A power struggle erased billions of dollars off Bitcoin, and it's about to get worse
If you've been following the price of Bitcoin, you're accustomed to volatility. Since the beginning of 2017, the price has quadrupled, but a few sharp drops meant that investors could've easily lost money as well.
But the recent price drop—from an all-time high of around $4,500 to $3,500, and then back to $4,200 again—is different.
SEE ALSO:How's Bitcoin doing after its big split? Never been betterThis volatility comes shortly after the introduction of Bitcoin's recently forged brother, Bitcoin Cash. This other cryptocoin was created on August 1 by a group that wasn't happy with the direction Bitcoin was heading.
It's currently the third largest cryptocurrency, with a market cap of more than $11 billion, and its price has recently tripled—from around $300 to $900—before falling back to around $660. This price rise of Bitcoin Cash has coincided with the price drop of Bitcoin, so what's happening?
All you need to know is in this chart, which show the wild swing of how profitable it is to mine Bitcoin and Bitcoin Cash.
At one point it became a lot more profitable to mine Bitcoin Cash than Bitcoin.Credit: fork.lolBoth Bitcoin (BTC) and Bitcoin Cash (BCH) protocols employ something called difficulty adjustment, which makes sure that miners (people who employ their computing power to create new bitcoins and power the Bitcoin network in the process) always mine an optimal number of bitcoins in a certain amount of time. When there's too much mining power, difficulty goes up to make sure new bitcoins don't flood the market too fast.
But when the mining power is lacking, difficulty goes down, and it went down sharply for Bitcoin Cash. Suddenly, a computer that could mine one BCH (Bitcoin Cash) per day could mine several times as many, making a lot more profit. And since Bitcoin and Bitcoin Cash are very similar, it's easy for miners to jump ship—and a lot of them did.
The chart above shows how profitable it is for miners to mine BTC as opposed to BCH. On August 18, it became more profitable to mine BCH, and since miners nearly always follow profitability, they simply switched to mining BCH instead of BTC. Then, on August 22, it became more profitable to mine BTC again, so miners are returning (see chart below).
The mining power is returning to Bitcoin.Credit: fork.lolThere was also a side effect to this: As mining power (also called hash power or hashrate) went away from BTC to BCH, Bitcoin transactions became slower and more expensive; now that it's coming back, the reverse is happening.
All of this is the most likely reason why the price of Bitcoin is currently recovering while the price of Bitcoin Cash is falling (though admittedly not very fast). But this short-lived reversal shows how fragile Bitcoin really is.
The politics of Bitcoin is messy and about to get messier
That little graph above will become very important again in November, when Bitcoin will once again fork (split into two) to adopt a proposal caused SegWit2x.
This proposal was rejected by Bitcoin's core development team, and even though the majority of Bitcoin miners and exchanges have pledged to upgrade, it might cause a lot of trouble for Bitcoin. Ideally (at least for SegWit2x proponents) after the fork, pretty much everyone should switch to the new version of Bitcoin, leaving the old one to die. But there's always a possibility that some group will decide to upgrade the legacy chain in a different way and push that version as the "true" Bitcoin. If such a plan gains traction, miners will have three different "Bitcoins" to choose from, and that could cause chaos.
All of these forks are mostly revolving around one issue: The block size in Bitcoin's blockchain. If you think of a blockchain as a big notebook with records of all transactions on the Bitcoin network, then one block would be one page in the notebook. Currently, at 1MB, that block is too small, and Bitcoin can only process a low number of transactions per day. Bitcoin Cash, SegWit, SegWit2x—all of these are different proposals to solve this problem.
Why is there so much squabbling over what seems to be a simple upgrade of the Bitcoin's software? First, it's not that simple. Bitcoin has become a huge network, and even the slightest change in code can have unwarranted consequences. Second, a lot of people have a lot of money in Bitcoin, and they're looking to protect their interests. Third, Bitcoin Core—a group of developers that have guided Bitcoin's development since its founder, Satoshi Nakamoto, had disappeared in 2010—has been extremely reluctant to accept third-party proposals. As a result, they're losing their influence over the network, and since miners can choose which proposal to support, if the majority starts to mine, say, Bitcoin Cash, the original Bitcoin might become abandoned.
On one hand, this is democracy at work. It's good, in a way, that Bitcoin cannot be easily altered; if it could, then it would not truly be decentralized. But just like in political democracy, the masses could be manipulated to vote the wrong way. Go to any Bitcoin-related forum and you'll see an immense amount of deception, half-truths, and good old muddying of the water, making it very hard to make an informed decision of any kind.
With Bitcoin's price and cryptocurrency buzz being near their all-time highs, things don't exactly look scary for the future of crypto. But scratch a little bit beneath the surface, and you'll see that the power struggle within Bitcoin, possibly the biggest in its history, is about to reach a climax soon.
The author of this text would like to thank Luka Zubović for his suggestions and corrections.
Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH.
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