Why Bitcoin Prices Are So Volatile
Anyone interested in cryptocurrencies has seen strange terms like “Bitcoin split,” “BIP 148 UASF Bitcoin,” and “Bitcoin SegWit.” What do they mean? More importantly, are they connected to the sudden increase in Bitcoin volatility?
The short answer to the second question is yes. They are related to Bitcoin volatility.
Here’s what happened:
- Bitcoin is incredibly slow at completing transfers, sometimes taking days.
- A handful of Bitcoin’s core developers propose a change.
- This change would apply to Bitcoin’s source code.
- Other core developers consider this a betrayal.
- A civil war ensues.
Bitcoin’s internal tug-of-war threatens to rip the currency in two. Literally. There may be two versions of Bitcoin trading after August 1. That’s what “Bitcoin split” means.
But let’s back up for a minute. What is the proposed change that started all this fuss?
What Is Bitcoin SegWit?
The proposed change is called “Segregated Witness” (SegWit). It tweaks Bitcoin’s code to allow more data in each block, thus making the platform faster. Transfer times would be a fraction of what they are right now.
It’s like if you came to a river, and there was a ferry crossing to the other side. For some reason or another, the ferry only takes TWO people at a time. It has space for FOUR, but it’s only taking two. Obviously a traffic jam starts to build on this side of the river.
Now imagine that someone yells out “Hey! Why don’t you take four people at a time! Then we’ll all get across faster!”
(Side note: That person is a hero. They said what everyone else is thinking.)
But the ferry conductor yells back, “No! We’ve always done it like this! Only TWO at a time!” Wouldn’t you think the conductor is crazy? I certainly would.
And I certainly do think it’s crazy in the case of Bitcoin. There is no rhyme or reason to limit the block size. It simply existed in the version of Bitcoin that was created by Satoshi Nakamoto.
For those who may be unfamiliar with Nakamoto, he is Bitcoin’s mysterious founder. No one knows who he is, where he lives, or why he chooses to keep himself secret.
At one point, an Australian man named Craig Wright claimed that he was Satoshi Nakamoto. But he failed to produce evidence, so he was probably just a fraud. But I digress.
Back to the matter at hand. The bottom line on SegWit is:
- It’s an attempt to speed up transactions on Bitcoin.
- It will help Bitcoin grow.
- The only core principle it violates is an arbitrary one.
So, why are some core Bitcoin developers upset about SegWit?
I think it’s because if we accept this change, it means that Bitcoin has room for improvement.
This idea scares Bitcoin’s true believers, because they view the original code as gospel. That’s where the opposition to SegWit comes from.
Why Is August 1 Important for Bitcoin?
The deadline for SegWit adoption is August 1, 2017. If the community of Bitcoin developers and miners does not reach an agreement by that point, the currency will likely split.
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This doomsday scenario is called a “user activated soft fork” (UASF). It would cause major confusion in Bitcoin markets, especially since Coinbase and other exchanges have not explained how they would handle a Bitcoin split.
You’ll also see the term “UASF” lumped in with “BIP 148” because that is the protocol that pushes it into action.
Think of BIP 148 as the fuse, and UASF as the bomb.
The only way to “defuse the bomb” is for a majority of Bitcoin miners (by hash power) to signal their support for SegWit. Remember that there is no CEO or president of Bitcoin.
There is no higher power to impose its will on Bitcoin, which is part of the cryptocurrency’s allure. It sold itself as a network that breaks power structures. This is the flipside to that promise, however, because now it is majority rule.
Should You Worry About Bitcoin August 1 Split?
Oddly enough, I’m not that worried about the August 1 deadline. I know it injected a lot of volatility into Bitcoin prices (which scares investors), but the data is optimistic.
The number to watch is the percentage of blocks signalling support for Bitcoin SegWit.
We’ve seen this number accelerate throughout the year, suggesting that the remaining developers will hop on board when push comes to shove. No one in the community wants to jeopardize the entire Bitcoin experiment; that keeps me optimistic.
So, even though Bitcoin prices might continue to swing in the run-up to August 1, I will keep calm and invest on.