It seemed, not for the first time, like the cryptocurrency bubble had burst yesterday, when the price of Bitcoin tumbled 22% and Ether – Ethereum’s native cryptocurrency – similarly dropped 23%.
The sell off apparently began after a Bitcoin mining firm proposed creating a hard fork in the Bitcoin network to create larger block sizes on the Bitcoin blockchain. The debate over block size is an ongoing one in the Bitcoin industry, and one that Profit & Loss
has previously covered
Essentially, increasing the size of each block would allow more transactions to be processed at once, with some users also claiming that bigger sized blocks are needed because spam transactions are using up space in blocks, meaning that many legitimate transactions take longer to get confirmed.
But other Bitcoin market participants want to keep the block sizes smaller because the scarcity of the block means it has more value, while making the blocks bigger would require more computing power to mine each one, increasing the miners’ expenses.
If a Bitcoin miner tries to make software changes to the Bitcoin network, this in and of itself is not big news, because the consensus model means that no one can unilaterally change the network. However, if a miner had enough resources, or could get 51% of the network to agree to the changes, then it would create a “hard fork”, which is a permanent divergence in the blockchain, meaning that nodes not upgraded to follow the new consensus rule would not be able to validate blocks on the new chain.
Given that it operates on a different blockchain, it is not immediately apparent why Ether also suffered a downturn. One logical explanation is that it simply suffered from contagion as traders, some of whom were perhaps already skeptical of the ability for these cryptocurrencies to keep rising in value, sought to dump all their cryptoassets when they saw Bitcoin selling off.
Another factor to consider is that the decision by the Federal Reserve to raise its benchmark interest rate 25 basis points to a range of 1% to 1.25% on Wednesday, might have made traders more inclined to sell off riskier assets.
However, late on Thursday, Bitcoin and Ether were gaining again, a trend that continued on Friday morning. Bitcoin had gained 16%, hitting $2,543 at 11:19 GMT, before dropping back down to $2,435 at the time of writing, 13:17 GMT
Meanwhile, Ether was back up to $361 by midnight GMT on Thursday, a 19% gain. However, there was no reliable pricing data available for Friday trading at the time of writing.