After looking like it was on the edge of a cliff last week, Bitcoin crashed over the weekend and lost more than 20% of its value.
The crypto-currency fell as low as $US970 and is trading at just over $US1,000 this morning, after reaching US$1,259 last week.
According to The Wall Street Journal, the crash is due to a disagreement among Bitcoin developers. Behind the scenes, there’s been a running two-year battle for how best to run the digital platform that forms the basis of the Bitcoin marketplace.
In the Bitcoin market, transactions get traded in batches known as “blocks”. Currently, the maximum size that can be processed for one block of transactions is one megabyte. Competing developers have been agitating to increase the size of the trading blocks as the network expands.
Recently, a proposal was raised to create a platform called Bitcoin Unlimited, which would put no size restrictions on the size of blocks for processing transactions. Developers who want to maintain the current version are adhering to a proposal called Bitcoin Core.
So what caused the crash?
Proponents of the Bitcoin Unlimited format are threatening to set up a “hard fork” for the Bitcoin marketplace, effectively an alternate software platform to trade Bitcoin on. The new format would be incompatible with the current platform, thus creating a split meaning that there would then be two versions of the currency.
A key driver of stability in the market for bitcoin is that every transaction is recorded and logged, which in turn creates an error-proof and transparent record of the currency’s transaction history. A dual market would muddy the waters around historical record keeping. The increased possibility of a dual market for bitcoin has therefore added to uncertainty and heightened liquidity risk for market participants.
On Friday, 20 bitcoin exchanges released a statement saying that they while they wouldn’t expressly endorse the new platform, “it is incumbent upon us to support a coherent, orderly, and industry-wide approach to preparing for and responding to a contentious hard fork”.
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