Bitcoin was scheduled to undergo a hard fork, a permanent change in its protocol, on or around 16 November 2017. Although no one was certain what exactly would occur, many expected that the event would split Bitcoin's blockchain in two, creating two separate chains with distinct digital tokens. Further, if the blockchain is split, it is impossible to know in advance how much hashing power each separate chain will obtain, making the viability of each blockchain—and its digital token—uncertain.
Should this potential network split occur at some point, and the new SegWit2x chain draws significant mining power, this could leave the legacy Bitcoin blockchain in a less secure state. Miners, whose payment for processing transaction depends on the value of the coins they receive, could easily support the blockchain whose corresponding token is more valuable at the time.
The value of such coins could change very quickly, providing a highly unknown situation for all those involved with Bitcoin.
The aforementioned plans came to a halt as of 8 November 2017, when those pushing for the implementation of the hard fork suspended their plans. They also released the following statement:
"Our goal has always been a smooth upgrade for Bitcoin. Although we strongly believe in the need for a larger blocksize, there is something we believe is even more important: keeping the community together. Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin's growth. This was never the goal of Segwit2x."
What Is SegWit2x?
SegWit2x was a solution designed to increase the Bitcoin network's capacity for processing transactions. This proposed solution involves the following:
Implementing Segregated Witness (SegWit), which is an upgrade that would allow blocks of the same size to hold more transactions.
Increasing the size of blocks in Bitcoin's blockchain.
SegWit2x, which was publicly announced in May 2017, obtained the support it needed for approval in June. For SegWit2x to be approved, miners holding 80% of the network hash rate needed to "signal for" (show their support for) the measure.
Since then, the Bitcoin network has implemented SegWit, helping reduce some of the pressure it was experiencing by decreasing the size of individual transactions that are fit into blocks. Once the hard fork takes place, each block will be able to fit twice as many transactions as it did before the fork.
What Is The Controversy?
There is significant controversy surrounding the upcoming hard fork. Certain developers, specifically the ones who maintain Bitcoin core, have come out against SegWit2x. In addition, some public figures, including litecoin creator Charlie Lee and Blockstream CEO Adam Back, have vocally criticised the measure.
Many critics have complained that SegWit2x draws its support from companies instead of users and developers. When Digital Currency Group announced the SegWit2x agreement in May, more than 50 companies had signed on to support the proposal.
The proposal failed to gain the support of many users and developers, resulting in most of the Bitcoin community opposing the solution. User communities, including the Seoul Bitcoin and Bitcoin Munich Meetup groups, issued public statements expressing their opposition to the hard fork.
While some of these user communities expressed their concerns about technical aspects of SegWit2x, one group took a far more confrontational approach. A group representing both Brazilian and Argentinian users and companies voiced concerns in mid-October about how the SegWit2x agreement came to exist in the first place.
"The very nature of an 'agreement' between a few parties in a decentralised consensus protocol can be interpreted as an aggression against the network," the statement read.
Potential Benefits For Investors To Consider
While some are concerned about the potential drawbacks of a network split, others realise that such an event could provide Bitcoin investors with more digital currency. Should Bitcoin's existing blockchain become two blockchains, investors holding the digital currency at the time of the split will have digital tokens for each individual chain.
Bitcoin investors have enjoyed similar windfalls before. When Bitcoin Cash (a fork of legacy Bitcoin that has 8MB blocks instead of 1MB blocks) emerged in August 2017, it quickly became one of the three largest cryptocurrencies by market capitalisation (market cap). In less than 24 hours, its total market cap surpassed US$8 billion.
Investors received a similar experience from Bitcoin gold, a digital currency that was created with the goal of "democratising" Bitcoin by making it possible for a wider group of people to mine the digital currency. While Bitcoin miners use specialised hardware to process transactions, Bitcoin gold can be mined using graphics processing units (GPU) that are available to a broad swath of people.
Should the Bitcoin network split in two, it's unclear which blockchain will be referred to as Bitcoin. While some investors may want to sell some of their tokens shortly after the split, this could be a dangerous gamble, as they may end up selling the digital currency that ends up being the "true" Bitcoin.
"At the last fork, it was very clear which fork was the minority chain," stated Olaf Carlson-Wee, who was the first Coinbase employee and now serves as hedge fund Polychain Capital's founder and CEO. "With this fork, there is a battle over Bitcoin—the name and brand and which chain is the true Bitcoin. And no one is backing down."
No one knows exactly what this hard fork would look like after it has taken place. Many believe that the Bitcoin network will split into two separate blockchains, but it remains to be seen what their names will be.
Should Bitcoin become two separate digital currencies, it is impossible to tell ahead of time how these tokens will perform in terms of future price movements. If the Bitcoin network splits, one of the resulting blockchains could potentially draw the majority of hashing power, leaving the other digital token vulnerable to attack.
Before purchasing or speculating on Bitcoin, investors can benefit significantly from conducting due diligence. They should also keep in mind that risk is inherent to investment, so they shouldn't invest any money they cannot afford to lose.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…