Should You Care About The “Hard Fork”?

One month ago, amid even higher than normal volatility, Bitcoin underwent a split known as the “hard fork”. While there were myriad technical reasons for this to happen, the most pressing issue was the Bitcoin network being too slow to process the much higher volume of trades developing as cryptocurrency becomes a viable investment. After a few alternative solutions failed to get enough support to improve this situation, including a “replace-by-fee” method where, in essence, the trades that paid the highest commission would pass through the exchange first, the community gained enough votes to support splitting in two, and launching a second currency.  While a financial advisor may compare this to a stock spinoff, what is actually happening is rather different, since unlike a stock spinoff, no value needs to be lost or redistributed from Bitcoin into an alt-coin.

This new currency, “Bitcoin Cash,” is a direct relative of Bitcoin, but designed for spending rather than investment, with a new faster infrastructure and support for each individual unit, or blockchain, to be traded a few thousand times before reaching the end of its useful life (and forcing a second hard fork). When it was introduced at midnight on August 1, anyone holding Bitcoins got an equal number of Bitcoin Cashes, at an initial offering price of 0.1 BTC, distributed similarly to a stock dividend.

In its first month, Bitcoin Cash has shown volatility both relative to Bitcoin and relative to the US dollar, contrary to the original expectation that it would maintain a 10 to 1 exchange rate. It is technically impossible to peg the value of one cryptocurrency to another as the Danish krone, for example, is pegged to the Euro. However, speculation has already caused two bubbles and accompanying crashes before settling for the past few days at 8 Bitcoin Cash to 1 Bitcoin.

Despite the original intent of making a currency that is easier to spend, however, many exchanges and online markets that accept Bitcoin have yet to adapt to the new currency. Some of this is due to incompatible software required to process both currencies, which can only be exchanged through a third party. The early volatility inherent to introducing a new cryptocurrency is also a factor, with no guarantee against a loss of value. Another reason, especially for exchanges, is the much lower transaction fee in a system that is no longer dependent on “replace-by-fee” queuing, eliminating the main source of revenue for cryptocurrency exchanges and leveling the playing field for smaller transactions.

So what does all of this mean? It’s too soon to tell. The instant 12.5% profit that anyone holding Bitcoin made was one positive, demonstrating cryptocurrencies’ ability to create value spontaneously by ‘printing’ an additional currency (a property already held by fiat money like the United States dollar), without losing that value from the original Bitcoin as many opponents to the hard fork expected. But while it was a profitable move for most, if not all, parties, it remains to be seen whether Bitcoin Cash will ever achieve a greater acceptance in the consumer market than Bitcoin, or become relevant as a currency for everyday retail transactions.

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Laura

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