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August 1, 2017

A fork in the Bitcoin road – Good news for investors, bad news for blockchain

The arrival of Bitcoin Cash could signal major returns for investors, but could the blockchain get too big? Could there be a 'wipe out'?

By Ellie Burns

Those who have invested in bitcoin could be heading for an unexpected windfall, with the cryptocurrency today being split in two following a ‘hard fork’ in the blockchain.

A small group of mostly Chinese bitcoin miners have initiated the ‘fork’, whereby the blockchain splits in two. The result of this ‘fork’ is an alternative to bitcoin, dubbed ‘Bitcoin Cash.’ Owners of bitcoin should receive both versions of the currency after the split – potentially doubling the amount in people’s online wallets.

The ‘fork’ was the result of a disagreement between the miners and developers of bitcoin, with key backers last week agreeing the adoption of a new technology which signaled a change in how the decade-old cryptocurrency would operate.

The argument revolved around two competing solutions to the boom in bitcoin demand and the pressure on existing technology. Segwit2x proposed to move data outside the block to allow for more transactions, whereas Bitcoin Cash wanted to increase the size of each block to 8MB.

READ MORE: Blockchain could save financial services $20 billion, say execs

“While the breakaway plan is argued to be more aligned to the vision of Bitcoin’s original creator and potentially more safe as it doesn’t include a controversial feature to move the digital signatures of transactions off the ledger, it arguably risks the blockchain – the ledger containing every transactions – growing too big,” said Mustafa Al-Bassam, security expert at Secure Trading.

“This will mean that fewer people have the storage space required to run a full Bitcoin client, which may cause Bitcoin to become more centralised, as only organisations with a large amount of resources will be able to store the entire ledger.

Following the split, Bitcoin fell by around 4% to around £2,000, with Bitcoin Cash rising from $200 to $370. However, the impact on prices is all speculative until traders start buying in to the alternate cryptocurrency. However, a fall in prices is just one risk to the splitting of the near decade-old bitcoin cryptocurrency, with investors being warned of a possible ‘wipe out’ in the event of either digital currency failing.

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“Today’s Segwit2x and Bitcoin Cash fork poses a risk for users of the cryptocurrency during the transition phase,” said Christian Kourtis, Senior Associate at Gowling WLG.

“In the event that only a minority of the network computing power supports one of the branches there is a potential for this weaker branch to become orphaned by the network or, in certain circumstances, for the forks to converge resulting in the “wipe out” of the weaker branch.”

BitcoinThe Bitcoin split also raises some interesting, some would say worrying questions. Is Bitcoin Cash an entirely new digital currency? If so then it should be treated as a security. Others, however, may argue that it is an offshoot of the original Bitcoin and so does not constitute a new currency.

There is a silver lining to these unanswered questions, with regulation seemingly an inevitability and whereby Bitcoin and other cryptocurrencies are brought into an environment where regulation is standard.

“Authorities may argue that technical events, such as forks on the network, mean that greater regulatory supervision is required for cryptocurrencies to protect the public,” said Mr Kourtis

“This is good news for investors who can buy investments which are subject to proper disclosure and regulatory scrutiny.  It’s also good news for issuers as regulation brings greater confidence and credibility.”

“However, the continuing issue for authorities is that they are unable to enforce regulations on the decentralised network. As has always been the case, the only point of access is vis a vis the virtual currency exchanges which are only a small piece in the overall consensus network.”

It is also an important milestone for those who questioned the monopoly of Bitcoin – the flagship digital currency which has seen prices soar from $750 at the beginning of the year to its current £2,000 mark.

“On the whole, the fact that there is disagreement and the freedom to offer a breakaway plan is positive.  While it is still a highly experimental and volatile system, the market is being allowed to determine which version of Bitcoin is more valuable – and this is an important precedent to set.”

The future of digital currency needs competition – for investors, merchants and consumers. Just like HSBC has Barclays and JP Morgan has Goldman Sachs, competition is necessary for a market to thrive. This ‘fork’ might just be what is needed to take Bitcoin mainstream. Alternatively, prices could crash and a ‘wipe-out’ could stall mass adoption – only time will tell.

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