Bitcoin Surges, Then Sags After Investors Lose Opportunity for Double Dip

A physical representation of a bitcoin.
Antana / Flickr

The price of Bitcoin surged to nearly $8,000 per unit Wednesday afternoon after BitGo, a Bitcoin app developer, announced it would cancel the upcoming Segwit2x “hard fork” in the digital currency’s blockchain, but it has since receded to $7,200 and boosted many alternative coins out of their recent price slumps.

If you have no idea what any of that means, here’s a quick glossary:

Blockchain: The underlying technology for digital currencies like Bitcoin, Ethereum, Litecoin, and Monero. Blockchains are public records of transactions that are hosted by groups of individual web users instead of privately hosted on a single server. This system aims for more accountability and security, guarding against foul play like book cooking or Equifax-scale hacks. For a more detailed explanation, read this article.

Hard Fork: A split in a blockchain, allowing users to choose between adopting new features/rules or continuing on with the old system. This is a general principle of software development, where an existing product’s code is modified drastically enough to become its own entity. For example, Amazon’s mobile operating system Fire is a “fork” of Google’s Android software.

Many blockchain systems are open source, meaning anyone can grab and use the existing code, and lots of new currencies have been created by people who modify an existing blockchain code to make improvements to it. When they start their own chain, they don’t have to do so from scratch — they can create a jump-off point from an existing one. Alternatively, the developer of an existing currency may make a radical change to the current code and deploy it through a hard fork. For a more detailed explanation, read this article.

Segwit2x: Bitcoin has been troubled lately by sluggish transactions and rising fees for those transactions. The issue comes with scalability — as more users buy Bitcoins (or fractions of Bitcoins), its speed in processing transactions has stayed the same, and, as such, the blockchain’s fee for each transaction is rising. A proposed solution to the problem would double the size of the network’s blocks from 1MB to 2MB, allowing more data to be processed in the same amount of time.

That’s the “2x” part of the name. “Segwit” stands for “segregated witness,” which is a technical upgrade to the blockchain that’s above this layman’s head. But while large-scale miners and developers liked the idea of the Segwit2x upgrade, the core userbase opposed it, primarily because it would slow down synchronization with the network. “Synchronization” means downloading the entire blockchain to your computer’s hard drive; if you recently bought some bitcoin, you need to sync with the blockchain to get the funds in your “wallet.” Faced with such an increased use in their hard drive storage, time, and bandwidth, most Bitcoin dabblers fought hard to maintain the status quo.

For a more detailed explanation, read this article.

Alt Coins: Other digital currencies that currently are nowhere near the price or market capitalization of Bitcoin, all jostling to become the Facebook to Bitcoin’s potential Myspace if its issues with privacy and scale lead to a drastic decline in everyday usage. Some of the top currencies in this space are Ethereum, Dash, Zcash, Factom, Neo, and Monero.

BitGo: Just to clarify an important point — the developers of Segwit2x are not the same as “Bitcoin Core,” or the official, decentralized developers of Bitcoin. Bitcoin’s inventor, the pseudonymous Satoshi Nakamoto, has not conducted any known public activity since 2010. The team that he (or they) gave the official Bitcoin assets to are vehemently opposed to Segwit2x.

Mike Belshe, CEO of BitGo — which took a leading role in developing Segwit2x — announced the hard fork’s cancellation in an email Wednesday afternoon. “Although we strongly believe in the need for a larger block size, there is something we believe is even more important: keeping the community together,” he wrote. “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.”

So what do these price swings mean?

Of course, it’s impossible to guess why millions of people would buy or sell a particular asset at any given time, but one big factor certainly comes to mind: a “double dip.”

Many users were aware of the upcoming hard fork and were buying up extra bitcoin with the expectation that anything they already owned would become two different coins — the traditional BTC and a new unit, B2X — at no extra cost to them. This had already happened once before; when “Bitcoin Cash” (BCH) launched, BTC owners got a new coin out of their investment which, if they held on to it, is valued at ~$630, slightly under 9% of BTC’s ~$7200. An immediate diversification of one’s portfolio and 8%+ growth? Not a bad deal.

Thus, most market capitalization was going to Bitcoin in anticipation of the hard fork, with true believers planning to sell off their B2X immediately for more BTC and others holding on for a BCH-esque outcome. This likely attracted many new buyers, as Coinbase, one of the biggest and easiest websites for fiat-to-BTC purchases, promised a double dip for Bitcoin owners.

The surge: The true believer userbase repeatedly called Segwit2x a “51% attack,” which is a term in the original Bitcoin whitepaper warning that anyone controlling a majority of the power behind the blockchain’s block creation could compromise its integrity. Now that it has been canceled, the Bitcoin community is rejoicing, saying that Bitcoin is strong enough to withstand a 51% attack, that it has achieved Satoshi’s vision of “rules without rulers,” etc. This optimism likely drove the price to a new record, not quite breaking $8,000 but still showing that buyers feel secure in the currency’s future.

The dip: However, traders who hoped for a double dip may have used the opportunity to maximize their profits by converting very strong BTC into altcoins — whose prices have recently slipped amid Bitcoin’s soaring. And with any big sell-off comes a price retreat.

Where do we go from here?

The short answer: Nobody knows. Earlier this week, a commentator I listen to frequently suggested that BTC’s bull run to $7,500 — and an ensuing drop for alt coins — would lead to an overall crash for the digital currency market, since Bitcoin would eventually correct with a big drop, hurting the public’s perception of digital currencies as a whole.

Of course, the big picture is that digital currencies will become as widely used as smartphones, as blockchain technology will fix a lot of problems endemic to the current Internet and banking industries. But which particular coin will become the “killer app,” no one knows — and there will be extremely volatile ups and downs until the adoption level is high enough to figure out what the “normal” value for these currencies should be.


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