The Bitcoin price is getting hammered as a result of a contentious and emotional debate over Bitcoin's future.
Just three weeks ago, Bitcoin prices had climbed back to about $295, rising from the mid-$220s of early June.
But as the debate over the best way to scale the Bitcoin network to handle the ever-increasing number of transactions has escalated, the Bitcoin price has plunged. The price of Bitcoin is down 21% since July 28.
The Bitcoin civil war took a more serious turn last weekend when two leading Bitcoin developers, Gavin Andresen and Mike Hearn, released an alternative version of the Bitcoin network software that implements their preferred solution to the problem.
That news added to the cloud of uncertainty. The Bitcoin price drop deepened and even suffered a "flash crash" on Tuesday.
The Growing Rift Sparks a Bitcoin Price Flash Crash
Centered on the Bitfinex Bitcoin exchange, the flash crash was fed by margin call selling. It briefly dropped the Bitcoin price as low as $179.35, close to the digital currency's lows for the year.
Unfortunately, the dispute seems likely to drag on for weeks, depressing Bitcoin prices for as long as it lasts.
While some within the larger Bitcoin community have taken sides, others are worried the civil war is a threat to Bitcoin's future, even its very existence.
So what's this all about, anyway? It has do with how Bitcoin is structured.
Every Bitcoin transaction must be verified by the Bitcoin miners and broadcast to the entire global network. This is done through the creation of digital blocks. One block is created about every 10 minutes, containing all the transactions from that time span. It is then added to the blockchain, the digital record of every Bitcoin transaction ever made.
But right now each block is just 1 megabyte in size, limiting the Bitcoin network to about seven transactions per second. By comparison, a credit card company like Visa Inc. (NYSE: V) has the network capacity to execute tens of thousands of transactions per second.
Everyone agrees that Bitcoin needs to be able to handle a lot more transactions per second to become practical. In fact, it's expected that if nothing is done, Bitcoin will hit a wall next year or by 2017 at the latest.
The dispute is over how to do it...
Why Bitcoin Prices Are Vulnerable to a Software Fight
The Andresen-Hearn software, Bitcoin XT, increases the maximum block size to 8 megabytes. It's compatible with the current Bitcoin Core software, but only until 75% or more users adopt it. At that point, it will be possible to create blocks larger than 1 MB.
Anyone still using Bitcoin Core would be left behind, unless they switch to Bitcoin XT. But a stubborn minority could carry on using the 1 MB version of Bitcoin amongst themselves.
Then you'd have a true split in the Bitcoin community, creating the nightmare scenario - two competing versions of Bitcoin. A split would undermine faith in Bitcoin, at best slowing adoption and at worst killing it off altogether.
That explains the falling Bitcoin price.
Now, if this civil war strikes you as ridiculous, I'm with you. There's a problem that needs solving, and a couple of smart guys have offered up what seems to be a reasonable solution. What's the issue?
Opponents to the Bitcoin XT option think it will harm the decentralized nature of the digital currency and that the larger blocks (with more room for data) will make Bitcoin more vulnerable to spam and hackers.
But they haven't got a better solution to the looming limit on Bitcoin transactions.
Meanwhile, both sides say their position reflects the true vision of Bitcoin's mysterious, never-seen creator, Satoshi Nakamoto.
What's Next in the Bitcoin Civil War
"For all of history, money has basically been controlled by an elite group. Now, for the first time in history, Bitcoin has presented people with the possibility to have a say in the outcome. Because of this empowerment, people feel the need to become highly emotional in defense of what they believe in," Paul Puey, CEO of Bitcoin wallet company AirBitz, told Money Morning. "This is leading to the online civil war we are seeing taking place."
As for who will win, the odds are with Bitcoin XT. Outside of the small world of Bitcoin developers, most segments of the Bitcoin community appear to favor the larger block sizes as the best way to ensure unimpeded growth of the ecosystem.
That includes most Bitcoin exchanges, wallet companies, payment processors, mining pools, and users.
"There is wide support for larger blocks amongst our clients," Marco Streng, CEO of Genesis Mining, told Money Morning. "We are currently checking and testing Bitcoin XT and will most likely switch to Bitcoin XT in the next couple of weeks."
The release of the Bitcoin XT software has the potential to resolve the fight in a democratic fashion - assuming it can get that 75% majority. And anyone running a full Bitcoin node - which entails maintaining a full copy of the blockchain on your computer - gets a vote.
It's not a huge group. There are only about 6,600 Bitcoin nodes in the world. Since last weekend, 13%, about 850, have switched to Bitcoin XT.
"I personally have faith in consensus and I believe it will work itself out," Eric Grill, CEO of Bitcoin ATM maker CoinOutlet Inc., told Money Morning. "Something had to be done about block size and now it's out there for the people to decide, which I think is a good thing."
Follow me on Twitter @DavidGZeiler.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.