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Bitcoin’s Brexit Moment Happening Now (Full Explanation)

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Hi everyone,

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You may have heard about the bitcoin scaling issue that is currently playing out so I would like to offer the following as a simple yet comprehensive explanation of what is about to happen.

U.K.’s Brexit referendum on June 23rd, 2016 caused the British Pound to lose 10% of its value in a single night, which is a massive move for a regular currency. For cryptocurrencies, a move of 10% in a day has become a regular occurrence, so the price effects could be far more significant here.

Hope you enjoy and appreciate any questions, comments, and feedback.

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@MatiGreenspan
eToro, Senior Market Analyst

Please note: All data, figures, and graphs are valid as of July 19th. All trading carries risk. Only risk capital you’re prepared to lose.

The History

It’s great to see that the bitcoin network is growing rapidly. However, the rate of growth has become quite alarming lately as the network was not initially setup to handle this much traffic.

At the moment, each block in the bitcoin blockchain contains 1 Megabyte of data, which can hold approximately 1,000 to 2,000 transactions. Usually, it takes about 10 minutes to mine a block. So if there are more than a few thousand transactions in a short time it results in the network getting clogged and people can wait a long time for their transactions to be processed. Sometimes even a few days.

True, bitcoin is a decentralized currency so we don’t have any government or central bank deciding on monetary policy, but it’s clear here that the community needs to make a decision to improve the protocol.

Bitcoin is controlled by the miners. People who run the bitcoin software and confirm transactions. There are many different types of software that are used around the world. In the old days, you could mine bitcoins with a laptop. These days it requires a lot more computer power. So miners have begun to form groups called mining pools. They all link their computers together and when they mine a block, they divide the rewards among themselves.

There are about twenty major mining pools at the moment. These are the guys who are currently arguing about the best way to improve bitcoin.

The Possibilities

So far there have been about 200 different proposals to improve bitcoin. Seeing that things were not moving, one of the proposals BIP148 put a hard deadline on this issue of August 1st. Less than two weeks from the time of this writing.

The goal of BIP148 is to force other miners to upgrade to the SegWit protocol. Without getting too technical, SegWit is a way of improving the bitcoin protocol in a way that each block can hold more transactions.

The idea is that anybody who does not upgrade their software to allow the implementation of SegWit will be rejected, causing a split (hard fork) in the network.

Wait… what’s a fork??

A hard fork is a major split that causes two different currencies to be created. This is what happened with Ethereum and Ethereum Classic about a year ago. Ether classic was the original form and Ethereum that we know today was the secondary currency that was created.

A soft fork is a simple change in protocol that does not split the network. For example, if everybody upgrades their software to BIP148 then it will upgrade the protocol to SegWit without causing a split. Of course, that’s a big IF.

However, some people were not happy with this solution. They quickly put together another proposal that would take effect before the August 1st deadline called SegWit2x.

The software that allows for SegWit2x should be available this Friday, July 21st and if it is adopted it will implement SegWit as a first step in the solution. Then, over the next six months will actually increase the block size from 1 MB to 2 MBs per block.

The setback is that this type of change to the bitcoin blocks would require the creation of a new currency. Yes, another possible hard fork.

For your convenience, we’ve put together a flow chart so that you can visualize the different possible paths that bitcoin faces at this time.

This image can also be found online at: http://imgur.com/a/0nWwn

Special thanks to everyone who helped put together this diagram. Our creative director Elior Abecsis, Moriah Waterland who is a leader in our efforts to put eToro on the blockchain, and Zach Chester our brand new Cryptocurrency Analyst.

Hoping that everything goes smoothly and wishing you a very pleasant day ahead.

This content is provided for information and educational purposes only and should not be considered to be a investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Featured image from Shutterstock. Story image from eToro.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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5 Comments

5 Comments

  1. knightofone

    July 19, 2017 at 11:56 am

    The segwit2x client is already avaimable, and miners started signaling ahead of schedule

  2. embersburnbrightly

    July 19, 2017 at 4:59 pm

    Nice explanation and diagram; thanks!

  3. Mati Greenspan

    July 19, 2017 at 5:01 pm

    Thanks embers. 🙂

  4. Nachshol

    July 19, 2017 at 8:28 pm

    So…. What we, as crypto investors, should expect towards this occurrence?
    Is it possible to assume that the newer coin would be “better” then the old (like ETH and ETH classic)?

  5. Mati Greenspan

    July 21, 2017 at 10:12 am

    Great question. It’s still not clear. A segwit2x coin with larger blocks would very likely be better than the current version. However, getting to that point is quite dangerous.

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Analysis

Technical Analysis: Bitcoin Hits First Correction Target as Volatility Reigns Supreme

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The violent correction that created a full-on panic in the cryptocurrency segment continues to unfold in a rather orderly way from a technical standpoint, reflecting the extreme nature of the preceding rally. That said, the percentage losses in some of the coins are huge, and the collapse of Bitconnect accelerated the process, spreading uncertainty among investors, and sentiment quickly got bleak.

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Bitcoin remains in the center of attention, and the most valuable coin finally breached the $10,000 level today, causing another strong wave of liquidation in the majors, that could be the base of a more durable bottom, and a consolidation in the coming days after the crazy last couple of days.

The coin is now oversold from a short-term perspective, and although further losses are likely before the end of the cycle, given the still only neutral long-term momentum readings, a counter-trend move is possible in the coming days. Below, $9000, strong support levels are still found at $8200 and near $7650.

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BTC/USD, 4-Hour Chart Analysis

Altcoins got slaughtered in the two-day crash with Ripple leading the way lower, while Ethereum also lost its relative strength amid the broad sell-off and its recent trendline break. ETH got close to the next major support level at $740 during today’s move, and as the short-term momentum is now oversold, a bounce to the zone around $1000 could be ahead. We still expect the correction to continue in the token, as the long-term momentum remains overbought, with key support at $625 and near $575.

ETH/USD, 4-Hour Chart Analysis

Ripple fell as low as the $0.85 support level during the crash, and although the coin rebounded above $1 afterward, it remains 70% off its recent all-time highs. Long-term investors could already accumulate small positions on the short-term sell-offs, although the correction will likely continue, and a prolonged consolidation phase might also be ahead. Key support levels are now found at $0.85 and $0.68, while resistance is ahead at $1.25.

XRP/USDT, 4-Hour Chart Analysis

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Market Update: Bitcoin at $10,000, Ripple at $1, Ethereum below $1000 as Carnage Continues

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Yesterday’s China induced technical breakdown led to an unmitigated disaster in the crypto segment, as all of the majors crashed, erasing hundreds of billions of market cap in the process. The collapse of the alleged Ponzi scheme of Bitconnect added insult to injury and caused another wave of selling in late trading, driving the price of Bitcoin to $10,000, a bit earlier than expected.

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BTC/USD, 4-Hour Chart Analysis

The most valuable digital currency rebounded as much as 15% after the late-session crash, but the selling pressure remained strong and today BTC briefly traded below yesterday’s low, with most of the majors holding up above the crash low.

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That said, the sell-off is unlikely to be over and volatility is probably here to stay for the week, with violent swings in both directions. The coin is still likely to push lower, with a possibly lengthy bottoming phase, so a quick recovery to the record highs is unlikely, but strong support is found below $10,000 at $9200, $8200, and $7650.

Traders should be aware of the elevated risk in short-term positions here, while long-term investors could slowly accumulate positions on the sell-offs, as the coins are headed to oversold territory.

A Little Perspective

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Altcoins

Fears of Regulatory Crackdown Flush $190 Billion Out of Crypto Market

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Bitcoin, Ethereum and every other major cryptocurrency collapsed on Tuesday, as fears of regulatory clampdown in South Korea triggered a mass exodus from the digital asset class. The collapse comes as mainstream media reports continue to push the idea of an imminent ban on cryptocurrency exchanges even as lawmakers cautioned no decision had been reached.

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Cryptocurrency Market in Free Fall

The cryptocurrency market declined rog $190 billion on Tuesday, marking one of the biggest single-day drops on record. At its lowest, the market was valued at $510 billion,  which was than $200 billion below its peak earlier this month.

The top 20 coins were each down in excess of 17%, according to data provider CoinMarketCap. Nearly $49 billion worth of cryptocurrency exchanged hands over the past 24 hours.

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Bitcoin plunged below $12,000, reaching its lowest level since early December. Ethereum, its biggest rival, fell back toward $1,000, while Ripple bottomed out at $1.23 after peaking above $3 just a few weeks ago.

South Korea Jolts Market

It was mainly regulatory issues that jolted cryptocurrencies on Tuesday, with South Korea mulling new legislation to stamp out excessive risk from the market.

South Korea’s finance minister Kim Dong-yeon reportedly told local radio that an all-out ban on cryptocurrency trading was a “live option, but that government officials still need to “seriously review it.” Seoul’s biggest issue with cryptocurrency trading is the level of speculation in the market and the role of anonymous accounts in spurring volatility. New regulations have already banned anonymous trading on domestic exchanges and barred foreigners from participating in the market.

Last week, some of South Korea’s busiest crypto exchanges were raided by police and tax agents over alleged tax evasion. The raids were confirmed by an employee at Coinone, who spoke to Reuters anonymously.

Seoul’s financial authorities had previously indicated they were investigating six banks that offer cryptocurrency accounts. In addition to speculative risks, authorities are also concerned about the link between cryptocurrency trading and organized crime.

South Korea is a major center for cryptocurrency and is home to some of the largest exchanges. Local traders have been the main catalysts behind some of the crypto market’s biggest gainers, including Ripple.

Some analysts believe that further regulatory crackdown will be ineffective given the borderless nature of cryptocurrencies. When China banned cryptocurrencies, traders there migrated their accounts offshore to Hong Kong or Korea. This suggests that a regulatory crackdown can only succeed with broad international cooperation, which does not exist at the time.

Chinese regulators know that their measures have done very little to limit virtual capital flight from the country. That’s why they are moving to block domestic access to offshore exchanges, according to a recent Bloomberg report.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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