Bitcoin Cash Surges After SegWit2x Fork Fizzles

The bitcoin community celebrated short-lived unity last week when business executives called off support for a controversial network fork, SegWit2x, which could have further divided the network's resources across rival camps. Then a previously forked currency called bitcoin cash (BCH) skyrocketed over the weekend to around $1,856 per token, according to Coin Market Cap. This temporarily made BCH the world’s second most valuable cryptocurrency, with a global market cap over $30 billion, trumping Ethereum as it raised questions about the future of bitcoin.

Cryptocurrency developer Tom Zander argued bitcoin cash could even eclipse bitcoin over the next six months. “I'm sure we'll just drop the "Cash" and call it ‘Bitcoin,’" Zander wrote in a blog post. Jihan Wu, co-founder of the world’s top mining hardware manufacturer Bitmain, told Forbes BCH has more potential than the original. There are a lot of unique factors driving BCH prices up as bitcoin itself dipped, stabilizing around $6,544 per BTC by Monday. Bitcoin is still king in the broader cryptocurrency market. But the weekend's events show just how vulnerable that position can be.

For starters, it's helpful to understand why miners wield so much influence. Bitcoin is a peer-led technology without leaders or institutional support. We call it “mining” when someone runs the special software fueling bitcoin’s global network. Miners receive newly minted cryptocurrency in return for contributing their computing power. Bitcoin’s underlying code states only 21 million bitcoins can ever be made this way, so the network automatically adjusts the ratio of rewards for work almost every two weeks.

Since BCH was born over the summer when the bitcoin network forked, the same mining equipment works for both currencies. The stars aligned this weekend to make mining BCH briefly more profitable. This sparked a chaotic exodus to the network with less difficulty. “Something like two thirds of all the hash power out there was mining bitcoin cash over the weekend,” bitcoin analyst Jimmy Song told International Business Times. “After the difficulty adjusted again, and it wasn’t as profitable, they all moved back to bitcoin.”

The repercussions rippled across bitcoin’s network in waves. Kyle Samani, managing partner of MultiCoin Capital, told Forbes many wealthy investors reacted to the SegWit2x cancellation by swapping millions of dollars worth of bitcoin for BCH. Both BCH and the SegWit2x proposal rely on bigger blocks to slash costs for high volume transactions. It could be months until bitcoin activates a similar boost. Meanwhile, the European exchange platform Bitstamp announced plans to start offering BCHwhile the Korean exchange Bithumb reported the rush to buy BCH drove trading volume up 800 percent above the October average.

All this meant bitcoin’s peer-led network had less people contributing their computing power. “When hashing power moves over to bitcoin cash, it means there is less hashing power on bitcoin. Blocks are slower, that means not as many people can get their transactions in, and fees will rise,” Song said. “There were [bitcoin] transactions with like $300 fees, which is insanely high. But that’s kind of what happens when you have a bit-traffic jam.”

There is still a small group of bitcoin users who promised to continue the SegWit2x fork despite the broader community moving on to different approaches to bitcoin’s scaling woes. “It really only takes one miner to mine a block with the 2x code in order to fork it,” Song said. “My guess is that somebody will, at some point, and there will be a 2x hard fork even if it doesn’t come right away.”

Regardless, the flux of bitcoin cash shows why forks are so controversial to start with. When the bitcoin network splits, it could create competition for resources. Industrial cryptocurrency mining operations, especially companies that rely on cheap electricity in China, now dominate the broader ecosystem. Many of those miners will follow profits, regardless of how it impacts usability for the average bitcoin newbie.

By this time next year, perhaps another cryptocurrency will become a more popular tool for certain types of transactions. On the other hand, these forks could simply slow mainstream bitcoin adoption without offering any comparable alternative. It all depends on where the diverse cryptocurrency community invests its time. The network needs miners as much as it needs users and developers.

“Right now there’s a lot of cash being pumped in that kind of subsidizes this bitcoin cash mining activity. But if it proves to not be as useful as bitcoin, that price will come down,” Song said. “My gut feeling is that store of value is the main use case for bitcoin and medium of exchange is the use case for bitcoin cash."