Sunday, February 16, 2020

Bitcoin Investors Fear Fork Will Hit Their Wealth

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Bitcoin investors are facing uncertain times ahead as a split in the cryptocurrency is about to generate a new generation of the virtual currency.

For Bitcoin investors, the situation is similar to shareholders in a company finding out the board is about to introduce a new class of shares.

In most cases, that leads to a dilution of their investment – making their holding worth less – and many are worried the ‘hard fork’ into Bitcoin Cash on August 1 will leave many worse off.

That’s despite the fork doubling the number of Bitcoin they own as the fork will reward current investors and create a new asset class for new investors.

It’s all a matter of size

Despite efforts to market Bitcoin as a currency, investors are effectively buying into a share of an asset when they stake their cash as governments refuse to recognise Bitcoin’s virtual status.

Bitcoin is effectively the database and security software facilitating the generation and holding of the asset as a virtual payment system.

One of the issues with the system is the size of the Bitcoin file is unwieldy at 1 megabyte, which slows servers and the processing of transactions.

But the new fork, Bitcoin Cash, is even larger, weighing in at 8mb.

Behind the scenes, Bitcoin developers have battled against each other, with one set wanting to limit the size of files to combat hackers and the rest wanting to write the code to speed up the network.

Metcalfe’s Law and Bitcoin

One Bitcoin commentator, Kevin Zhou, of cryptocurrency fund Galois Capital, believes investors are worrying unnecessarily.

“Due to Metcalfe’s Law, the value of a network is greater than the sum of its parts so a fork should cause the total value to decrease,” he said.

“This effect is stronger when the value split is closer to 50-50 and weaker when the split is lopsided, such as 99-1. Bitcoin Cash is likely be very lopsided.”

Bitcoin hit a peak value of around $3,000 a few weeks ago, but has dropped to nearer $2,500 recently.

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