For Bitcoin investors and enthusiasts, November 16 is a day of reckoning. That is when the cryptocurrency, which breached the $6,000 mark for the first time in its history last week, undergoes its third hard fork of the year. It underwent a fork today resulting in the creation of Bitcoin Gold, which is designed to enable bitcoin mining for lay users. But today's fork has not resulted in much traction for Bitcoin's price levels. (See also: Bitcoin Price Declines As Bitcoin Gold Forks From Main Branch.)
Bitcoin’s previous significant fork was back in August, when Bitcoin Cash was launched. That split in its blockchain resulted in a temporary price decline. (See also: Bitcoin Cash: The New King Of Crytocurrency?) But investors converted their Bitcoin Cash to the original cryptocurrency to revive it. Subsequent months have further boosted Bitcoin’s price while Bitcoin Cash, which began trading at $900, crashed to as low as $300. As of 2:41 PM UTC, Bitcoin Cash is trading at $336.81, while Bitcoin’s price is $5,658.96.
What’s At Stake In The New Hard Fork?
The SegWit2X hard fork, as it is popularly known, creates another fork in the original bitcoin blockchain network. The logistical underpinnings of this fork are similar to the one in August. It will increase block size to 2MB (from the original 1MB). This is expected to increase speed and decrease costs for transactions on the new network and will enable the currency to compete with other payment networks, such as Visa Inc. (V) and Mastercard Inc. (MA).
While an increase in transaction throughput might be considered a good thing, its overall consequences have split the community. This is because the split could decide the original cryptocurrency’s future trajectory.
As expected, the fork’s proponents cite scaling, efficiency and affordability of bitcoin transactions in the future as key benefits. Some claim that the price of Bitcoin would have blown past $10,000 if the Bitcoin Core team (which is the core developer community for Bitcoin) had allowed increased block sizes on the original network.
Opponents compare the oncoming fork to a “hostile corporate takeover.” Their argument for retaining bitcoin’s original block size is rooted in creator Satoshi Nakamoto’s vision of a decentralized system.
According to them, increased transaction costs for Bitcoin is an example of capitalist market mechanisms at work, where scarcity in nodes to process transactions has resulted in rising costs. The introduction of an increased block size will compromise Bitcoin’s “censorship-resistant” and decentralized ethics because it will enable select developers, who will make decisions on processing of transactions as volume increases, to become gatekeepers for transactions. Currently, the cryptocurrency’s core algorithm is responsible for these decisions.
How Should Bitcoin Investors Play The Fork?
Analysts are expecting the hard fork to be the next big event to result in Bitcoin price volatility. As with August, much depends on support garnered by each side. This is because increased support translates to more transactions and greater upswing for the currency. (See also: Bitcoin Price: What's Next?)
Based on reports so far, major Bitcoin vendors and businesses are lining up behind the original Bitcoin network. Coinbase, the biggest online wallet for Bitcoins, has said that it will continue calling the original bitcoin “bitcoin” and reserve the “BTC” ticket for it. Others are citing the absence of a transaction replay feature, which could result in duplication of transactions on Bitcoin as well as the new cryptocurrency, on the new fork as reasons for not supporting the block’s new player.
The other factor to consider is liquidity. The number and types of cryptocurrencies has multiplied in recent years. By virtue of being one of the oldest and most popular cryptocurrencies, Bitcoin remains the main source of liquidity in the markets. In an interview with online publication qz.com, Charles Hayter from Cryptocompare said bitcoin was the "central point" of liquidity. "People are moving in and out of the more risky cryptos, saying, 'yes, let's pull back into bitcoin,'" he said. This happened immediately after Bitcoin Cash's launch in August and may recur in November due to lack of community support.
Finally, another important factor in the days preceding and immediately after the split is hype. Because cryptocurrencies are not widely used, their prices are also a reflection of hype and chatter about their prospects. Several publications have discussed the correlation between Bitcoin prices and Google searches and media mentions. The more the online chatter about Bitcoin (or its competitor), the greater chances of a surge in its prices.