Bitcoin rival doubles in price in four days as Bitcoin price slumps

One bitcoin is now worth less than $5,900, down 25 percent from Wednesday's high above $7,800. Meanwhile, the currency of a rival, spinoff network called Bitcoin Cash has doubled to more than $1,500 over the same four-day period.

This is good news for one side in Bitcoin's ongoing civil war—the side that sees an urgent need to boost the network's capacity to deal with growing congestion and rising transaction fees. People in this camp have been flocking to Bitcoin Cash after a plan to expand the capacity of the main Bitcoin network fell apart on Wednesday.

"Bitcoin Cash is what I started working on in 2010," tweeted Gavin Andresen on Saturday. "A store of value AND means of exchange." It was a pointed dig to the mainstream Bitcoin network, where slow transactions and rising fees have made it an increasingly unappealing way to make everyday payments.

The endorsement is significant because Andresen was chosen by founder Satoshi Nakamoto to lead the Bitcoin project after Nakamoto faded from the scene in 2011. Andresen was frozen out of the Bitcoin Core development team last year in the midst of a bitter debate over the network's future.

Right now, Bitcoin Cash is still the underdog, as the value of conventional bitcoins is about four times the value of "cash" bitcoins. But supporters are betting that this will change as demand for both networks continues to grow. The Bitcoin Cash network has greater capacity now and it has a community that's committed to expand the network further as needed.

Bitcoin Cash backers believe that with the leaders of the mainstream Bitcoin network stubbornly resisting such capacity increases, it's only a matter of time before these advantages make it the dominant payment network in the Bitcoin world.

Why some have opposed expanding Bitcoin's capacity

Until recently, a hard-coded limit in the Bitcoin software—one megabyte per block—limited the network to processing no more than about seven transactions per second. The big-block faction has argued that this limit should be raised to accommodate further network growth.

But others saw decentralization as the essential attribute of the Bitcoin network. They worried that enabling a flood of transactions would make it too difficult for ordinary people to participate in Bitcoin's transaction-clearing process. They've promoted a hack called segregated witness that helps to squeeze more transactions into each one-megabyte block. But beyond that, they've argued that it's actually healthy for Bitcoin fees to rise over time to prevent the network from getting cluttered with low-value transactions.

The conflict came to a head in recent months. In August, some in the big-block camp split off from the main Bitcoin network to create rival network Bitcoin Cash, which supports blocks up to eight megabytes. This provided an alternative platform for those who were frustrated with the lack of growth in the main Bitcoin network.

Later that month, the main Bitcoin network activated the segregated witness hack, which moves cryptographic signatures outside the one-megabyte block limit. This change has roughly doubled the capacity of the network and brought some temporary relief to congestion that had plagued the network for months.

Under the terms of a May compromise, the activation of segregated witness—long favored by the small-block faction—would be followed by an increase in the block size limit to 2 megabytes. That change was supposed to take place in mid-November. But after segregated witness went into effect in August, the apparent consensus began to evaporate.

By the start of November, the proposal to double the block size had become hotly contested. The Bitcoin network is based on consensus, so it's risky to make changes unless they'll be broadly supported. Last week, the leaders of the effort to double block sizes threw in the towel, announcing that the controversial change would not take place after all.

Bitcoin Cash has deepened polarization in the Bitcoin world

Obviously, the fact that Bitcoin won't get a capacity increase this week doesn't mean it can never get a capacity increase. As congestion in the Bitcoin network gets worse, a consensus might still emerge about the need to allow larger blocks.

But it also might not. Many small-block advocates envision an alternative future for Bitcoin in which Bitcoin itself becomes a low-volume settlement layer for high-value transactions—much as banks once shipped gold bars to each other to settle their obligations.

Small-block fans have pinned their hopes on Lightning, a new type of payment network that allows people to make fast, small Bitcoin payments without having to post every transaction to the Bitcoin blockchain. In theory, Lightning could allow millions of bitcoin-denominated payments to happen every day without changing Bitcoin's one-megabyte block size limit. But Lightning is still in development, and it's far from clear if it will work as well as advocates hope.

In any event, excitement about Lightning has convinced some small-block advocates that block size increases aren't necessary at all. And as more big-blockers flee to Bitcoin Cash, opponents of larger blocks will gain the upper hand in Bitcoin's internal politics. That could leave Bitcoin stuck with one-megabyte blocks indefinitely.

Meanwhile, the big-block faction has broad support from Bitcoin's business community—including well-funded Silicon Valley startups. So far, a lot of these companies have continued focusing on mainstream Bitcoin. But with proposals to upgrade the Bitcoin network stalled, it wouldn't be surprising if these companies have a change of heart, concluding that the future of Bitcoin rests with Bitcoin Cash.