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Bitcoin’s Blockchain May Split In Two. And Soon.

Published June 9, 2017

Amidst the wall-to-wall hype in the cryptoasset space, a storm is brewing in Bitcoin that may setback much of the recent gains. Those new to Bitcoin will be unaware of an impending hard fork (blockchain split) and what its implications may be on the price of not just Bitcoin, but Ethereum too. It is worth taking the time to understand what is set to happen in the next 2 months so as to avoid being caught up in the panic.

What’s the problem?

Bitcoin is having difficulty scaling to meet its increasing demand. The network cannot scale because each Bitcoin “block” (set of validated transactions with a 1mb limit) is full. As a result, transactions are being left in situ for hours and days before squeezing their way into a block. A side effect of this is that users are spending more and more on transaction (tx) fees in the hope that it will incentivize a miner (who receives the tx fee as a reward) into including their tx in a block.

There are solutions to this problem, however these solutions are contentious. So contentious that a community of Bitcoin idealists, developers, and business leaders have created an orgy of character assassination and conspiracy theories. It’s not pretty. After more than 2 years of debating these solutions, it appears that the route forward may be coming to a head in the very near future.

Bitcoin Splits

I want to avoid details of the different scaling solutions, and instead look at a likely split in the Bitcoin blockchain as a result of a grassroots user activated soft fork (August 1st) or a proposed SegWit-2Mb hard fork which has widescale commercial agreement. Both will put Bitcoin in a better position to scale, however they are also both likely to create 2 versions of Bitcoin.

Those who have been following Ethereum, will know that – following a large scale exploit of an Ethereum smart contract – the Ethereum chain split in two. Due to sustained support for both the existing and new Ethereum chains, two coins were born from one – Ether and Ether Classic. The same is looking more and more likely to happen to Bitcoin; but will “Bitcoin Classic” survive in the same way that ETC has?

Here’s a likely timeline for a Bitcoin chain split. For simplicity, we are going to call the second Bitcoin chain, “Bitcoin Classic”:

Users get both coins
First, it’s essential to point out that if you are a proud owner of Bitcoin, then you’ll also be a proud owner of Bitcoin Classic. When a blockchain splits, the number of coins you have (at the time of the split) on the Bitcoin chain are mirrored on the new one. Instructions on interacting safely with both chains will become available nearer to the time.

1. Users/miners/nodes choose a chain
For a period of time there will be economic activity on both chains. It may be that 100% of activity moves almost immediately towards one of the two chains and peace is restored in the world. Or perhaps economic activity splits across both chains in some fashion. The reality is we don’t know if both chains will survive, and at what capacity they will survive. However, we do know that this will become very clear in the hours and days following a chain split. Those with Bitcoin can then decide what to do with their new Bitcoin Classic coins.

2. Critical mass takes hold
Once it becomes clear which chain is “winning” – ultimately which has the most hash (mining) power – then a bigger migration towards the winning chain may occur, potentially dismantling what is now considered the “old” chain. In Ethereum’s case, we saw that following the split, the vast majority of support moved to Ethereum and Ethereum Classic was left at a fraction of the value of Ethereum (7% as of today).

3. Bitcoin Classic
Given that any meaningful support towards either chain would result in its survival, I would suggest that it is likely we will see an established “Bitcoin Classic” coin following a chain split. I would also speculate that a split will happen in the next few months, with a “crypto run” occurring in the build up to the event, fuelled by uncertainty and confusion. Such a run would heavily reduce the price of not just Bitcoin, but Ethereum and dozens of altcoins. Billions could be wiped off of the cryptoasset market cap in a matter of weeks, resulting in a short period of uncertainty followed by a several month long period of stability and then growth.

Alternatively – and possibly most worryingly – there may be no scaling implementation at all. Bitcoin may go on for another year of high fees and slow transactions. Who knows what that might mean for Bitcoin’s already waining dominance on the crypto market cap.

Where does this leave us?

None of this takes away from the fundamentals of public blockchain based cryptoassets. A short term panic will only make the asset class more appealing to new and existing investors. Even if Bitcoin and Bitcoin Classic are total failures and the currency crashes into oblivion, another cryptoasset will take its place. Whilst I am extremely bullish on Bitcoin over the long-term (Bitcoin Classic or otherwise), it is more apparent than ever that a diverse cryptoasset portfolio is essential.