Battling camps at odds over digital currency’s purpose—commodity or quick way to settle transactions?
The bickering over bitcoin has hindered interest in the virtual currency, sending some to a newer alternative, Ethereum. PHOTO: MARK LENNIHAN/ASSOCIATED PRESS
A calcifying rift in the bitcoin world is pitting two camps with competing visions for what the virtual currency should be against each other, accentuating the volatility that has come to define this market.
Even for bitcoin, though, last week was a wild ride. It rose to a high of $3,018, only to fall 27%. The currency then recovered somewhat and by Tuesday was trading at $2,650.
The sharp swings followed bitter jousting by bitcoin developers and businesses over how best to expand the currency’s processing capacity and could result in it being split into separate, competing coins. On one side: those who want bitcoin to act more like a digital version of gold, a commodity with a limited supply that can be held as a store of value.
The opposing camp wants bitcoin to look more like a currency, a unit that can be used to settle transactions. That faction wants bitcoin to be as fast and easy to trade as a dollar.
The two sides have been at a stalemate, but new proposals coming this summer could provide a breakthrough—either changes in the bitcoin network’s processing capacity or a split between a high-speed and slow-speed bitcoin. “You watch a fine marriage that is falling apart,” says Emin Gun Sirer, a Cornell professor who studies virtual currencies. “Eventually, you say, I think a divorce is the best thing.”
The bickering has hindered interest in the virtual currency, sending some to a newer alternative, Ethereum, that has surged more than fortyfold this year and is now worth only about 20% less than all the traded bitcoin, according to CoinMarketCap.com.
“A lot of my friends are selling their bitcoin and buying ethereum,” says Zachary Mallard, who runs a men’s grooming-products business in Brooklyn, N.Y. Mr. Mallard bought some ethereum in recent months, passing up on bitcoin in part because he views the potential split in the currency as limiting the potential gains.
The debate between the two sides has intensified in recent weeks, as bitcoin has rallied more than 160% this year—and that is despite the recent swings in the currency’s value. Ultimately, how the trading is structured will help determine who controls the increasingly valuable currency, and who potentially gets rich from that control.
As it was developed in 2008 by the pseudonymous creator, Satoshi Nakamoto, bitcoin has a limited supply, 21 million coins, that are released on a set schedule and awarded to businesses that confirm transactions in a process known as “mining.”
The network it trades on was designed to be fast and cheap, operating without middlemen, with an immutable ledger recording transactions. The ledger, also known as blockchain, was simultaneously transparent to users and protective of the identity of buyers and sellers, some of whom historically used bitcoin for money laundering or other illegal purposes.
Briefly, this is how bitcoin trades: individual transactions on the network are packed into blocks by companies that specialize in processing the trades, so-called “miners.” Under its current structure, the size of those blocks is capped, allowing only about seven transactions per second, far below the hundreds of thousands a network like Visa can process.
In bitcoin’s early days, the limit wasn’t an issue. That has changed as bitcoin transactions have surged and the currency has piqued more widespread curiosity. The result has been bottlenecks and rising transaction fees.
Many investors and processors have pushed to increase the limits in an effort to make bitcoin trade more like a modern-day currency. But purists and some developers have fought back, in part because it could hurt their financial interests but also because it goes against their libertarian, anti-big business bent.
With past efforts at compromise between the two sides failing, “we’ve reached the point now where we accept that it’s a possibility” that the factions will go their separate ways, said Eric Lombrozo, one of bitcoin’s leading developers.
Last week, a prominent bitcoin mining company, BitMain, released a plan to alter bitcoin’s underlying software that would result in two live versions at the same time. There are other proposals as well that would have the same effect. It isn’t clear which if any will be adopted.
On paper, everybody seems to be in favor of raising the capacity limits. In practice, there are two sides starkly divided over how to do that. One group, led by businesses, wants to raise the size limit for all bitcoin trading. The other, led by developers, wants to create what is essentially another, subordinate network for processing transactions quickly. This option would leave the current main network unchanged.
People involved in the fight say the fate of bitcoin may become clearer in the next two months as owners and miners vote on the various proposals to break the logjam.
Arching over all of this is the question of who ultimately controls bitcoin. “Why is it so acrimonious?” Mr. Gun Sirer asked. “It isn’t about the parameters, it’s not about the block size. This is about voice.”
—Aaron Lucchetti contributed this article.