Bitcoin swings as civil war looms

The value of the virtual currency Bitcoin has always been volatile.

Even so, there has been particular turbulence in recent days as fears of a "civil war" among its adherents first grew and then subsided, although they have not gone away altogether.

On Sunday, the value of one bitcoin dropped to about $1,863 (£1,430) before bouncing back to $2,402 on Wednesday, according to data from the news site CoinDesk - still some way off a June high of $3,019.

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What's at stake?

Bitcoin risks becoming a victim of its success.

The popularity of the financial technology has caused transactions to be processed slower, with some users complaining of having to wait three days or more for confirmation of trades when the backlog was at its worst , in May.

Moreover, fees have also risen, hitting a high of $5 per transaction at the start of June.

That makes it too costly to justify its use for some purchases, such as buying a pint of lager in a Bitcoin-accepting pub.

There are ways around the problem, but the cryptocurrency's community has been split over which solution to adopt.

The risk is that Bitcoin could effectively split in two, with one type becoming incompatible with another, ultimately undermining confidence in the project altogether.

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In simple terms, why does this problem exist?

The issue is that Bitcoin's underlying technology has an in-built constraint: the ledger of past transactions, known as the blockchain, can have only 1MB of data added to it every 10 minutes.

To understand why, it's helpful to first understand how Bitcoin works.

To authenticate Bitcoin transactions, a procedure called "mining" takes place, which involves volunteers' computers racing to solve difficult mathematical problems.

For each problem solved, one block of bitcoins is processed. As a reward, the successful miners are given newly generated bitcoins.

An updated copy of the blockchain database is then copied to all the computers involved in the validation process, which are referred to as "nodes".

Bitcoin originally did not have the 1MB/10min blockchain limit, but the feature was added to help defend the technology against denial of service (DoS) attacks, which might overwhelm the blockchain by flooding it with tiny transactions.