The FINANCIAL — The world’s largest cryptocurrency by market capitalization rose to eight-day highs above $7,520 last Friday. Prices dropped 29 percent after the developers suspended a controversial software upgrade, known as Segwit2x, on Nov. 8. “Given the market is in its infancy and is highly volatile, such a large drop cannot be excluded a priori. owever, a collapse in prices due to increasing regulation and competition does not necessarily represents a bad as it will be most likely a symptom of stabilization as the market becomes more mature”, Daniele Bianchi, of Warwick Business School, is an Assistant Professor of Finance believes.
“The large drop in Bitcoin prices is probably due to the competition of Bitcoin Cash, which in fact increased its market capitalisation quickly and has now surpassed Ripple and Litecoin, and is approaching Ethereum, according to data from CoinMarketCap. Perhaps frustrated by the cancelled technology update of the original Bitcoin blockchain, which was announced recently, an increasing number of users are switching to Bitcoin Cash which allows for bigger block sizing, giving ample capacity for everybody’s transactions, as opposed to Bitcoin’s cap at 1MB blocks.
“Indeed, one of the main problems with Bitcoin is that it does not scale up properly as more and more users adopt it. This makes transactions slower and slower as the block size is fixed. In addition, the segregated witness – ie SegWit2x – technology recently introduced by Bitcoin scientists, raised questions about the progressive centralisation of Bitcoins mining towards big servers, something which is fundamentally against the original proposition by Satoshi Nakamoto.
“Bitcoin Cash addressed this issue by increasing the block size to 8MB to accelerate the verification process, with an adjustable level of difficulty to ensure the chain’s survival and transaction verification speed, regardless of the number of miners supporting it. The security of the Bitcoin Cash blockchain, though, is still unclear.
“The internal fighting between Bitcoin to Bitcoin Cash is probably here to stay for few weeks and months. The situation is very fluid, and market valuations are both constantly calibrating and volatile, especially given supply is limited and everything is mostly driven by aggregate demand.”
Q. Do you expect future drops caused by development of other crypto currencies?
A. This is very possible. The market of cryptocurrencies is highly competitive as essentially there are very limited entry barriers to the introduction of alternative cryptocurrencies. In fact, the availability of the blockchain source code has already led to a proliferation of hundreds of them. These have been introduced to solve some of the issues of the original Bitcoin platform, such as to increase the block size and speed up transaction processing. So far, except perhaps Bitcoin Cash, none of the cryptos is threating the first-dominance of Bitcoin. This however might be about to change as alternative coins such as Litecoin, Ethereum, or Bitcoin Cash indeed becomes more and more appealing to the public. As the market of cryptocurrencies is essentially demand driven, having limited supply, any demand shock will inevitably translate in possibly big price swings.
Q. What is the potential of Bitcoin cash?
A. The main advantage of Bitcoin Cash with respect to Bitcoin is transaction speed. Indeed, Bitcoin Cash is based on a protocol which allows to accelerate the verification process of transactions, and thus being closer to an actual digital cash rather than a “store-of-value” as often Bitcoin is referred to borrowing the analogy from the Gold market. The potential of Bitcoin Cash is still to be verified as its adoption is still way lower than Bitcoin. At the end, it really boils down to what investor will prefer in terms of transaction speed, transparency and degree of decentralization. The battle is still open.
Q. How world governments may affect the market with taking control over mining process?
A. It is almost a fact that the market of cryptocurrencies is becoming too big to be ignored. However, most regulators are still in a wait-and-see attitude as they are trying to fully understand the phenomenon. Perhaps the main exception is the U.S. where according to the Commodity Futures Trading Commission (CFTC), which has started to clamp down on unregistered firms that trade derivatives of the cryptocurrency, the latter should be treated as a commodity, just like oil and gold. The distributed and decentralized nature of the mining process makes very unlikely that central banks and regulators will be able to take over the entire market and/or the mining networks.
Q. Do you exclude let’s say 50% drop of Bitcoin rate?
A. Given the market is in its infancy and is highly volatile, such a large drop cannot be excluded a priori. However, a collapse in prices due to increasing regulation and competition does not necessarily represents a bad as it will be most likely a symptom of stabilization as the market becomes more mature.