Bitcoin is embroiled in a civil war — here’s one way it can unfold

Bitcoin is up 250% since last year, but recently it has experienced big swings in its price.MI

A civil war is taking place in the world of bitcoin, putting the future of the red-hot cryptocurrency in question.

Bitcoin is up over 250% since last year, but in the past few months its price has experienced big swings.

Arthur Hayes, CEO of BitMex, a bitcoin derivative exchange, told Business Insider he thinks recent volatility in bitcoin’s price reflects the uncertainty surrounding the outcome of this war, which will be decided August 1 when crypto-power brokers determine how the tech that powers the currency will be structured.

A bitcoin civil war

The ongoing bitcoin battle is connected to the cryptocurrency’s design. According to bitcoin evangelist Paul McNeal, bitcoin’s blockchain network, the technology that delivers bitcoins, can only process so much information at a time. To put it in more technical language, the “blocks” that carry information in the chain are limited in their size to 1 megabyte (MB).

This, McNeal says, was done on purpose to protect the network from hackers and other cybersecurity threats. But as the number of people using the cryptocurrency has increased, so too has the time it takes for transactions to process. This has made bitcoin transactions more expensive, which is one reason why merchants have been slow to accept it as a form of payment, according to Morgan Stanley.

That said, bitcoin faces a chicken and the egg dilemma. Consumers have limited places to spend their bitcoins and it appears merchants do not have enough consumers to make it worth their time to invest the energy and capital to understand and accept it.

“This blockchain size issue has drawn a battle line between two main camps,” McNeal told Business Insider. “On one side you have folks, mostly miners, who think the size of “blocks” should increase because it would be financially lucrative to do so, and those who want to maintain the status quo – safety and security of the network.”

Bitcoin themed balloons float in the air during the “Inside Bitcoins: The Future of Virtual Currency Conference” in New York.Reuters/Lucas Jackson

The folks who want to maintain the size of the blocks are referred to as the “core developers.” According to McNeal, they are the guys who maintain the code and are responsible for implementing changes when necessary for future innovation. By doing so they keep the blockchain stable.

Their view is that an increase in the size of blocks above the current 1 MB cap would jeopardize the entire network.

As such, they have come up with an alternative solution to the problem called SegWit. According to reporting by Bloomberg’s Lulu Yilun Chen and Yuji Nakamura, this solution would move some activity on the bitcoin blockchain to an outside network.

“But moving data off the blockchain effectively diminishes the influence of miners, the majority of whom are based in China and who have invested millions on giant server farms,” Chen and Nakamura wrote.

In order to find middle ground, some “business executives and miners” created a proposal called SegWit2X, which would move the threshold for implementing SegWit down to 80% and also allow for a small increase in the size of blocks on the chain to 2 MB, according to McNeal.

But “fundamentalists” on both sides of the argument are holding their position. This could eventually lead to a split in the bitcoin world, thereby creating more than one bitcoin currency.

What will happen next?

Arthur Hayes, CEO of BitMex.Arthur Hayes

Hayes told Business Insider that a split, or fork, is very likely.

“Support for SegWit2x has reached levels unseen for previous solutions,” according to Bloomberg with about 85% of miners reporting they will agree to the new bitcoin setup.

Those who hold out will either remain with the old system or adopt their own. When all is said and done, Hayes thinks there could be up to four different bitcoin iterations.

As a result, the price of bitcoin will continue to rise and fall sporadically until the August 1 deadline, according to Hayes. He expects nervous bitcoin investors to move over to Ethereum, the popular bitcoin rival. On Wednesday the price of an ether token, the token powered by the Ethereum blockchain, was up 20%. But that doesn’t mean he’s bearish on bitcoin.

“Sure, people are going to get out as a result of this uncertainty and the price will fall,” Hayes said.

“But there are people with billions of dollars of skin in the game and they will ultimately go with the superior bitcoin network, and then the market will follow,” Hayes concluded.

In the end, he thinks the winning bitcoin could reach $5,000 a coin.