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The Overall Influence of Bitcoin Forks Explained

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Bitcoin fork

In the Cryptocurrency World, a “fork” is a modification to the software of the digital currency that results in the creation of two separate versions of the blockchain with a shared history. When any software change is proposed to a digital currency protocol, users need to show their approval for the new, upgraded version. A fork takes place when many people agree to the need for an upgrade. Bitcoin bifurcated in two when the digital currency officially forked creating bitcoin cash. Bitcoin forked again creating bitcoin gold. The current scenario is dominated by the SegWit2x fork.

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The Bitcoin Gold Fork and its Effect

Recently the bitcoin economy went through the bitcoin gold fork and made some interesting market moves as a result. For instance, on Oct. 20, 2017, bitcoin’s value reached the $6,000 mark before quickly hitting $6,200. In such instances, it is quite normal to encounter a chain split, which refers to a break from the Bitcoin network.

In simpler terms, a chain split usually occurs after a fork.  Token holders can suddenly find themselves owning several split tokens which are equivalent to the number of tokens on the Bitcoin network.  The main reason for this is the fact that the new chain is an exact copy of the bitcoin blockchain, till the point the fork occurs.

The chain split for the Bitcoin network is explained in the pictorial below.

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Fig 1 Bitcoin fork

Effect of Forks on User’s Wallets

For token holders who use crypto-wallets that support the forked chain’s software, the holder automatically becomes the owner of both digital tokens. In this instance, the chain results in the creation of two digital tokens: the original bitcoin (BTC) and bitcoin cash (BCH).

This results in double ownership of tokens, where existing bitcoin owners became the owners of an equivalent amount of bitcoin cash following the split. For example, if a person owned 10 BTC (bitcoin) before the split, s/he will now hold 10 units of both BTC (bitcoin) as well as BCH (bitcoin cash).

Investor Reactions after the Fork

There are many ways to handle an upcoming fork in the Bitcoin network. As an example, we will take the following scenario:

Person X owns 35,000 BTC which is valued at $5,000 per bitcoin. Hence, his total asset worth comes to $175,000,000.  To remedy the situation, X follows the news and real-time events that may affect his position in a particular market.  Suppose X has knowledge of the fork beforehand and knows that a new token (bitcoin cash) will be created. Coincidentally, X also learns that the crypto wallet that he uses will also support the supposed fork’s software. As mentioned earlier, this means X will get both the 35,000 BTC as well as the same amount in bitcoin cash tokens.

This may result in X creating a “buy” wall to drive the price up since X now is a large player in the market. Hence, whatever amount X increases will result in the increase of bitcoin cash tokens under his ownership.

In a case where X turns out to be an educated trader or investor, he may choose to increase his position in the bitcoin market. This is done so that X can amass 50,000 bitcoins before the fork occurs.  As a result, X will have 50,000 BCH in addition to the 50,000 BTC he already owned.

Effect on Value after Fork

When a fork occurs in the Bitcoin network, the value also split into the forked chain. On July 23, 2017, the value of bitcoin dropped from $2,800 to $2,700, following the fork. This resulted in the creation of bitcoin cash, which at the time of launch was valued at $555.

Opening and Closing Prices of Bitcoin (July 21st, 2017 from Coinbase)

Instances of Past Forks and Their Effect on Bitcoin Values

The bitcoin cash fork took place on August 1, 2017, and the SegWit took place on August 23, 2017.

Bitcoin Gold

Ideally, the user transactions are gathered into blocks that are turned into a complex math solution. The block miners operate high-powered computers and work out solutions to verify if the transaction is possible. Once other miners determine that the puzzle is correct, the transactions are accepted and the miners are rewarded in bitcoin. The need for high-tech machinery has necessitated the mining process to be controlled by a small group of people equipped with powerful computers. Bitcoin gold was invented to change this process. The idea is to allow more people to mine bitcoin and with less powerful machines. This would allow the process of further decentralization of the network so that it can be accessed by a wider user base. The collective minds behind bitcoin gold designed a code that creates a fork or split in the bitcoin blockchain. This split took place on Oct. 25, 2017. As a result of this fork, bitcoin gold came into existence. However, it quickly plunged 60%. Bitcoin hit a low of $5,374.60 before recovering nearly $300.

Five days prior to the bitcoin gold fork, the price of BTC reached a new all-time high; on Oct. 20, the valuation of bitcoin surpassed 6$,000 for the first time before adding another $200. There are 21 million solutions to the bitcoin encryption puzzle. Each solution represents a coin or token which affects the bitcoin price. Coinmarketcap reported that on a weekly basis BTC was up by 3.3 %, while on a monthly basis, BTC had increased by 55%. After the bitcoin gold fork, the price of BTC fell to a five-day low. Other than the creation of bitcoin gold, the drop from the record high can be blamed on overbought conditions.

Since its circulation, bitcoin gold has been getting traded at just over 161$ per coin, as per reports of Coinmarketcap data. Investors started selling-off the cryptocurrency, which indicated a lack of faith in the market about the newly-created bitcoin gold. The fork had other adverse impacts on bitcoin as well. The website for the new version of the cryptocurrency i.e. bitcoin gold, suffered a denial-of-service attack. Many cryptocurrency exchanges have not even started trading in bitcoin gold yet, signaling a lack of faith in the protocol. By comparison, the current value of the BTC/USD exchange rate is roughly $17,000.

Bitcoin Cash

Bitcoin had undergone a similar fork, which created bitcoin cash. As a result of the fork, the newly- created bitcoin cash witnessed an initial surge in price. The price hit an all-time high of $914.45. However, prices declined steadily after the surge and subsequently traded at only $330. Backers of SegWit, also known as the Bip141, opposed bitcoin cash on ideological grounds. Instead, they proposed SegWit as an upgrade for the following reasons:

  1. SegWit could effectively increase the volume of transactions that fit into each block without raising the block size parameter. This means more transactions per second can be registered on the blockchain. Thus SegWit can elevate the transactional capacity of bitcoin.
  2. SegWit removes transaction malleability, which is the result of a cryptographic trick to change a signature without changing what it stands for. If this issue is resolved a number of network improvements could take place.
  3. SegWit has the potential to decrease the data need for bitcoin nodes.

The SegWit2x hard fork and its effect on Bitcoin value

On Nov. 8, 2017, bitcoin recovered recovered north of $7,400 after briefly falling below $7,000. This dip was caused by the market’s sustained support for the original version of the cryptocurrency over the SegWit2x. Several analysts have stated recently that this subsequent surge in the price of Bitcoin should be credited to the allocation of funds from investors hoping to obtain B2X from the SegWit2x hard fork. However, it might be an exaggeration to claim that the recent upsurge in the price of bitcoin is prompted by the SegWit2x movement. That is because the majority of investors do not have the technical expertise to understand the implications of SegWit2x.

After dipping below $6,000 earlier in November, the price of bitcoin skyrocketed recently to a level as high as 8040 dollars on one of the largest exchanges in the world called Bitfinex. Bitcoins prices have made their gains since falling to a level of 7829 dollars on Bitfinex. This price was slightly lower than the globally weighted average high price.

As most readers are no doubt aware, bitcoin’s value has skyrocketed over the past month. This recent surge has triggered primarily by expectations of rising institutional interest in bitcoin. Established investors are increasingly foraying into the territory of cryptocurrency. The rise in the price of bitcoin has also been credited to the anticipation regarding the SegWit2X fork.

Featured image courtesy of Shutterstock. 

 

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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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Analysis

Long-Term Cryptocurrency Analysis: Broad Correction Enters Next Phase

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The overbought BTC-led correction that has been the dominating technical process in the cryptocurrency segment in the last month or so continued in earnest today, amid the intensifying regulatory steps concerning the sector. The three-week-long consolidation that followed the initial mini-crash concluded with a sharp sell-off overnight rearranging the long-term charts, while likely kicking off another volatile period.

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While most of the crash lows held up today in early trading in the majors, especially in the case of the late leaders like Ethereum and NEO, some of the relatively weaker coins are already trading below the December minimums. We expect most of the majors to follow Dash and LTC, the weakest of the largest coins, lower and trade below the previous lows, as sentiment will likely swing to a bearish extreme.

The $11,300 level has been in the center of attention throughout the session today and the most valuable coin experienced heavy trading around the level as expected. As the daily MACD is still in neutral territory, the coin could be in for another leg lower, but after the 40% correction and the rather lengthy consolidation, investors could be looking for entry points during the move near the key support levels at $10,000, $9000, and the stronger levels at $8200 and $7700.

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BTC/USD, Daily Chart Analysis

As Ethereum is in a different part of its cycle the long-term momentum readings are still overbought, and that could mean a more protracted correction for the second largest coin. That said, following a multi-month consolidation like the one in Ethereum before, we still expect the token to outperform BTC from a long-term technical standpoint. ETH is now below the short-term trendline, and it’s likely to dip below $1000, and the prior top at $850. Further key levels are found at $740, $625, $575, and near $500.

ETH/USD, Daily Chart Analysis

Let’s see the outlook for the other major altcoins after today’s bloodbath.

(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

Crypto Update: Chinese Crackdown Triggers Next Leg of Correction

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The cryptocurrency segment is crashing again, with double-digit losses across the board, and with several coins shedding around 30% in one day amid the widespread and heavy selling. The sell-off was triggered by reports on a new set of measures by the Chinese authorities limiting crypto trading, which added to the still looming South Korea related regulation worries. Bitcoin tested the mini-crash lows at $11,300 today in early trading, dipping slightly below that level before a strong bounce started.

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The most valuable coin is now between two crucial support/resistance lines, with the other ahead at $13,000, and as the downtrend is entering its more mature phase the $10,000 and $9,200 levels could come in play, with a possible dip to the support zone near $7,650.

BTC/USD, Daily Chart Analysis

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Interestingly, the coin is still hovering within the daily range of the crash of December 22nd, and that points to a very active and volatile period ahead near the low at $11,300, as automatic orders will likely get triggered on both sides of the market.

The short-term setup is bearish, and although it’s possible that the primary support level will hold, odds still favor another leg lower, following the exponential run-up at the end of last year that pushed sentiment into bullish extremes.

BTC/USD, 4-Hour Chart Analysis

Altcoins

(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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