Observers who wondered not long ago whether Bitcoin was too valuable to be a payment method may now be wondering whether it’s too volatile. The cryptocurrency has soared all year, reaching a peak near $7,800 only six days ago, but then it crashed hard, shedding about $2,000 in value by Sunday. Yet, as of Tuesday morning, it had recovered about half that loss.
The crash last week coincided with a decision to abandon a controversial proposal that would have opened up more processing capacity for a currency that has struggled for more than a year with congested processing lanes and rising user fees.
That proposal, known rather inelegantly as SegWit2x, would have created a so-called fork in Bitcoin’s underlying code, which in turn would have rewarded Bitcoin holders with shares of the new coin. Some observers attributed Bitcoin’s leap past the $7,000 level to investors buying in to get in line for the “free” bounty. When that prospect collapsed last Wednesday, they said, a selloff by those recent buyers led to the rout.
SegWit2x was so-called because it would have doubled Bitcoin’s 1-megabyte block capacity, opening up much-needed space on a blockchain that many players say has slowed to a crawl with increasing transaction volume. As a result, the average daily transaction fee had already reached $2.41 in the second quarter, up from 13 cents a year earlier, according to Coindesk.
The proposal, which was set to take effect this week, was called off by its backers in the Bitcoin community because of the opposition it faced from developers and others. “Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time,” said Mike Belshe, chief executive of blockchain-security firm Bitgo Inc., in a note he issued on behalf of a group of backers Nov. 8 to officially abandon the move.
But the capacity crunch, and the problem of rising transaction costs, remain an issue for Bitcoin. “As fees rise on the blockchain, we believe it will eventually become obvious that on-chain capacity increases are necessary. When that happens, we hope the community will come together and find a solution, possibly with a blocksize increase,” said Belshe in his note.