Ethereum drops 15% as increased demand sparks fear of growing pains

  • Increased demand for ethereum raises worries about the system's ability to grow smoothly.
  • Ethereum has quickly gained in market value this year, coming close to beating the older bitcoin digital currency.
  • Developers see greater potential in the ethereum network for potentially building the next generation of the internet.

The price of ethereum, a bitcoin rival, briefly fell more than 15 percent Wednesday amid a flood of demand and increased worries it may face a divisive debate on how to upgrade its network.

Ethereum, also known as ether, recovered to trade slightly lower near $328 Wednesday evening, according to CoinDesk.

The sharp fall comes after ethereum shot up more than 3,000 percent this year, far surpassing bitcoin's already stellar 180 percent gain and coming close to beating bitcoin as the digital currency with the greatest market value.

Ethereum 1-week performance

Source: CoinDesk

Both cryptocurrencies are based on the same blockchain technology — a fixed, transparent record-keeping system that allows money to quickly change hands regardless of geographical location. However, ethereum has grown in popularity for its ability to support applications, potentially becoming a structure for a decentralized, next-generation internet.

On Tuesday, investor demand at the funding launch for an ethereum-based messaging app called Status clogged the ethereum network. Online investors were also reportedly unable to withdraw funds from digital currency depositories known as wallets.

"The Status.im token launch was constructed in a way that caused a huge number of transactions to be formed to chase purchases of the token, so the pools of unprocessed transactions grew large and are being worked though," said Joe Lubin, an early supporter of ethereum and founder of blockchain software developer ConsenSys. "We can expect many future experiments as we all figure out the most effective and fairest approaches to building these kinds of systems."

Status did not immediately respond to a CNBC request for comment.

Ethereum trading on Wednesday was also affected by an outage of the GDAX exchange run by Coinbase. Some traders online noted orders for ethereum being placed this afternoon at far below the $300 price. GDAX said in a statement Wednesday evening ET that trading had resumed, but had no further comment to CNBC on the low-priced trades.

In the last several weeks, a surge in digital currency prices has contributed to a flood of investor demand, which has overwhelmed websites and attracted cyberattacks.

Growing pains have affected both as well. Bitcoin's price fluctuated in the last few months as developers debated the best way to upgrade the network. News last week that two upgrade methods, BIP148 and SegWit2x, may be able to work together helped bitcoin recover from its lows of the month. Now, a flood of demand for ethereum has increased similar concerns.

"The scaling issues are a function of rapid adoption which should have a positive effect on the price eventually," said Benjamin Roberts, co-founder and CEO of Citizen Hex, an ethereum-focused start-up backed by three Canadian venture funds.

Watch: Ethereum hits another record high