Home Stock & Shares Bitcoin Cash Rise Hurts Original Bitcoin as Price Falls

Bitcoin Cash Rise Hurts Original Bitcoin as Price Falls

by Jonathan Adams

Bitcoin’s price has this week seen its first significant drop since October, with prices sliding from $20,000 on Sunday to under $17,000 on Wednesday evening. A correction in Bitcoin’s price between Sunday and Tuesday was intensified by over 10% yesterday as Bitcoin Cash, an offshoot from the original Bitcoin blockchain, made its debut on the Coinbase exchange.

Bitcoin Cash jumped over 50% overnight on its debut, to around $3000, though an anomaly meant it was being quoted at almost $8500 on Coinbase for a short time. There are often differences in the exchange rates for cryptocurrencies between different exchanges due to the lack of connecting infrastructure, market makers and liquidity. However, the variation is generally much smaller than witnessed between between Coinbase’s $8500 quote and the circa. $3000 elsewhere. Coinbase suspended trading until prices came into approximate line with those elsewhere.

Bitcoin Cash’s rising price impacted Bitcoin because the offshoot, which resulted from a ‘hard fork’ in the Bitcoin blockchain in August is a direct rival. With Bitcoin facing scalability problems earlier in the year due to an increasing volume of transactions, the community discussed the best way to alter the cryptocurrency’s protocol, or blockchain software, to speed up processing times.

The blockchain ledger system that verifies and validates ownership and transactions of Bitcoin is made up of a chain of peer-to-peer verified data blocks in which all historical transactions are recorded. Each of these blocks is of uniform size and contains transaction data and the individual key signatures of senders and recipients. As the volume of bitcoin transactions increased these data blocks were filling up more quickly. Bitcoin’s software protocol limited the pace at which new blocks of roughly 1MB could be verified and added to the blockchain to one every 10 minutes. This was leading to backlog of transactions waiting to be verified, which meant paying by or exchanging Bitcoin was becoming gradually less efficient.

The solution to the problem proposed was a technology change to the Bitcoin protocol termed ‘segregated witness’ or SegWit2x. This involved removing the signature data from transactions, which accounts for up to 65% of the total data in a block. Signature data was to be stored in a separate interlinked blockchain thread running parallel to the main blockchain. This would increase the number of transactions that each block could hold, increasing the speed of the verification process.

Some miners and developers were opposed to this solution, considering it to be both in conflict with the bitcoin ‘roadmap’ set out by founder ‘Satoshi Nakamoto’ and also as not effectively addressing the scalability issue longer term. The counter-proposal was to simply increase the size of the blocks in the blockchain to 8MB. The difficulty level of verifying these larger blocks was also made adjustable so that regardless of the number of transactions being processed, and number of miners verifying them, the verification speed would not drop. SegWit2x advocates believed this solution compromised the blockchain’s security and deadlock was reached with neither party having a large enough majority within the community to reach the consensus rules set by bitcoin’s software protocol.

The result was the hard fork in the blockchain or August 1st. With neither party verifying the kind of blocks being verified by the other, the blockchain split in two. The SegWit2x fork, which had majority support, continued as Bitcoin, and the 8MB blocks fork became Bitcoin Cash.

As such, Bitcoin cash is a contender for the crown of the dominant Bitcoin fork. The huge surge in Bitcoin’s value and transaction volumes over the past couple of months has again brought the cryptocurrency’s scalability problem into focus. It’s put forward as a strong argument why Bitcoin cannot develop as a serious alternative to fiat currencies.

Bitcoin Cash being accepted onto major exchanges such as Coinbase, and seeing demand for it increase, pushing up its value, puts pressure on the dominant Bitcoin fork. There will be further cause for concern if the trend of the past couple of days continues for any length of time.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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