News Navigator: Why did bitcon currency split in two?

From July to August, the split of the digital currency “bitcoin” into two separate virtual monetary systems became a hot topic. The Mainichi answers some common questions readers may have about the split and the new Bitcoin Cash currency.

Question: What is bitcoin?

Answer: Bitcoin is a type of virtual currency that is exchanged online and does not exist in the physical world. Online bitcoin exchanges decide the exchange rate between the virtual currency and existing currencies, and bitcoins are used to pay for internet transactions and to send money, as well as in speculative trading. Bitcoin was released around 2009 and is the largest major virtual currency. Even in Japan, the number of transactions in which bitcoins can be used is increasing, and they can be used in purchases at major electronics stores. Other special characteristics of the currency include having a low service charge for transactions and allowing easy transfer of money overseas.

Q: How much is one bitcoin worth?

A: The market rate changes day by day, but as of Aug. 16, 2017, one bitcoin was worth roughly 4,100 U.S. dollars. At the end of 2016, a single bitcoin was worth around 1,000 dollars, but heading into 2017, the currency grew rapidly in value as Japanese investors expanded trade in the wake of changes in domestic laws and other market conditions.

Q: So, what was the commotion about the currency splitting in two?

A: First of all, you need to have an understanding of how the bitcoin system is organized. Bitcoin currency is managed by a regularly updated public network of transaction ledgers called the “blockchain.” The ledger nodes of the blockchain are being broken up, so the large servers for central management are now unnecessary. In addition to lowering management costs, this also reduces the risk of hackers infiltrating the server and rewriting the data in the blockchain.

Q: Who can input data into the blockchain?

A: Business operators that volunteer to add data to ledgers in the blockchain. Some of them offer to do so for rewards as they can receive bitcoins in return for their services. Since this requires the use of a large number of computers, operators in China, where the cost of electricity is low, are most common.

Q: So how does this relate to the split?

A: Along with the spread of bitcoins, trading volumes also grew. It began taking a long time to process data and this led to transaction delays. On one hand, the developers who maintained and managed the system suggested reducing the size of the data written in the ledgers that comprise the blockchain as a countermeasure for the overloaded servers. On the other hand, some business operators, like those in China, pushed for expanding the amount of information that the ledgers themselves could store. This put the two groups at odds. A compromise plan was hatched to both compress the data and increase the capacity of the ledgers. At one stage, it was even speculated that the system could be broken down into three different types.

In mid-July, most domestic bitcoin exchanges gave notice that they would suspend a portion of trade in the currency, and the value of a bitcoin plunged to less than 2,000 U.S. dollars. However, by the end of July, exchange operators and almost all related parties announced they would support the compromise plan.

Q: But they still decided to split the currency?

A: Operators who did not agree with the compromise plan and others used their clout to create the new Bitcoin Cash system on Aug. 1. That was the split that caused the commotion. At the time, there was a lot of uneasiness about what would happen after the split, but the effects turned out to be minimal.

Q: What are the effects on bitcoin holders?

A: In accordance with the split, an amount of Bitcoin Cash equal to the amount of bitcoins will be created. Since the systems are separate, effects are said to be limited as there would be no reductions in the shares of bitcoins held by individual traders. However, issues such as whether or not customers are provided with Bitcoin Cash are still left up to individual exchange operators.

Q: What will happen to each kind of bitcoin?

A: Each type of bitcoin will operate separately within its own market. The bitcoin market is strong, with a single coin worth over 4,000 dollars. Bitcoin Cash is currently being traded at roughly 300 dollars per unit.

Q: Wasn’t there a way to avoid confusion?

A: This was commotion borne from the special characteristics of virtual currency, which is not managed by a single group like a central bank. It can be said that the commotion made the weaknesses in the system clear, but it is precisely because of the freedom in a system created through debates between related parties that separates virtual currency from its conventional counterparts and makes it particularly interesting. However, the possibility of yet another split in the future is high due to varying opinions on how to expand the amount of storage in the blockchain ledgers and other issues. If you want to invest in bitcoins, then it is crucial to learn about the special nature of virtual currencies first. (Answers by Daisuke Oka, Business News Department)

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