A fork in the road for the cryptocurrency, the launch of Bitcoin Gold also illustrates the ongoing debate regarding how best to resolve scaling and governance issues around bitcoin, says Nir Gazit, CEO of COTI (Currency of the Internet), a bitcoin-based payments platform that adjusts transaction fees based on user reputation.
Bitcoin will face a similar challenge in coming weeks with the creation of Bitcoin SegWit2x if proposed changes to the bitcoin network to improve the speed and efficiency of transactions are not universally accepted. This second fork would create yet another distinct bitcoin-based cryptocurrency.
Bitcoin Gold “wants to change the bitcoin’s proof-of-work algorithm from SHA256 to Equihash so all specialized SHA256 mining equipment will be obsolete”, says Gazit.
In layman’s terms, it means replacing bitcoin’s existing mining algorithm with one that is far cheaper to run, using less complex graphics processing units, meaning mining will be opened up to a broader audience, not dominated by a small group.
Nir Gazit, COTI
“By doing that they believe they will better support bitcoin ‘creator’ Satoshi Nakamoto’s idealistic vision of “one central processing unit, one vote”, adds Gazit.
David Cheetham, chief market analyst at online trading platform XTB, says proponents of the new market believe it “will alleviate the current problem that mining has now become highly centralized into the hands of large mining companies and therefore goes against what is arguably bitcoin’s main selling point of decentralization”.
Gabriel Dusil, co-founder of blockchain technology incubator Adel, says: “As bitcoin has grown in popularity, so has the influence of a handful of miners who have dominated control over the bitcoin blockchain.
“Bitcoin Gold is the self-regulated community’s response to mitigate these monopoly risks and maintain the spirit of decentralization.”
There is, however, opposition to the new currency.
Miguel Leite, CEO of Coinvision, an AI-powered alerts system for the cryptocurrency market, says: “Bitcoin Gold is under a lot of criticism from part of the crypto community and major exchanges are questioning its security, stability and value.”
Bitcoin Gold is yet to be accurately priced, but the news triggered some selling of standard bitcoin, which fell 3% on the day of the unveiling.
However, Leite predicts the forks will not have any lasting impact on the popularity of the original bitcoin, saying: “Any major exchange won’t rename the main blockchain and people will always tend to invest and give credibility to the name they know.”
The forks are just the latest example of the rapid proliferation of new digital currencies.
Danny Masters, director of the Global Advisors Bitcoin Investment Fund (GABI), says: “There has been a quantum change in the diversity of the digital assets space in the last 12 to 18 months, which is even more impressive than its growth in terms of scale.”
|Danny Masters, GABI|
Masters believes bitcoin is only strengthened by this increasing diversity, particularly with the emergence of separate currencies, such as ether, which serves to raise interest in cryptocurrencies generally.
“Bitcoin has evolved into a reserve currency for digital assets, due to the breath of infrastructure in place and its relative price stability,” he says. “It has started to really disrupt both fiat money and gold.”
However, the forks in the bitcoin community show the digital currency is as liable to disrupt itself as it is more established assets, and will contribute to the still-high levels of volatility endured by its investors.
Maksim Balashevich, CEO and Founder of Santiment, a data service provider for cryptocurrency investors, sees no imminent change to this state of affairs, given the many risks surrounding such currencies, such as regulatory uncertainty and forks.
SEB agrees prices will remain volatile for a long time, but it notes that “the nature of the underlying blockchain technology implies long-term stabilization”, with the finite supply of 21 million bitcoins serving as a kind of decentralized monetary policy. With around 75% of those bitcoins currently in circulation, all available currency is set to be mined by around 2024.
In the meantime, high levels of volatility create exciting investment opportunities for those willing to tolerate it. While the convergence of exchanges in the US has left most trading divided between ICE and CME – creating a single price for most financial instruments and few opportunities for arbitrage – cryptocurrencies remain highly fragmented.
Substantial variations between the prices posted by different venues provide huge opportunities.
Even a buy-and-hold strategy is liable to make money. Bitcoin took 1,789 days to reach $1,000, and another 1,271 days to reach $2,000. Since then, its rise has been more rapid. It went from $2,000 to $3,000 in just 23 days, with the next two $1,000 milestones coming after 62 and 61 days respectively.
Its latest milestone, the $6,000 mark, was reached only eight days after it had breached $5,000 on October 12. By Tuesday, bitcoin was trading at more than $6,500.
Masters, who predicted bitcoin would reach $4,000 by early 2018 – at a time when it was trading at around $1,600 – stresses the difficulty in accurately forecasting bitcoin prices, but believes it can add another $2,000 within the next six to 12 months.
Ether is likely to see a more gradual appreciation, he adds, but will soon reach $400 – up from the current level of just above $305 – he predicts.
GABI is considering developing new products based on digital assets, including a GSCI-like index product based on cryptocurrencies. It would also like to develop a UCITS bitcoin fund if and when the regulatory environment made it possible.
This still presents novel challenges.
Setting up funds to trade equities, currencies or other asset classes is a relatively simple process. Service providers such as prime brokers and administrators have plenty of experience working with such funds and understand their needs.
However, administrators have little experience working with crypto funds and the issues thrown up by digital currencies such as anti-money laundering and know your customer.
Meanwhile, prime brokerage does not currently exist for funds investing in cryptocurrencies.