Why Bitcoin Could Split Into Three in November: QuickTake Q&A

Updated on

Five Reasons 'Bitcoin Jesus' Loves the Digital Currency

Bitcoin has become so successful that the way it operates needs upgrading, and fast. Trouble is, there are opposing views on how to do that and no all-powerful administrative body to determine which method to adopt. After all, part of bitcoin’s allure is its lack of central oversight. The arguments between the different camps transcend the purely technical to encompass philosophy and politics, raising the prospect of the cryptocurrency splitting into different offshoots. After splitting once already in August, another test awaits in November.

1. What’s the problem with bitcoin?

It was built with security more in mind than the kind of volume its success has brought. To prevent counterfeiting, bitcoin transactions are verified by so-called bitcoin miners in batches called blocks. The blocks are then strung together to form the decentralized open ledger known as the blockchain that’s one of the currency’s biggest selling points. Worries about cyberattacks led the system’s designers to cap the size of blocks at 1 megabyte. But as bitcoin grew in popularity over the past nine years, transaction times and processing fees soared to record levels.

2. How big is the issue?

The average time to confirm a bitcoin deal ballooned from under 20 minutes to six hours at one point this year, according to blockchain.info. The backlog of transactions rose to a record, pushing up fees as bitcoin holders offered miners increasing amounts to deal with their transactions sooner. In recent weeks, the congestion (and fees) have lightened significantly as some users have steered clear of the traffic jam.

3. Who are the opposing sides?

As bitcoin is open-source software, anyone can put forward proposals for tweaks. Two main camps have emerged. One is made up of bitcoin miners, the thousands of individuals who form a vital part of the blockchain process by deploying their powerful (and expensive) computers to verify transactions. They support increasing the number of bitcoin transactions in each block. The other represents the so-called Core developers who have been instrumental in constructing bitcoin’s bug-proof system. Their proposal: Allow some data to be moved outside the main network, in effect creating multiple ledgers called sidechains. Without a compromise, two versions of bitcoin’s blockchain would probably come into existence -- effectively splitting the cryptocurrency.

4. What happened with the first split?

In late July, a small group of miners began backing an offshoot with block sizes of 8 megabytes. It’s called Bitcoin Cash. On Aug. 1, they successfully deployed their version of bitcoin’s software, triggering the split. The price of bitcoin hardly moved, perhaps because Bitcoin Cash initially had little support from miners. Even so, its market value soared to $7.3 billion the next day, one-sixth of bitcoin’s.

5. Why is bitcoin not out of the woods?

In July, the broader community compromised with a proposal called SegWit2x -- a combination of the Core developers’ suggestion (called SegWit, for Segregated Witness) and the majority of miners’ proposal. The first step of SegWit2x has been locked in and bitcoin’s network adopted SegWit technology. In November, bitcoin will face its next big challenge when some of the world’s biggest miners move to adopt phase two, the doubling of the size of the block. That could lead to bitter disagreements.

6. What’s that argument about?

Some developers argue that increasing block sizes will leave too much power in too few hands, since the technology required will get more expensive. Some miners have embraced Bitcoin Cash instead and see the SegWit2x proposal as an unnecessary and unloved alternative. Because of the way SegWit2x is designed, the software will activate even if just 1 percent of the community supports it, which would lead to a split again. To avoid such a schism, more than 92 percent of computing power on bitcoin needs to rally behind the proposal, which is looking less likely, according to key players.

7. Would such a split be more dramatic?

Indeed. Greater volatility would probably ensue as more members of the community side with one approach other other. Users could be confused about what would be considered the legitimate bitcoin legacy. Capital and resources could become even more scattered before a winner emerges.

8. Why are some people upset about the splits?

Miners and Core developers need each other to function -- and prosper. Research analyst Ronnie Moas sees bitcoin’s scarcity and acceptance by investors doubling its value to $5,000 by next year, then surging to as much as $50,000 in the next decade, albeit he didn’t specify which offshoot he was referring to. The splits could cause newcomers to become confused about what offshoot can be deemed as "bitcoin," effectively diminishing some of its first comer’s advantage. As the oldest cryptocurrency, bitcoin is facing competition from other alternatives and protocols that vow to displace it.

9. What does ideology have to do with it?

Created in 2009 by a person or a group under the pseudonym Satoshi Nakamoto, bitcoin initially attracted an array of figures including libertarians who wished to counter the control of sovereign regulators and central banks. One attraction is that, in contrast to limitless printed currencies, there can never be more than 21 million bitcoins. And as bitcoin’s market value has surged, peaking at more than $75 billion, the debate has intensified over whether it should embrace more mainstream capitalism or fortify its position as a libertarian beacon. More practically, the debate has revolved around whether bitcoin should become like gold and other assets that store value, or whether the community should focus on developing it as a payment system and platform for economic activity.

The Reference Shelf

Watch Next: A Look Inside One of the World's Biggest Bitcoin Mines

    Before it's here, it's on the Bloomberg Terminal.