The Bitcoin Civil War – Rate Reductions A Possibility

Bitcoin experienced a remarkable increase over the course of 2016, rising by 250% against the United States dollar in a twelve-month period. The outlook was hopeful as we entered 2017. Unfortunately, what we’ve seen is constant fluctuation in the currency this year.

There’s a war raging around Bitcoin. This makes the future of the cryptocurrency uncertain. Some even feel that the issues surrounding Bitcoin could lead to the currency’s fall from grace.

The issue comes down to disagreements between the developers of Bitcoin. That’s the opinion of BitMex CEO Arthur Hayes, at least. He believes the current fluctuations demonstrate how uncertain the community behind Bitcoin is about the future of the currency. In particular, he points to the important date of August 1st, 2017, which is when several important decisions about the techniques behind Bitcoin must be made.

The Way Bitcoin Works

So what has caused the disagreements within the Bitcoin community? To figure that out, we first need to examine how the cryptocurrency currently works.

Bitcoin relies on something called the “blockchain”. This is a public registry that has no central location. It lists every single transaction made using Bitcoin. In doing so, it removes the need for third-party intervention in Bitcoin trading. This is why so many traders prefer using Bitcoin exchanges over more traditional exchanges.

The blockchain consists of a series of blocks. A new block gets created every ten minutes when a batch of transactions receive approval. This block then gets added to the existing blocks. The chain currently stands at about 475,000 blocks. Over 52,500 new blocks get generated each year.

Bitcoin experienced a remarkable increase over the course of 2016, rising by 250% against the United States dollar in a twelve-month period.

It gets more complicated from there. A lot of computational power goes into deciding which transactions receive approval. It’s essentially a big puzzle. Those who find the solution receive new Bitcoins, which is why so many people keep working away at the currency. However, the amount of total Bitcoin generated halves each year. This limits the total amount of the currency that will ever be generated to 21 million pieces. Right now, there are approximately 16 million Bitcoins circulating.

Almost 8,000 computers – each referred to as a “node” – run in tandem to keep the Bitcoin software up and running. This network also tracks transaction approvals and maintains the full register or blockchain. Having so many computers also offers a security benefit. Each node has a full log of Bitcoin transactions. If somebody tries to alter the log illegally on one node, the rest will pick up on it instantly. This ensures the integrity of the exchange.

The process begins anew every ten minutes. Each remaining transaction gets placed together with newer transactions and the ones that receive approval to get added to the next block in the blockchain.

The Big Issue

It’s pretty complicated. Still, the system has been in place for many years. Even so, there exists a lot of disagreement relating to the blocks that make up each transaction period. The “war” revolves around how many transactions can fit into a ten minute slot, especially now that Bitcoin has grown so extensively. The size of a single block stands at 1 MB. This allows for three transactions every second.

The growth of the cryptocurrency makes that seem inefficient to some. The point of contention is that the current network’s size does not match the amount of Bitcoin transactions. Many point to the fact that it can often take several days for them to receive payments for a transaction as evidence of this. Some, including programmer Mike Hearn, believe that the size of a block should increase. He suggested a size of 8 MB, which would allow 24 transactions per second.

That’s where the contention arises. Some argue that increasing the size of a block places the decentralized nature of Bitcoin at risk. Large blocks mean that each computer needs, even more, power to process transactions. This could exclude slower computers from the blockchain and make Bitcoin a more exclusive currency that it was intended to be.

The war of words has led to two possible solutions. The first is the use of what’s known as “Segregated Witness”. This would take away the cryptographic signature attached to each transaction, thus allowing for more transactions in a block. The technology is already a part of the Bitcoin network but has yet to become part of the Bitcoin protocol. For that, it needs the support of 80% of Bitcoin miners, according to the Digital Currency Group.

The second is more controversial as it relates to expanding the size of blocks. Some argue that the size of a block should increase to 2 MB within six months, thus doubling the number of transactions processed per second.

It’s a controversial issue that has no consensus approval, despite the debate raging for a number of years.

What Happens Next?

The most likely action is the increase of Bitcoin blocks to 2 MB. That’s an opinion that both Bloomberg and BitMex CEO Arthur Hayes share.

This would require all Bitcoin miners to switch to a new version of the cryptocurrency’s protocol. However, there is a chance that not everybody will make the switch. This would split the network and essentially create two different kinds of Bitcoin.

That possibility has caused a lot of unrest and has led to many, including Hayes, to speculate that we will see a lot of fluctuation in the value of Bitcoin until August 1st. It’s also possible that a lot of current Bitcoin investors may make the switch to Ethereum, the second most popular cryptocurrency.

Over the long term, these fluctuations should settle down. After all, there are investors who have millions, or even billions, of dollars tied into Bitcoin. The likelihood is that the collective decisions of these high-end investors will influence the decisions that all investors make in the coming months.

How Interactivated Can Help

Interactivated is increasingly active in the cryptocurrency sector and can help you with any concerns you have with trading or Bitcoin mining. Further, we have developed innovative trading bots that will help you understand the complexities of the blockchain. We may even release our own cryptocurrency in the future.

Whether you’re a business owner or individual trader, Interactivated can help you understand Bitcoin. Contact us today to discuss new cryptocurrency opportunities.