Prices for a break-away version of bitcoin fluctuated wildly on Wednesday in the first full day of trading, ranging between $700 and $1300 a coin across a number of crypto currency exchanges.
The fragmentation in trading demonstrated the difficulty of the market ascertaining a consensus price for a potentially divisive rival, known as bitcoin cash (BCH).
The original bitcoin currency, BTC, was released as open-source software in 2009 by anonymous architects who wanted to forge the world’s first truly decentralised peer-to-peer electronic cash, which could not be controlled by any central authority. Underpinning its value from the onset was its lifetime limited supply of 21m coins.
In recent months, bitcoin’s growing popularity has seen it run up against inbuilt limitations impeding its ability to settle cheaply and swiftly. This in turn has sparked a deep-seated ideological battle over the most effective way to expand the network. The dispute hinges on whether it is better to expand capacity at the cost of profitability, or maintain profitability at the cost of centralisation and universal access.
Holders of BTC have received an equivalent amount of BCH. However, owners of coins stored on exchanges such as Coinbase were warned that they would not be supporting the rival currency or distributing it to customers.
The long-term success for BCH is dependent on the coin gaining traction with bitcoin’s mining network — those who compile recent transactions into blocks. Without their committed support it is unlikely the currency will receive the computer processing power it needs to stay secure.
Mining the latest chain is uneconomic compared with BTC, which was trading steady at $2,720 a bitcoin on Wednesday, posing a risk the rival coin might not survive for long.
“These miners must voluntarily take a loss compared to bitcoin mining to ensure the survival of BCH. How long can that continue?” said Jon Matonis, a founding director of the original Bitcoin Foundation.
Even with BCH, prices moving steadily higher on many exchanges, the new coin has garnered only about 3-5 per cent of bitcoin’s computer power.
In theory, the higher the price of the new coin gets, the more cost effective it becomes to mine. But critics insist implied market valuations of $13bn to $22bn are unrealisable in the real world against fiat currency.
“The main attraction of BCH is free money for existing BTC holders. Realising this free money will be difficult. Crypto markets are so thin that ‘market cap’ is not a meaningful number,” said David Gerard, author of the Attack of the 50-Foot Blockchain, a critical take on the crypto currency phenomenon.
People in the industry said a near-term scaling solution must be found if transactions are to avoid expensive bottlenecks in the future. This year such bottlenecks saw bitcoin fees jump as high as $4 per transaction, impeding consumer activity and compromising bitcoin’s adoption as a day-to-day currency.
BCH hopes to resolve the system’s inbuilt capacity limitations by lifting its cap on block sizes — wherein transaction data are accumulated every 10 minutes — from 1 megabyte to 8Mb.
Competing with BCH is an upgrade known as Segwit2x that was designed to facilitate more transaction processing capacity off the main blockchain, using so-called sidechains or compatible systems such as the Lightning Network. It was implemented on the original bitcoin this year.