Recently, Bitcoin has experienced significant price volatility. On the 17th of July, the price fell towards the region of $1900 then bounced back to the region of $2700 on 21st July.
What Is a Fork?
The reason for this has been the uncertainty surrounding a fork in the coin. A fork is a change in the protocol making up the blockchain, therefore creating two different chains; a new chain and maintaining the current chain.
There has been a disagreement between miners and users of Bitcoin over how to ensure scalability of the digital currency, cost and the speed of transaction. The current Bitcoin currently has a block size of 1MB, making the transactions slow. In addition, the fees are high making it expensive to use.
If it were to be used in everyday transactions, and therefore, to compete with VISA, then something needed to happen. Further to this, other coins with their own advantages may overtake Bitcoin. This could lead to the demise of the flagship cryptocurrency.
A proposal was made which needed large support from the community. But if no consensus was agreed, the currency would be forked. When an agreement didn’t look likely, the value of the coin fell. But since a clearer future has emerged, the price has since increased again.
The proposals that are favoured by 80% of developers is called Segregated Witness (SegWit). This is added to the existing blockchain and aims to increase the block size by November to 2MB and to 4MB by 2018 to speed up transactions. However, those against say that it is not worth it is as the currency is expanding too fast and SegWit will become redundant quickly.
Bitcoin Fork: What Would Happen?
The agreement has since not gone through and the currency is looking likely to be forked. A new currency would be available, Bitcoin Cash. The difference between the two types of Bitcoin is the size, quantity and value of the coins.
Bitcoin Cash will have a block size of 8MB: more coins will be available and the transaction fees will be lower. What’s certain is that there is uncertainty around the future of Bitcoin and the fork. A few key points to look at are:
- The impact to alternative coins. The fork may increase the use of Bitcoin, decrease it or provide opportunities for alternative coins to increase their market presence.
- As we see in other markets such as equities, when there is uncertainty, price volatility is higher and that is no different for Bitcoin. Investors will attempt to price-in events and demand. This will provide a great opportunity for profit making.
- The survival of the new Bitcoin Cash will be determined by the demand for it, the ability to use it and the willingness of the miners to mine it.
Those who own Bitcoin should know that if they hold coins on their computer, they can control what happens to them. If they are held in a wallet or exchange, then this control is limited; the provider of the service will have decided on a migrating pattern, and whether these will be received as Bitcoin Cash – this may have been disclosed to the holders already.
Finally, investors have been advised to avoid buying or selling bitcoin around the date of the fork, 1st August, as these transactions may not be recorded, leaving holders out of pocket.