per unit  – and the Economist reported that tokens worth more than $10 billion are now in circulation, which is still some way behind Bitcoin’s $47bn. Perhaps Bitexit will not prove to be as damaging as Brexit, after all. Bitcoin continues to climb and trades at  all time high, $3437.6 at the time of the report.

This article was written by Oliver Pickup, a senior analyst at eToro.