Bitcoin poised for 'civil war' over software changes

Alternative cryptocurrencies and the price of ether continue to bleed this week, as traders position themselves for what could be the biggest event trade in cryptocurrency history: a change in the Bitcoin software.

On July 21, a new type of software called SegWit2x will be rolled out and, depending on which Bitcoin miners – those with the computing power to verify the legitimacy of the blockchain – accept it, Bitcoin could be in for some serious price adjustments.

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Bitcoin slumped 4.5 per cent to $US2,520 a coin on Tuesday, with its fellow crypto-assets suffering a much more pronounced selloff.

Ether, which enjoyed a hefty bull run last month, has been in virtual freefall, plummeting 8 per cent on Tuesday, extending a a 22 per cent fall in the last week.

Ethereum is a blockchain network allowing the transference of smart contracts; these contracts are legitimised by the ether token. From a high of $US414, ether is currently fetching $US224 a token.

"People are getting the hell out of ether at the moment, they don't really know how this software fork will play out," said one trader.

SegWit2x is a software compromise between two warring factions within the cryptocurrency community.

It is an extension in the size of the blockchain – a digital ledger that has struggled to cope with the increasing number of transactions and seen processing fees soar – and also paves the way for some of the workload to be spread across other, emerging protocols.

But whether or not miners – mostly Chinese firms with multimillion-dollar server farms – will agree to run the software is what has traders on edge.

These miners argue a simple increase of the blockchain size is enough to solve the transaction bottleneck, but a group of core developers – imaginatively called Core Group – insist the cap on blockchain traffic is what keeps the network safe from cyber hacks.

Additionally, Core says, if some of the data is managed on other, emerging protocols, new projects could develop and further the exploration of the cryptocurrency ecosystem.

Miners have been vocally reluctant about the plan, mostly because a move to other protocols would ultimately diminish their influence and put at risk the millions of dollars they've invested to support the blockchain and verify its transactions.

SegWit2x is a compromise for both parties, an increase and a slight data re-distribution, but whether it is taken up by all parties remains to be seen. Some miners may ignore the update and continue to run the original software.

Should this happen, the Core developers will run an agenda called UASF (user activated soft fork) from August 1, which will reject transactions not compliant with SegWit.

If there are large volumes of rejected transactions, then a split in the Bitcoin currency is likely to occur.

If this happens, there will be two blockchains with two bitcoins operating in parallel and the expectation is traders will rapidly reprice the value of both, a move expected to prompt extreme volatility.