Fintech Investing

The release of Bitcoin XT, a competing version of the software that currently powers bitcoin, could fracture the tightly knit bitcoin community.

The bitcoin community is tightly knit, perhaps due to the currency’s marginalized beginnings. However, some market watchers believe that Bitcoin XT may end that closeness.
Released on August 15 by Gavin Andresen and Mike Hearn, Bitcoin XT is a competing version of the software that currently powers bitcoin. If it becomes more popular than the original bitcoin software, the bitcoin community may fracture.

Introducing Bitcoin XT

Bitcoin XT was created primarily for technical reasons. When bitcoin creator Satoshi Nakamoto designed bitcoin blocks (batches of bitcoin transactions that render the currency secure and transparent), he limited their size to 1 Mb. That is enough to handle around 300,000 bitcoin transactions per day. However, should the number of transactions per day exceed this amount, the process becomes unwieldy.
As bitcoin is embraced by the mainstream, this limit is becoming a pressing concern. Vox recently reported that currently the network is only 30 to 40 percent full on average. However, during periods of high demand, the network can become congested, causing delays for users. Furthermore, if growth continues at the current rate, the network could near full capacity in the next year or two.
Bitcoin XT has the potential to upgrade block size to a maximum of 8 Mb, with the potential to double that amount each year. Inevitably, there is a catch: for this new software to work, it has to process at least 75 percent of blocks. That will require widespread adoption on the part of bitcoin miners, and as yet it’s unclear whether the new software will catch on.

A community under threat?

It’s the possibility that Bitcoin XT will catch on that has some market participants believing it has the potential to divide the space. For instance, Bloomberg Business has discussed the possibility of some purists remaining faithful to the original software, with others choosing to adopt the new software.
Decentralization is a key reason some people might want to stick with the old software. One of the main drawing points of bitcoin is its decentralized nature, and some miners fear that dramatically increasing the blockchain will undermine the currency’s decentralization, turning it into something that more closely resembles a traditional payment system.
That said, Hearn has rebutted these concerns in a blog post, stating, “these people have never really been comfortable with Satoshi’s intentions [to scale up bitcoin] because they fear success.”
Similarly, The Economist predicts that there will be no fracture in the bitcoin space because “once it becomes clear which version is likely to prevail, all miners will have an incentive to jump on the winning bandwagon.” Indeed, if enough miners adopt the new Bitcoin XT software (8 percent have already jumped ship), it will ultimately render the old bitcoin software obsolete. On the other hand, if there is not a majority adoption of the new software, bitcoin mining will continue as is.
Nonetheless, the introduction of Bitcoin XT marks a vital turning point for the future of bitcoin. As the battle between traditionalists and reformers plays out, investors will be keen to see which faction emerges victorious, and what that will mean for the price of bitcoin.

Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.
Related reading: 
The Case for Increased Regulation: Grayscale’s Michael Sonnenshein on the Future of Bitcoin Investing
The End of the Mt.Gox Saga: What Mark Karpeles’ Arrest Means for the Future of Bitcoin Exchanges
Are Frequent-flier Miles the Key to Understanding Bitcoin Fraud?


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