Technology

Why Did Bitcoin Crash?

Bitcoin, the current hero of the cryptocurrency world, lost over $1,000 of its value in the past couple of days, dropping from the heady heights of nearly $8,000 down to around $6,100 (all prices USD). Some analysts suggest the tumble is not over, with a potential for the floor for the  BTC price to be around $5,000.

This is quite a slide for a currency that has spent much of the summer of 2017 hiking its way ever higher and carrying with it the collective optimism of the cryptocurrency market in general

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This is not the first BTC price crash, in fact such events are typical of all cryptocurrencies, but this one may have more to it than a simple market correction. It was likely a victim of SegWit panic.

bitcoin bubble BTC price

The hard fork known as SegWit2x (called 2x for short) was scheduled to happen in mid-November at bitcoin block 494,784. SegWit2x was supposed to improve bitcoin operations by increasing the network's block size to 2MB, up from 1MB today, as well as continuing the newly installed process of removing (segregating) some of the more cumbersome elements of recording (witnessing) the transactions.

It was a substantial hard fork that proved to be divisive within the communities of Bitcoin power players, and as a result of the confusion and lack of consensus, it was cancelled.

Volatility and unpredictability are not welcome in the investment community, and with BTC price having gained substantial traction among investors over the past few months especially, the market is showing greater interest in it as a nicely performing commodity than the social-mathematical experiment that it started out as.

As the investment market caught wind of the SegWit2x cancellation, it proved yet again that the fantastic ride upwards in value comes with significant elements of risk. These include:

Divisiveness and confusion within the Bitcoin communities, including uncertainty as to which way is the best way to operate (1MB? 2MB? 8MB?)

Literal secession, with the creation of parallel currencies Bitcoin Cash and Bitcoin Gold, each with their own philosophical and technical preferences.

A continued lack of direct practical usability – people still really can’t use their bitcoins for much, and transaction approvals still take too long.

Then there’s the speculators. Given that the SegWit2x fork intended to duplicate the currency, investors were piling on their BTC price purchases in anticipation of literally doubling their money, post-fork. As soon as the cancellation became news, they immediately and accordingly reduced their positions and sold off big time. A huge selloff inevitably gathers momentum as it rolls downhill.

The Rise of Bitcoin Cash

At the same time, however, Bitcoin Cash (BCH) started to rise. It surged out of its post-birth doldrums to climb to around $800 and surpass Ethereum as the crypto with the second largest market cap.

This activity might signify a growing interest in alternative currencies. Its older sibling, the original Bitcoin (BTC), long held the mantle of the most admired and understood currency, but with the SegWit2x fiasco now fresh in everyone’s minds, it might have finally proven itself to be impractical as an actual currency, transforming itself instead into a “store of value,” almost like a bond or a cash reserve.

Investors and cryptocurrency enthusiasts alike may now be looking around for the next ideal transaction vehicle, and Bitcoin Cash, with its more efficient allocation of block size and transaction capacity seems ready to step up to the plate. As Laura Shin writes in Forbes, “Bitcoin Cash has a few other things going for it -- namely the fact that it is now 2.2 times as profitable for miners who can secure blockchains to mine Bitcoin Cash than to mine Bitcoin. That means the Bitcoin blockchain has lost so-called hash power, which will mean it will take longer for transactions to be processed.”

Once a technology gets bogged down, in the case of Bitcoin, to an even slower transaction rate paired with lowered expectations, it is easy for it to slip further behind. As we ourselves wrote back in August, alternative currencies Bitcoin Cash and Ethereum Classic “have merits that make them entirely capable of overtaking their predecessors in the way that Netflix beat its own mail-delivered DVDs, which themselves beat VHS which had already beaten BetaMax tapes.

BTC price tanks, but is This the End of Bitcoin? No.

Despite the market’s dramatic activities following the SegWit2x cancellation, BTC price rallied slightly, and Bitcoin Cash lost some of its gains. The panic may be subsiding, or at least hardening into a conviction that the cryptocurrency business is still far from mature. Although opinions vary widely as to what will happen next, it is likely argue the bulls, that the original BTC price will continue to trudge uphill towards the $10,000 mark, as the market accepts and absorbs it slightly redefined role.

But in the meantime, alternative currencies, at least those that can demonstrate a technologically sound business plan, as Bitcoin Cash seems to have done, will continue to advance their credibility and gain market value based not on speculative furor, but on an intelligently evolving business model.

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