On Saturday Mike Hearn, ex-Google employee and major Bitcoin developer, posted an essay describing the need for moves to be made to resolve expected Bitcoin network block size scalability issues. To get the ball rolling to make a change manifest, Hearn and Bitcoin Foundation Chief Scientist Gavin Andresen published a new client, Bitcoin XT, as a fork for the protocol to allow larger blocks. Keep reading below for a run-down of the reaction in the Bitcoin community, the approach taken by external media (such as economist news sites and tech sites,) and the thoughts of the geek community in general.

While the Bitcoin XT code fork is a big deal, something else happened recently that’s caught a lot of attention: Bitcoin’s market value plummeted over 15 percent this week during a flash crash. The reasons for this crash appear to point to margin trades that occurred on the major Bitcoin exchange Bitfinex and not the controversy rising from the Bitcoin fork.

In this screenshot from BitcoinAverage.com the global average of BTC can be seen suddenly dropping from $250 to around $211.

Bitcoin flash crash may be caused by Bitfinex margin trade

Last night, the global average bitcoin market value dropped suddenly from around $250 USD to around $211 and eventually recovered to near $234 USD. According to Bitcoinity.org charts, the price on major Hong Kong-based Bitcoin exchange Bitfinex fell to a minimum of $162. As Bitfinex usually represents 30 percent of bitcoin trade volume, this flash crash affected the entire market–and during the aftermath of the value drop, Bitfinex hit 50 percent of global trading volume.

As of publication, BTC value appears to have dropped once again closer to $224.

A screenshot of Bitfinex’s tradebook at BitcoinWisdom.com showing the flash crash to $162

So what happened? The news appears to be that a set of trades on Bitfinex went bad and were closed out. Several Reddit posts point to a 10,000 short position and an 8,000 long position being closed.

Margin trading has been blamed before for Bitcoin market value crashes. In fact, August last year, Bitfinex found itself in the hot seat of a theory proposing the exact same occurrence. CoinDesk reported then the hypothesis that margin trading caused a dip in Bitcoin prices when a 500 BTC sale order on Bitstamp caused the amount to be sold in one minute; this cascaded to Bitfinex where dropping prices triggered margin calls and this increasing downward momentum.

It seems also that August is a common month for margin trades to go south as Bitfinex CSO Phillip Potter appears to say during an interview shortly after the flash crash posted to Reddit. The thread title misattributes Potter as the CEO, but he is in fact the CSO.

The flash crash in price also happens at a time for opportunists taking advantage of media coverage of the Bitcoin block size fork, which some have cited as the reason for the sudden drop; however, the margin trade speculation seems to fit the facts better.

Bitcoin fork splitting the community?

Over the weekend two of Bitcoin’s best known developers released a fork of the Bitcoin Core software in an attempt to help resolve the current crisis over the scalability of the network. Gavin Andresen, Chief Scientist at the Bitcoin Foundation, and ex-Google employee Mark Hearn released the client, Bitcoin XT, on GitHub and to various Linux distros.

Mike Hearn is a Bitcoin core developer and ex-Google employee, photo via Money & Tech.

Saturday, August 15, Hearn published a strongly worded essay about the need for the new client (the code fork) and the scalability issues underlying the decision.

In the essay, Hearn himself cites a lack of communication about the Bitcoin Core client as the reason why a fork (and Bitcoin XT) must happen and he cites the division in the community itself directly.

“Clearly, there is a serious problem here,” Hearn writes in his essay. “Communication has broken down, both sides feel they are vigorously defending decentralization and the One True Bitcoin Vision. The community is divided.” He concludes that the only way to resolve this disagreement is to bring the problem to the user base (the miners) with a modified version of the client, which is the XT fork in play currently.

Bitcoin XT is designed to support larger block sizes than the standard Bitcoin client, which enables the stuffing of more transactions into a single block. This is important because the discovery time for new blocks is relatively static (about 10 minutes), but as transaction volume on the network increases this means some transactions will begin to be left behind into a backlog, slowing down confirmations.

Currently Bitcoin blocks can reach a maximum size of 1MB; the implantation of the protocol in Bitcoin XT allows sizes to reach 8MB. The idea is to provide breathing room for blocks to grow as transaction volume grows and give more time to gather up further solutions in the future.

Now Bitcoin XT needs to get enough miners—approximately 75 percent of the network or more—on board in order to cause a shift from the smaller block client to the larger block client before much can happen.

The discussion of how to handle the ever-increasing volume of the Bitcoin network and scale the protocol has been a long and arduous discussion between various Bitcoin core developers trying to reach a consensus and resolution.

The release of Bitcoin XT has led to larger media taking notice of the “fork” and the technical discussion spilling out of the internal Bitcoin community culture. It has also generated a lot of misunderstanding and concern over the stability of the protocol itself.

For example, notable outlets have begun to publish stories on the debate: “A bitcoin civil war is threatening to tear the digital currency in two” via Business Insider, “Bitcoin could split in debate over currency’s future” via BBC, “A spat between programmers may split bitcoin” via The Economist, and “Bitcoin comes to a fork in the road and takes it” via Fast Company.

What would ordinarily be a technical discussion that involves the community of bitcoin users and miners has become a niche commentary for much of the tech media peering into the fishbowl. As a result Andresen and Hearn have had their voices heard far and wide and the culture of the Bitcoin protocol displayed as having a democratic and communal nature.

While all that may suggest stormclouds for Bitcoin, the fork and fears of a “split in the community,” there are other problems rumbling. Specifically fury over the suppression of discussion of the Bitcoin XT codebase in the Bitcoin Reddit community by one of the mods, /u/theymos.

The following has become a common comment expected during moderation of blocksize discussions:

Note: Blocksize/fork discussion is currently banned, so this is deleted. Probably in the near future there will be a daily thread or something to accommodate this kind of discussion.

With the fork underway, and having been discussed before Andresen and Hearn’s client submission on Saturday, this appears to be raking much of the community over the coals.

Bitcoin still not well received in greater geek community

The block size controversy and discussions on how to handle it have hit more main stream media, and as a result articles to the nature of it have gained a wider audience. However, much of the audience outside of the majority Bitcoin community do not appear to see Bitcoin very favorably.

Notably articles on Slashdot, “Bitcoin Fork Divides Community,” and Ars Technica, “Op-ed: Why is Bitcoin forking?” (a repost of the essay written by Mike Hearn) have attracted a multitude of scorching comments.

photo credit: Bitcoin IMG_1924 via photopin (license)

On Slashdot comments such as, “Bitcoin’s reputation? There wasn’t much left of a reputation before this new crisis…” and “No, not economics at all. People who received a play-money system from a mysterious unknown person and actually convinced themselves that it has value are now facing a schism over the money market failing to grow without bounds. Unless, that is, the software is modified in a way that might, over time, disincent [sic] people from playing the game,” can be found between discussions of the fork itself and often upvoted as Insightful.

On Ars Technica the first comment could be ironic, “Aaaannnndddd … bitcoin is dead,” citing the multitude of “Bitcoin is dead” headlines that have appeared in the past five years. Other commenters weighed in on the currency with, “Oh good! Another alt coin bubble to get in and out of for a quick profit before it tanks,” and “Forking bitcoin gives twice the opportunity to separate fools from their money. This ought to be entertaining,” with others weighing in that Bitcoin shouldn’t even be relevant to the news on a technology niche site such as Ars.

In the first few days, these sorts of comments dominated. Now as the week wears on, scathing cultural or personal commentary seems to be slowly being supplanted by technical and explanatory commentary.

So far, it seems that only Hacker News, a geek news aggregator, approached the news of the Bitcoin fork with something that resembled more technical discussion and less “Bitcoin is dead.” It also appears that HN has a lot of other things to talk about other than Bitcoin and it quickly fell off the site’s radar.

Featured photo: Dawson/Bloomberg News