Introduction

For anyone who is reading this article and not aware of my background, I am a Crypto trader, and I share my trades and strategy with others entering the market. I do not claim to be a technical expert or an advanced trader. I share my experiences to help other traders enter the market and avoid making mistakes and losing money.

This article exists because, like me, there are many Bitcoin and Crypto traders who do not understand the technical side of the scaling debate but have investments which are affected by forks. I have written this as an attempt to explain, in as simple form as possible, why this fork is happening, why I don't support it and how I intend to trade it.

One thing I have noticed when trying to understand the block size debate is whichever side you are on there are people who can put together a solid counter argument. Fundamentally, both sides of the debate have valid points. I have read countless articles and posts covering this, and the conclusion I have come to is that the most likely outcome to achieving fast and low-cost payments at scale is through a combination of factors:

Increasing the capacity of blocks through code optimisation

Reducing the cost and increasing the speed of payments through off-chain scaling

Increasing the capacity of the network through block size increases

What I don't support is increasing the block size as proposed by Segwit2x and I was helped to reach some of my conclusions by a post on Reddit which explains the politics of the scaling debate and is a firmly an anti SegWit2x post.

My article is mainly a rewrite of the Reddit post but adding in further information and personal opinion which I feel is necessary. I want to be clear; I am not against a block size increase, I am against the SegWit2x block size increase because it is a threat to the future of Bitcoin.

SegWit2x is a hostile corporate takeover of Bitcoin to remove the Core development team and replace it with a discredited developer, Jeff Garzik. If successful, which it won't be, it would centralise control and allow specific corporate players to have a significant voice in the future direction of Bitcoin.

I expect that some will read this and offer valid counter-arguments back, which is why this debate is so interesting. You may not agree with one side of the argument, but it does not make it invalid, it just makes it different to yours. There may also be valid technical arguments back; I have done my best to write something as a non-techie, which other non-techie investors can understand. Believe me when I tell you, the majority of people now invested in Bitcoin have no idea how this stuff works and don't care, they just want fast, low-cost payments.

I do believe it is inevitable that a block size increase will be needed for Bitcoin to be able to compete with the likes of AMEX/MasterCard/Visa, but for me, it is important how upgrades to the Bitcoin protocol are agreed.

Firstly, I want to thank Chad Lauterbach for helping proof this article; he is one of the resident miners in my Facebook group. Secondly, I wrote another article on Saturday focusing in on why the futures market will destroy B2X before it launches. In that post, I highlighted a couple of essential terms worth knowing, which I have included below but added to:

Segwit2x is the agreement made behind closed doors in New York, known as the New York Agreement (NYA) where a bunch of parties with a vested interest agreed to implement Segwit if a 2mb hard fork followed it

is the agreement made behind closed doors in New York, known as the New York Agreement (NYA) where a bunch of parties with a vested interest agreed to implement Segwit if a 2mb hard fork followed it The Segwit part of SegWit2x is the implementation of the Segregated Witness, which is best explained here

part of SegWit2x is the implementation of the Segregated Witness, which is best explained here The 2x part of SegWit2x is the doubling of the block size from 1mb to 2mb

part of SegWit2x is the doubling of the block size from 1mb to 2mb B2X is the proposed name of the new coin when it hits the exchanges

What is a Fork?

For those who do not fully understand how the blockchain works I suggest reading The ultimate 3500-word guide in plain English to understand Blockchain on YourStory. It is the simplest and easiest to understand explanation of how the Blockchain works that I have read.

In its purest form, the blockchain is a linear collection of blocks which collect records of transactions. Everyone in the network keeps a record of all the transactions in the block and a block is closed by solving a complicated mathematical equation, this is called mining. Once the block is closed, it is sealed, can't ever be edited and a new block is created.

The Bitcoin network is maintained by nodes, also known as a 'full client', which is a computer running the Bitcoin software nodes and thus participating in the network by validating and relaying transactions. A fork happens when there is a change to the rules within that software. There are two types of fork possible, a soft fork and a hard fork and they differ by what the rule changes in the software are:

A soft fork is where an update to the software is backwards compatible. What this means is that when the fork happens, those operating the old software will see new blocks as valid, but any new blocks they mine are seen as invalid by those who have upgraded to the latest software.

is where an update to the software is backwards compatible. What this means is that when the fork happens, those operating the old software will see new blocks as valid, but any new blocks they mine are seen as invalid by those who have upgraded to the latest software. A hard fork is where an update to the software is not backwards compatible. What this means is that when the fork happens, those operating the old software will see new blocks as invalid, and as such, to switch over to the new chain and mine valid blocks then all nodes must upgrade to the new software.

A fork almost only ever occurs as a planned event where an individual or group wants to develop Bitcoin in a way which is different from the current software, but they can't get agreement from the entire community. It is a political disagreement over the Bitcoin rules, for example, the size of blocks. If enough of the network decides to start mining this new version of the software, Bitcoin will fork, and the chain will split, in this scenario, we now have two chains and essentially two separate coins. This is what happened with Bitcoin Cash and is about to happen with the Bitcoin Gold and B2X forks.

Occasionally forks happen for short periods of time without being either a hard or soft fork. Satoshi planned for this by resolving a chain split with the longest chain winning and discarding the other chain; this is why any Bitcoins generated by successfully mining blocks can’t be spent until another 99 blocks have been mined, this acts as a disinterest for miners to mine separate chains as they will lose their rewards.

You can read more about Bitcoin forks in the Coindesk article a Short Guide to Bitcoin Forks Explained.

Why is Bitcoin Forking Again?

I am going to ignore the Bitcoin Gold fork, for now, I discuss this at the end of the article. I am going to focus on the B2X fork which is a result of the raging debate within the Bitcoin community about how to address scaling. I am going to explain this in the simplest way I can.

Bitcoin has a scaling issue, in that each block can carry a maximum of amount of data. If a block is 1MB, therefore 1,000,000 bytes and a transaction will use 495 bytes of data. Consequently, each block can handle around 2,020 transactions. A new block is mined every 10 minutes, thus 600 seconds which means that Bitcoin can process 3.37 transactions per second. If you compare this to PayPal which can handle 193 transactions per second and Visa which can handle 1,667 transactions per second you can see that Bitcoin must compete on these numbers. Further, the likes of Visa, MasterCard, AMEX and PayPal can also handle peak load volumes on busy shopping dates like Christmas Eve and Black Friday, a whole other issue which Bitcoin will need to solve.

Once a transaction is made on the Bitcoin network and has been validated by the nodes it sits in something called the memory pool also known as the mempool. Think of this as a holding area for transactions where they wait here for a miner to pick them up and add them to a block to be mined. If when miners are adding transactions to a block, and it reaches its 1mb limit, then any other pending transactions need to wait in the memory pool until the next block.

The issue this causes is that when the blocks are filling up, the miners will increase their fees for including transactions within the block, and therefore it becomes a supply and demand bidding war for having your transaction included. What this means is that for small transactions (the old cup of coffee argument), either the transactions do not get picked up because the fee offered is too low or the fee becomes too high to justify the transaction. Therefore, the Bitcoin use case will only support large transactions as it is cheaper and quicker to use cash and cards for small ticket items.

There are two primary sides to the argument for how to scale Bitcoin:

Big Blockers: those who want to scale Bitcoin by increasing the size of the blocks

those who want to scale Bitcoin by increasing the size of the blocks Small Blockers: those who want to scale Bitcoin by making the code more efficient (SegWit) and using second layer off-chain solutions for taking care of smaller transactions with Bitcoin acting as a settlement layer

It is clear with this that high transaction fees are only within the best interest of the miners as no user wants to pay more for transactions than they have to. As such there will always be a conflict of interest allowing miners to lead the scaling debate. This may change in the future; the Bitcoin software is designed to halve the mining rewards every four years until all 21 million Bitcoins have been minted. We currently have over 16.6m with miners being rewarded 12.5 Bitcoins every block. The block reward is set to halve again to 6.25 Bitcoins per block mid-2020. Only at the point when all Bitcoins have been mined, and miners rely purely on transactions fees to support the network should transaction fees change to economically support them. Still, this should be led by the users in a way which makes mining economically profitable but does not allow miners to have full control over network fees.

Big Block Argument

The big block argument is that we can keep increasing the size of the block to handle more transactions and therefore there is a single record of all transactions kept within the blockchain, and this, by itself, is not a long-term solution as it can increase centralisation. Why? To understand this, we need to understand how mining works.

The following explanation from the Economist is good (edited as the block reward has changed since this was written):

"Every ten minutes or so mining computers collect pending bitcoin transactions (a “block”) and turn them into a mathematical puzzle. The first miner to find the solution announces it to others on the network. The other miners then check whether the sender of the funds has the right to spend the money and whether the solution to the puzzle is correct. If enough of them grant their approval, the block is cryptographically added to the ledger, and the miners move on to the next set of transactions (hence the term “blockchain”). The miner who found the solution gets 12.5 bitcoins as a reward, but only after another 99 blocks have been added to the ledger. All this gives miners an incentive to participate in the system and validate transactions."

Forcing miners to solve puzzles to add to the ledger provides protection: to double-spend a bitcoin, digital bank-robbers would need to rewrite the blockchain and to do that they would have to control more than half of the network’s puzzle-solving capacity.

The miners compete to solve these puzzles with hashing power. Thus the more power they have to crunch the numbers, the more likely they are to solve the puzzles and receive the mining rewards.

Successful mining comes down to scale, and scale comes from money and cost of power, as such, mining has become increasingly centralised around large operations. You can see the mining pools below and read more about them here.