Bitcoin and other cryptocurrencies were on a magnificent wave of seemingly endless growth this past year. That run came to an end today as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and other major cryptocurrencies crashed today.
Bitcoin's price dropped 25 percent this week from a high of almost $20,000 to a low of below $12,000. Volatility is a major issue for investors looking to invest and this dip isn't reassuring.
Since the beginning of 2017, Bitcoin's price rose with seemingly no end in sight. On Jan. 1, it's price was listed at almost $997. At its peak, the price rose to just south of $20,000.
As the price slipped this week, investors started selling causing the price to dip below $12,000. Most cryptocurrencies have been experiencing double-digit losses in the last 24 hours.
Many cryptocurrencies saw a huge spike in December, with more investors taking note of the cryptocurrency market. Prices started to tank this week after one of the founders, Emil Oldenburg, of Bitcoin.com announced that he would be selling his stake in bitcoin. Oldenburg criticized bitcoin for high transaction fees. He threw his support behind another cryptocurrency, Bitcoin Cash.
Bitcoin Cash was created from a disagreement in the way that Bitcoin handles transaction fees. In the beginning of December, transaction fees cost $6 on average to get a transaction accepted on the Bitcoin network. That fee soared to $26 a couple of weeks ago and reached an average above $50 on Thursday.
Fees are used to speed up the process by which transactions are recorded onto the blockchain. Pending bitcoin transactions are turned into mathematical equations which are then solved by miners. The miner who solves the equation first gets to place the next block on the blockchain, collecting the transaction fees as a reward. Transaction fees help incentivize the miners, who are doing this to release new bitcoins, to include the transaction in the recently mined block.
Drama in how blockchain software was being handled is the cause of the split that led to the birth of Bitcoin Cash. In Bitcoin's blockchain, each block is up to 1 megabyte in size. This limited each block to around 2,000 transactions per block. Each new block is created every 10 minutes. With limited blocks, transactions fees have skyrocketed as users want their transactions to be recorded in the blockchain as quickly as possible. Instead of waiting for change, those frustrated by the system Bitcoin used the founded Bitcoin Cash. Blocks for Bitcoin Cash are 8 megabytes, allowing smaller transactions fees.
Solutions to the problem are slowly trickling out. There's been a recent upgrade called segregated witness, that might almost double the number of transactions. A new payment layer called Lightning is currently being developed. It works by creating payment channels for bitcoin payments that don't need to be individually recorded onto the blockchain. This creates a batch of payments that can be submitted singularly, spreading the cost of one transaction among all the individual payments.
The system still hasn't been implemented. Transaction fees weren't part of the promise of Bitcoin when businesses began accepting it. Those fees could lead to the adoption of other competing cryptocurrencies.