Traders Worry Over The Future Of Bitcoin

Traders Worry Over The Future Of Bitcoin

Uncertainty makes bitcoin investors turn to other cryptocurrencies

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Bitcoin has always been known for its volatility, but further concerns related to its ability to deliver on promises about faster and cheaper transactions than those made in the conventional financial industry – the backbone of its blockchain – have adversely affected its value. Nearly $2 billion were wiped out within 3 days because of  the issues related to the limited number of bitcoin transactions that can currently happen on its blockchain and the uncertainty whether those could be solved successfully. The proposed “hard fork” solution has also split the bitcoin community.

The price of the bitcoin has always been extremely volatile and that has been considered a huge hindrance by businesses willing to adopt it. Currently a new issue has raised concerns from the bitcoin community – its lack of ability to deliver on promises about fast and cheap transactions – the backbone of its blockchain.

What is more, the latest legal constraints on bitcoin exchanges in China and the rejected proposal for bitcoin-backed exchange-traded fund in the US led to increased pressure on bitcoin trading and subsequent major fluctuations to its price, therefore raising questions about the future of the currency. To be specific, bitcoin was traded above $1,000 on 18 and 19 March, a short time before that it has reached an all-time high of around $1,325 on March 10. Finally, from Friday morning (24. March) until Monday afternoon (27. March), bitcoin’s value had dropped under the $1,000 mark, and even beneath $900 on Saturday.

These developments have challenged bitcoin’s community and its view for a possible solution that could bring back the past fame of the virtual currency as a reliable medium of exchange.

What has happened?

To understand the issue, it is necessary to look at how the system works. The bitcoin transactions are delivered via a process called gathering of “blocks”. When miners use their high-powered computers to make a transaction the whole process is backed up via those blocks. The recipients, who are other miners, also trace the blocks and if they appear correct, they receive the award in bitcoins. It is a two-sided process, which is complete, when the undertaken actions of both sides are technologically correct.

The current issue is because of a discrepancy in the process – there is a huge delay between making and receiving transactions that slows down the system and leading to a massive backlog of transactions waiting to be processed.

Now the main questions are: why has that happened and what does it lead to?

A ‘hard fork’ as a potential solution

The main concern is how to make it possible for the transaction discrepancy issue to be solved. The bitcoin community has split while discussing the possible solutions. While the so called Bitcoin Unlimited group is calling for a “hard fork”, some bitcoin developers believe that such an approach could be unsafe and lead to an unfavorable outcome.

To “hard fork” would mean to split the bitcoin blockchain in order to increase the size of the blocks to process more transactions – the ultimate goal for solving the issue. According to Investopedia, the term ‘hard fork’ relates to blockchain technology and it is “a radical change to the protocol that makes previously invalid blocks/transactions valid (or vice-versa). This essentially creates a fork in the blockchain, one path which follows the new, upgraded blockchain, and one path which continues along the old path.” It is essentially a duplication of the blockchain, which creates two chains that work simultaneously, but one of them is outdated.

Ethereum went through both an unintentional and an intentional fork in the past year and now bitcoin faces a similar challenge. However, industry experts point out the risks associated with forks, especially the uncertainty whether miners would choose to mine the coins in the old or the new blockchain, after it splits as a result of the fork.

For example, because of the famous DAO attack that siphoned off tens of millions of dollars worth of virtual currency by an anonymous hacker, Ethereum went through a hard fork that allowed DAO token holders to get their Ether funds returned.

However, the uncertain outcome of a fork is a great concern for bitcoin traders that affects the currency’s value and is the reason for its dramatic decrease. Experts point out that bitcoin investors are getting rid of their bitcoins or hedging their bets, while waiting to see if the fork happens, and which blockchain will be preferred by the market after it.

Aftermath

The compromised value and stability of both bitcoin and the blockchain is shown in data delivered by Bitfinex that indicates around 49 million more coins have been sold than bought, which is roughly 5 percent of the total coins traded.

Therewithal, other cryptocurrencies such as Ethereum, Dash and Monero have more than doubled since March 10 from $3.5 billion to more than $7 billion, according to data provided by ARK Invest. This study clearly shows that traders are likely about to transfer to another form of digital currency, which they find more stable, but still stay on the blockchain.

At this time it is hard to tell whether or not the fork will happen. But industry experts point out that these events may harm the Bitcoin brand and reputation, while other brands like Ethereum are expected to benefit as a result.

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